When Mrs. FireAt40 and I came up with the goal of $2 million by the time she reached 40 years old, we figured that'd be enough for us to be Financially Independent so we could spend our time doing what we felt was most valuable to us. Perhaps that means we take on some part time jobs that we really enjoy or managing rental properties. This is a hefty goal and it took some time for us to create a path that could hopefully get us to this amount. We're starting off at over $600,000-$700,000 depending on where the stock market is, so adding $1.4 million in 8 years is not going to be easy. Here is what we plan on doing to close this gap:
1. Maximize our 401Ks: We plan on putting the maximum amounts in our 401K each year, so that means $38,000 per year (2019 limit is $19,000 per person). I also receive $6,000 per year from my employer and the Mrs. receives 5,000, so we can figure a total of $49,000 per year. We'll invest in the S&P 500 index, which has garnered a 6% average return (with dividends reinvested) during my working life. In the last 100 years, it's returned 7% with dividends returned. And yes, this includes taking inflation into account. Using an investment calculator and plugging in our current balance of $500,000, that yields $1.3M in 8 years.
2. Keep the Savings Account Stable: We currently have $100,000 in savings and plan to keep that amount in savings over the next 8 years. Why do we have $100K in Savings? Well, for a few reasons: 1) We understand how easy it is to lose a job growing up in the 2008 recession-era, 2) We live in NYC, which is very expensive, so having a strong emergency fund makes us sleep easy at night, 3) We will use some of this money to purchase additional rental homes to be used for down payments. Our current salaries allow for us to save $2,000 per month, but I haven't taken this money into account since I like to be conservative in my calculations.
3. Home Equity: This idea is an interesting one. So, we have an extra $3,000 a month to invest in taxable accounts, which could yield $435,000 in 8 years if the market performs at the average return of 6%. However, what if it goes down 6% over the next 8 years? I guess it's possible. This type of uncertainty makes us uneasy if we really wanted to be FIRE at 40. What if instead of investing this $3,000 a month in the stock market, we just paid off our $500,000 house we are going to buy this summer? I mean, who wants a $3,500 or $4,000 a month mortgage when retired? Doing the math, we can pay the house off in 8 years and no matter what the stock market does, we will have a $500,000 house paid off and will have saved ourselves thousands in interest. This gives us more freedom such as having at least one of us scale back on work or selling the home and moving to a less expensive area of the country (since Long Island taxes are not sustainable). Even if the housing market crashes we'd have no mortgage during our FIRE years, which makes it all work out. And one more thing, if the house is worth at least $435,000 during a housing market crash and we sell, we still break even when comparing this to the idea of investing our money in the market (at a 6% return).
4. Rental Properties: We have one rental property and expect to purchase seven more over the next five years. The one property we have yields about $5K in profit each year and we put extra money on it each month to help pay down the mortgage. The money we make off the rental properties is invested into the S&P 500 index fund and after 8 years, we will conservatively have $100,000 in a taxable account. We buy these properties for about $60-100K and plan to put 25% down on each property. In 8 years, the plan is to profit around $40-45K per year on our rental properties, which will be helpful during the FIRE years.
End Result: There you have it, $1.3M in retirement accounts, $100K in Savings, $500K home equity, $100K in taxable accounts from our rental properties, and the bonus is $40K per year of rental income. This is how we plan on reaching $2M by 40. Is it a perfect plan? Absolutely not, but it's our plan and it's tailored to meet our needs. Wish us luck and we'll see how it goes!