How to fund my Retirement?

I learnt about Financial Independence in early 2014 (here). I spent a lot of time studying the different blogs that talk about Financial Independence and came to a definition of what Financial Independence means to me. I also realized that there are two different kinds of retirement…early and real retirement phases. Since I wanted to gain financial independence by year 50 (wish me luck), I decided that my retirement will have two phases.

  • Early Retirement (50-70yrs)
  • Real Retirement (70-100yrs)

Now, with my health issues, I am sure I will not live until 100. But, I do not want my family to run out of money. So, I am going to plan assuming retirement lasts until 100…if we have a few down years in the market, this additional planned period should help compensate.

The next question is: how do you fund the two retirement phases? Here is my high level design

  • Early Retirement (50-70 yrs)
    • Funded by Passive Income Streams
  • Real Retirement (70-100 yrs)
    • Funded by 401k and IRAs

Early Retirement Funding (50-70 yrs, $50000 pa)

Having decided that passive income streams will fund my early retirement years, the following questions come next.

  • Why Multiple Passive Income streams?
  • What kind of Passive Income?
    • My choice are Interest from cash and Dividends from stocks and bonds.
    • Details here
  • What are the core principles I should follow for my Passive Income Streams?
  • How should I implement the passive income design principles?

I established multiple passive income streams in 2014 and let them fly. In 2015, I would like to put the investments on auto pilot and let the investments compound from all the automatic investment amounts and the dividends that each investment produces. The progress of these investments are tracked here.

Real Retirement Funding (70-100 yrs, $30000 pa)

For real retirement, I wanted to use the traditional funding vehicles like 401k and IRAs. To support 30 years of $30000 pa, I would need at least $900K in my retirement fund. Since I had 401Ks from multiple companies, I decided to combine my previous employers’ 401Ks into one single Vanguard IRA. The next important question was how to invest the money inside the IRA.

There are a few main ideas I wanted to follow for my IRA investments

  • Automated rebalancing
    • I.e. Target retirement funds
  • Spread the risk across 5 year time periods
    • Lets take a 2030 Target date retirement fund.
    • This fund will get super conservative as it approaches 2030 i.e. sell stocks and move that money to bonds and cash.
    • If there was a 5 year bad stretch of the market preceding 2030, then all the stock investments sold will be at a loss.
    • So, I wanted to make sure that not all the money is invested in 2030…some in 2035, some in 2040, some in 2045, etc. This will spread the risk of a bad 5 yr market performance across many 5 year periods.
    • In addition, this will keep the IRA money in buckets with different conservative basis i.e. there will be a growth component as well for some of the funds.

Considering the above main ideas, I have spread the IRA money into different 5 year buckets:

  • Vanguard Target Retirement 2030 Fund (55 yrs of age)

  • Vanguard Target Retirement 2035 Fund (60 yrs of age)

  • Vanguard Target Retirement 2040 Fund (65 yrs of age)

  • Vanguard Target Retirement 2045 Fund (70 yrs of age)

The goal is that when I reach 70 years of age, the above four funds would have reached their most conservative state and be ready for consumption during the retirement years.

Conclusion

My expectation with the two pronged attack (early and real retirement funding) is that a combination of the passive income streams and the retirement fund should provide a reasonably comfortable money pool for each month spent in retirement.

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