This is a guest post from Debbie M giving a detailed budget for a retirement plan costing half a million dollars. For most incomes, half a million means a less early retirement. Yet, it is still earlier than the “usual million(s)”.


The best part of my story is figuring out my expenses. Since I plan to quit work forever (or at least be able to) once I achieve financial independence, this is vital. It’s much harder to find a job when you’ve been out of work a while, and frankly it’s hard enough for me to find jobs now.

The first step in guessing what my future spending will be is to figure out my current spending. There are several categories of spending, some of which are easier to measure than others:

  1. fixed monthly costs – These are things like mortgage payments and Netflix dues that may change over time but are basically predictable, and you can add an estimate for inflation to predict future costs.
  2. variable monthly costs – these are things like groceries and utilities that vary from one month to the next and so are difficult to predict for a given month but easier to predict for an “average” month. Here is where budgeting comes in handy. If you budget a certain amount each month and whatever you don’t spend one month you can save for the future, then after a while you can figure out whether your budgeted amount makes you happy or whether it is too high or too low. Use that budgeted amount as your figure for your monthly expenditures.
  3. fixed irregular costs – these are things like annual property taxes and biannual auto insurance that are predictable but do not happen every month. The main difficulty with this category is remembering what all these costs are, but after paying attention for a full year, you’ll probably get them all.
  4. variable irregular costs – These are things like car repairs and doctor visits and needing a new roof. You may hope these things never happen but you know you are not going to escape them all. These are by far the most difficult to predict. I have split mine up into various categories so I could use the budgeting strategy described for #2 above. I think after several years, I have enough categories and have a pretty good estimate going for each one:
    • next car – My current strategy is to buy a ten-year-old car every ten years. I find that saving $50/month (actually, I’m starting to add inflation to that) gives me enough padding so that if I accidentally buy a lemon, I can just try again immediately.
      car repairs – I was going negative for a long time with my current car. Finally after two years I added up all my actual expenses for that car, divided by the number of months and came up with a significantly bigger number which is the number I now use, adjusting for inflation each time I get a pay raise.

    • house repairs – It is recommended that one save 1% to 2% of the entire value of the house each year toward these expenses. My house value has increased faster than [overall] inflation, so I’m closer to 1% right now. It has been no problem dealing with things like a broken central air conditioner.
    • house renovations – My current house does not work as well as it should with my current roommate (of ten years) or with certain other conditions (strong sun and hail). So I am saving for a dishwasher, a laundry room, and covered parking. This is in addition to the house repairs fund which is just to keep the current structure maintained.
    • health – I used to ignore this because I’m lucky enough to not spend much on health issues. I started paying more attention when my employer adopted that plan where you can save some of your pay tax-free to pay for health costs, but it’s a use-it-or-lose-it system. So good, but conservative estimates are best. After several years of doing that, I have a pretty good idea of how much I’m actually paying for health care. If I add the amount my employer is currently contributing in insurance premiums, then I have a good idea of my current cost assuming I stay in basically good health and away from bad injuries. I’ve also started asking my providers what the costs would be if I didn’t have insurance. I should probably plan on these figures at least doubling when I get old, so I’m trying to start saving for that now.
    • long-term fun – This includes expensive things that I don’t get every month. For me, that’s far away trips, computers, and cameras. It used to include furniture, but I don’t need any more.

Here is my specific timeline:

Ongoing: Keep costs low. Keep learning ways to reduce costs and still be happy. Remove irritations such as having no dishwasher and having a strained rotator cuff. Apply for funner jobs with same employer.

In three years and four months: make last mortgage payment. That will reduce housing expenses by $505/month. That brings my housing to $300/month taxes and insurance + almost $200/month for repairs + almost $200 for utilities all divided by 2 (paying roommate). Not bad for city living.

In five years and two months: retire with full pension. That pension by itself will cover all my expenses. Unless they change the rules. Or inflation skyrockets. Or taxes skyrocket. Or a million other things that could go wrong. I’ve been maxing out my Roth IRA since Roth IRAs were first created, and I’m now also contributing to a Roth 403(b). (My pension is taxable, so the Roth stuff diversifies, plus taxes are going nowhere but up in the future. Just look at the history of US income tax rates and you’ll see what I mean.)

My investment plan is a little less exciting. I prioritize diversification. I used to not include bond-like things because my pension is bond-like, but really my pension fund is also invested in stocks, so if stocks plummet, my pension could be in trouble. So I’m including large cap and small cap, domestic and foreign (including developed and developing), growth and value, and bond funds and REITs. If I-bonds ever get good again, I want more of those. If CDs ever get good again, I’ll get some of those. I’m still working out exactly how I’m going to diversify—I’d like equal blocks in each category so I can easily see how they’re doing relative to each other. For example:
25% US total stock fund
25% foreign total stock fund
25% bond fund
25% REIT

or probably better

11% US large caps
11% US mid caps
11% US small caps
11% foreign stocks – Asian
11% foreign stocks – European
11% foreign stocks – developing countries
11% bond fund
11% Treasuries, I-bonds, CDs
11% REITs

Unlike Jacob, I’ll do most of my investing in index funds because I have learned that I cannot trust myself to pick stocks (or even to pick stock-pickers) and because index funds have very low fees. As I contribute, I’ll buy more in the categories that are cheaper. And when I retire, I’ll sell from the categories that are more expensive.

I plan to start with a CD ladder of 1 – 3 years worth of expenses depending on whether the market is plummeting, in a bubble, or normal. (For example, if the market is in a bubble when I retire, I will sell enough for 3 years of a CD ladder.)

Then I will withdraw a certain percentage of my investments each year. I will not adjust for inflation, but always just take the same percentage each year no matter how much or how little this is. This way I should reduce the chance of running out of money. That percentage will be at least 4% but no more than 7%–I haven’t decided yet. (I guess the latest “in” estimates for market growth and inflation are 8% and 3% respectively, which means I should be able to withdraw [8 – 3 =] 5% each year. In those years when that’s a lot of money, I’ll roll the extra into my CD ladder. In those years when it’s not quite enough, I’ll take the extra I need from my CD ladder. Note that this is not at all scary for me because I have a honking big pension.

Here are my predicted specific expenses during retirement in today’s dollars:

350 housing (334 taxes and insurance + 148 upkeep + 210 utilities -1/2 from roommate)
167 food at home (actually, I’ve been working on this and I think it’s closer to 120 these days)
500 health (400 insurance + 100 other)
228 car (174 car upkeep + 54 toward next car)
200 long-term fun
350 other spending (clothes, dance lessons and other classes, tools, family lending fund, eating out, books, movies, games, events, etc.)
257 charity
2052 TOTAL

That would require a savings of $500,000 with a withdrawal rate of 5% plus paying off my mortgage plus having a roommate.

To pay for this, I will be having a pension that currently is predicted to pay for all the insurance (400) plus about 1877 after taxes = $2277. This requires me to work five more years. This leaves me no deficit at all. If I quit now, I’d qualify for about $1350 + insurance in 11.3 years. If I wait two months, I’d qualify for about 1500 + insurance in 10.3 years. If I quit now and withdraw my pension money (I wouldn’t get the employer match), my entire retirement savings is $118,700, which would give me a monthly income of about $500. Also, I still have three years of mortgage payments ahead of me.

If I keep up with current contributions to Roth retirement vehicles for the next five years, I will have $155,000 in those alone, which would give me $645/month, which gives me some wiggle room in case the pension rules change or I can’t get a roommate or I start requiring pricey medications in my old age.

Disclaimer: I don’t technically fit Jacob’s request because my plan does not involve retiring before age 50. I am going to be 52. Or I might retire at 51, which would make me ineligible for my pension until age 53, and live on my savings for two years. So it’s merely early retirement for me and not extreme early retirement because I insist on living in a remodeled house (though small), having my own car (though old), taking dance lessons (though from a nonprofit), and relying on my employer’s pension.