Emergency Fund Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss or other unplanned costs, and allows us to take a more long-term view with our investment portfolio.
Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. .
Home Equity I don’t think everyone should buy a house. I don’t necessarily think it’s a very good investment over time. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in 10-15 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.
There are many ways to define home equity, and I admit I am using a rather generous method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). I just enjoy having continuous progress without worrying about my home’s exact market value. .
Investment Portfolio The goal of my investment portfolio is allow withdrawals to support my expenses (minus the mortgage). Again, income and expenses are not the same thing. I expect our required expenses to be less than 25% of our current income. I like to assume a simple 4% safe withdrawal rate, which means for every $100,000 saved, I can generate $4,000 a year of inflation-adjusted income. This may be too optimistic, but again it does provide a quick estimate of progress. .
(The actual implementation of my plan will probably require more flexibility. I plan on using some of my money and invest in an Immediate Annuity, as well as vary my exact withdrawal rates a bit with market conditions. Once I reach 67 or so, Social Security will kick in something. No, I don’t think it will disappear, and I don’t expect to be so rich as to not get anything. Finally, I expect to continue my low-demand freelance work and thus maintain a low level of income indefinitely.)
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