The Internet is full of articles claiming that the first **insert amount** is the hardest to save. And that each next **insert amount** will become progressively easier. A popular early net worth milestone is to have $100,000 saved or invested, so we’ll go with that amount. A theory underpinning this statement is that when saving the first $100,00, your contributions are the main increase to the balance. Once you’ve achieved that level of wealth, the power of compounding helps out your contributions and a snowball effect begins. Interest or gains, depending on how the money is invested, will combine with your contributions to increase the balance more quickly. This theory works more reliably with interest than it does with market gains, but interest rates are much lower than stock market returns. Consequently, it should be easier to save the second, third, fourth (and so on) $100,000 than it was to save the first.
Maybe easier is different than faster. I equated the two in my mind. For us, each subsequent $100,000 milepost has taken longer to reach than the one before it. During this time we’ve even dramatically increased our monthly investment amount. Because we’ve automated more of our investing, it is easier to save than it was ten, or five, or even three years ago. But as you can see, accumulating more benjamins hasn’t been exactly linear (or predictable).
We did not start tracking our net worth from zero. When we started tracking, our invested assets already exceed $100,000. Strictly speaking, it is probably true that the very first $100,000 of net worth did take us the longest and was the hardest to accumulate. Starting from age 18 or even college graduation, it took us several (more than five, but less than ten) years to achieve six-figures of invested assets, and even longer for our net worth (when accounting for our mortgage and other liabilities) to exceed $100,000.
But because I am too lazy to look back and reconstruct the evolution of our net worth, we will start above zero. From the time we started tracking, it took just four months to accrue another hundred grand on top of what we had. After that, the next $100,000 took twice that time–eight months. The market is a powerful force. For those who believe it’s been trucking right along over the last few years, I have news. The market has slowed since 2017. While the power of compounding gains gives a boost to your investments, losses will slow your progress.
How does this impact our plans and expectations?
We aren’t particularly bothered by fluctuations in our net worth. Stock market volatility is expected to some extent, even if markets have jumped around more than usual in recent months. Maybe this will feel different when we complete the accumulation phase. I do wish that our accounts were still adding $100,000 every four months though! That kind of pace would propel us to financial independence a lot sooner. We’d be on track to hit our nest egg target about three years ahead of the schedule we expect. That means we’d reach financial independence in a little more than one year from now. But note that this level of return is not what we expect. Despite the current volatility, the markets are delivering roughly what we plan for, if not a little more.
The market could accelerate again and we could see higher returns. I won’t complain if that happens. But this illustrates the point that past market performance is not a guarantee of future results. The markets will probably pick up again at some point. However, market volatility also demonstrates how important it is to project returns that are as realistic as possible, or even a little conservative. In short, the slowed market growth does not alter our plan.
Even in calculating historical data, experts debate methods and accuracy of quoted return rates. When adjusted for inflation, the S&P 500 has returned somewhere around 7%. Often a higher number is quoted, but 7% is usually about the lowest we see. Our projections estimate a more conservative 6% return. This further provides insulation against fees. We use a fee-based financial planner. We talked about why in this post. We understand that this is [probably] more expensive, but we also appreciate the transparency. We found it much more difficult to spot fees on our own because many funds bury them. Even DIY investors inevitably pay fees (albeit perhaps at a lower cost). Fees are difficult to avoid. For example, if we want to invest our health savings accounts in the market (instead of an interest bearing savings account), we pay a monthly fee to do so. Market returns are sufficiently high enough to offset the fees, so it should be a net positive over time. This is why we think it’s wise to account for fees somewhere in your plan, whether investing with a fee-based planner or on your own. In addition to conservative return estimate, we also keep fees in mind by using a nest egg goal that is closer to a 3% withdrawal rate, rather than the 4% number used in the Trinity Study.
Our timeline is further insulated from short-term market returns thanks to our “early” and “traditional” nest egg phases. The two phase calculation means we can retire with fewer total dollars. During early retirement, we can draw down Phase 1 funds, including the principal, to near zero because our traditional retirement, Phase 2 age-restricted funds will compound for another decade-plus untouched. We estimate an even lower rate of return on our Phase 1 funds. That money will be needed within a shorter time, over the course of a decade or so. We don’t want to assume long term growth rates when the money won’t be invested long term. By the time we’ve reached traditional retirement age and are eligible to start withdrawing from the Phase 2 accounts, without having contributed any additional money during our early retirement and estimating conservative growth, the balances should exceed 33x our annual spending. That gives me all sorts of warm fuzzy feelings of security. Because our total nest egg goal is reduced by the two phase approach, we are less dependent on boosts from a bull market.
By contrast, if all of our funds were lumped together, we would want to accumulate 33x our annual spending before pulling the plug on our careers. Considering only one pool of money means we would need to save an additional 19% before reaching that full nest egg target. Even though a significant portion of our Phase 2 money is invested in Roth IRAs, where we could technically access our contributions before age 59-½, we are treating all tax advantaged and age restricted accounts the same. This method also ensures a more secure “traditional” retirement because we aren’t planning to withdraw from any of those accounts until we reach age 59-½. Even with a larger nest egg, our retirement would feel less secure overall. We’re more exposed to sequence risks and if we have a shortfall late in early retirement (even due to market factors), we could pull from those Roth IRA contributions. That could jeopardize our traditional retirement years.
Would we consider an earlier than 2024 career departure?
Even if the market were to suddenly pick up and turn bullish, we don’t anticipate ending our careers before 2024. We continue to refine and recheck our plan. We are glad we weren’t counting on a sustained bull market to carry us to the finish line. That would lead to some serious disappointment right now. Our data is sound, at least based on what we’re seeing now. We don’t object to pulling the cord from our career jobs earlier than planned if we pick up some big tailwinds and hit our numbers early. Although an earlier than planned career exit would require us to recalculate our nest egg target numbers. For every year we subtract from our careers, those Phase 1 dollars need to stretch further. Our time horizon is already so short that compounding and higher returns don’t have a chance to be of much help. Our Phase 2 funds are pretty much in coast-mode already, so traditional retirement isn’t an issue. Beyond the accumulation piece, we’re also considering exit timing within our retirement year for healthcare and tax reasons. So it’s likely that we’ll continue working for some period of months after hitting the numbers to reach the appropriate season, no matter which year. Right now, it looks like we’ll work for around nine months after we achieve our nest egg target. Even if we hit those targets tomorrow through some big windfall, we would stay in our careers for almost a year.
Given all of these factors, it’s unlikely from a logistical standpoint that we’d retire much earlier than our current target of 2024 because we have other, not strictly monetary preparations to make. We’ve got a lot to do! In the midst of feeling impatience, it’s sometimes strange to think that we are already retiring as soon as we reasonably can–there’s more to this than hitting a number. As we continue to track our progress, it is possible that we could exit our careers a year or maybe two, ahead of schedule.
What about your finances? How does the market affect your sense of security? Are you thinking about early retirement? Why or why not?