Case 1: Seth and Teresa

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Seth and Teresa

It is May, 2017.  Seth (Age 37) is a software tester.  Teresa (Age 32) is finishing her first year of residency.  They have two young children.  They are very interested in the financial independence retire early plan, or working part time as soon as they can.

Goal

To retire by June 2035.

Balance Sheet

Seth and Teresa Balance Sheet
Figure 1.1: A snapshot of Seth and Teresa’s current financial picture

Special Considerations

Teresa expects her income to increase from $55,000 to $250,000 in June of 2019, when she completes her medical residency.

Seth is receiving an inheritance of approximately $160,000 late this year.  The couple wants to put $45,000 of this aside towards a house down payment fund.

Make A Plan For Your Money

Seth and Teresa want to spend $70,000 per year during retirement.  They decide to make a goal that is a bit safer than the 4% rule and use 3.5% instead to reach a target of $2 million in investments.

Their appetite for risk is moderate, so they target a 70% stock / 30% bond allocation which they will re-balance to 50/50 after they reach their retirement goal.

Seth’s investment knowledge gives him confidence that they can implement a more complex strategy with their investments than a typical family might.

  1. They will save $500 per month towards retirement until Teresa finishes her residency program.
  2. After residency in June 2019, they will increase their savings to $5100 per month.
  3. Seth will use the $115,000 remaining inheritance to completely pay off their student loans, and then put the rest towards their retirement goal.

Results

Here’s the long term outlook of their plan:

Seth and Teresa Long Term
Figure 1.2: Seth and Teresa’s long term plan

Because they started this plan 10 months ago, we can see how they are doing so far by zooming in on the first year:

Seth and Teresa Short Term
Figure 1.3: Seth and Teresa’s progress so far

 Learn more about the model used to generate these graphs. 

Contingency Plans

It is important to plan for the unexpected.  Seth and Teresa have contingency plans that fall into two buckets.

Upside

If the future brings unexpected good fortune, Seth and Teresa have the option to retire sooner or transition to part time work sooner.  If they find themselves over-performing the median expected case, they will stick to the plan they made and continue to invest aggressively.

Downside

There are a myriad of downside possibilities.  Seth and Teresa each have term life insurance policies to protect surviving family members in case of death.  Since Teresa has a high earning potential in the coming years, she has a disability insurance policy to manage that risk as well.

They have developed a plan for retirement without consideration for social security and medicare benefits, but they consider these a safety net against some downside scenarios.

In general, if they find themselves under-performing the median expected case, they will stick to the plan and attempt to increase contributions to stay on target.

Ultimately, they both accept that they may need to work longer or reduce their spending during retirement.

Conclusions

Seth and Teresa have a plan to meet their goal for early retirement.  Do you?  Comment below or Contact Me with your questions and ideas.

All dollar values and calculations are adjusted for inflation

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