The long road ahead to my FI cross-over point

I’ve been procrastinating on updating my income target goals but I finally decided to get it done. What are the numbers? Read on to find out!

Making predictions of future income growth is hard; especially when not only are dividend amounts increasing but there’s a variable amount of new capital being added through the year. Purchases made early in the year will also have much more impact on yearly income than those made towards the end.

And the longer the timeframe of predictions, the more inaccurate any projection is likely to be. So I decided to plot out a conservative / realistic growth estimate showing what I need to do to achieve Financial Independence by the age 65.

And here it is, including my progress as of last year in red.

The upper gray line represents current yearly living expenses based on my Budget. I reduced spending last year, but keeping a lid on it is getting hard as I’ve incurred a number of medical expenses this year. So I’ve projected a 2% annual increase going forward. On the other hand my income has increased more than 2% a year so that’s not necessarily a bad thing.

The black line represents my yearly target; it’s calculated by using an estimated 3.5% yield based on estimated portfolio value after new contributions and capital growth. I’m confident on being able to add $24,000 per year and will adjust that 2% each year. As for capital growth I’ve estimated 6% although the last two years have been under that level. Maybe 2016 will reverse the trend. In reality, I’ve been able to add more than the $24,000 estimate in previous years so a lower capital growth hasn’t really had much effect.

You could also calculate the projected income based on dividend income and expected dividend growth. I prefer to use total market value and calculate income as a percentage of that.

The chart makes visible the two levers of Financial Independence – Income (in black) and Expenses (gray). Lowering Expenses moves FI that much closer.

You can find the actual numbers on my Goals page; but here’s a summary of the progress so far.

Year Budget Contrib Growth Total Income Contib Growth Total Income
2011 3,650 7,000 0 7,000 0 6,742 53 6,795 0
2012 3,700 45,000 1,918 53,918 1,530 57,407 1,543 65,745 1,530
2013 3,750 45,000 4,967 103,885 3.975 45,816 7,218 118,779 4,299
2014 3,960 45,000 8,215 157,100 4,950 53,832 2,255 174,866 5,376
2015 3,900 45,000 11,674 213,774 5,850 49,359 -9,213 215,011 6,792
2016 3,900 24,000 14,675 252,449 7,020

Higher contributions in 2012-2015 were mostly from existing money being re-purposed for my Income Fund, plus work-related bonuses that I don’t assume to receive.

I calculated the actual growth value as the difference between the market value and the prior year’s total + change in cost basis.

The minimum goal

Here are the projections for last year and next year.

Year Age Budget Contrib Growth Total Target Months Yearly 
Target $
2015 44 3,900 45,000 11,674 213,774 1.50 5,850
2016 45 3,900 24,000 14,675 252,449 1.80 7,020
2017 46 3,970 24,480 17,205 294,134 2.10 8,337

I beat my original 2015 target dividend income quite comfortably with end of year income of $6,792 vs a target of $5,850. That means I have a big head-start to meet the original 2016 target of $7,020.

Stretch Goal

However I decided to aim higher and go for 2.0x my monthly income as a stretch goal – this would be $7,800 or an increase of $1,000 over my 2015 income. I think this result is achievable based on my estimated dividend payments this year.

I’ve updated the blue sidebar on the blog with the new target and status information as of February 2016.

Why an income target can be bad

One of the things I don’t like about setting a particular dollar amount as a goal is that it can lead to chasing yield in order to meet that goal. I’m using this number only to track my progress towards Financial Independence; it’s not something that must be beaten at all costs. If I achieve the minimum goal of $7,020 then I’m on track for FI at age 65.

On the other hand, If I beat the target, then I’ll be reaching my FI date earlier than planned which is my real goal since I’m contributing all spare money to my Income Fund. I fully expect to be able to reach the FI cross-over point before I’m 65; I just don’t know how much sooner it’d be at this point. But I like keeping the original target values to (hopefully) see how much I over-achieved rather than continually re-adjusting the plan.

Quote of the Day

I try not to get involved in the business of prediction. It’s a quick way to look like an idiot.

9 thoughts on “The long road ahead to my FI cross-over point”

  1. Having a plan with a lot of assumptions beats having no plan at all.
    With this exercise, you will be able to track progress within a context. That is key!

    I like the idea to plot planned and actual progress in one chart. I will do this as well with the amber index that I use.

    1. Hi Ambertreeleaves,

      Yes I suppose it’s really more a set of milestones than plan (my plan is to save as much as I can), but either way it allows tracking of where I’m at and how far to go as you mention.

      Best wishes!

  2. I’ve been doing a bit of long term planning/forecasting as well and we’ve still got a long road ahead of us. Especially since this year likely won’t see much in the way of progress other than dividend growth.

    Glad to see that you’re on track to reach your FI goals right now. Even though it still looks like a bit of a daunting task since it’s 20 years away I have a feeling that you’ll be able to draw that date in further as time goes on. If you can decrease your expenses you get the boosting effect of a lower income requirement plus more capital to invest each month/year. That’s a win win.

    1. Hi JC,
      No one can predict the future but I think it’s good to project out and see what kind of numbers are involved in reaching FI. I do expect to bring the date forward as I’m currently contributing a lot more than the $2,000 a month I projected but many things can happen in the next 20 years.

      I’m certainly keeping an eye on expenses because it helps every metric as you mention but I’m not sure how much more I want to cut to be honest. I think if I keep any increase to less than an inflationary target of 2% yearly then that might be a good balance.

      Best wishes,

  3. A big downside of focusing only on income as a target is that it can force you to chase yield versus quality. Some of us were caught doing that before and well, ask any one of us in the community our thoughts about KMI or BBL. There is nothing wrong with setting tough/challenging/stretch goals as long as you stay disciplined as an investor and hit the goal the right way by investing in great companies.

    Best of luck as you find the perfect goal and way to calculate it. Cheers.


    1. Hi Bert,

      Although I missed KMI, I caught some of BBL and have a -43% loss so far. Luckily the purchase was small ($400) so the income impact was pretty minor. Ironically this was an attempt to diversify sectors rather than reach for yield although it was close to my yield limits when I bought. I suppose I successfully diversified between a bad dividend paying stock and good ones 🙂

      I definitely agree with you on the income targets; the target I went for is my current projected income more-or-less so I’m not hungry for higher yields in that sense. My projected income isn’t certain though since it depends on variable fund payouts. I look at the long-term projections as milestones more so than goals, so I know if I’m falling behind or not.

      Thanks for stopping by. I am looking forward to reading your March results – it’s always a good month for dividends!

      Best wishes,

  4. I like your conservative approach, where you are guarding yourself against chasing yield. I also like the fact that you are aware that merely adding new money increases income – but it could be masking problems with legacy positions.

    After all, your goal is to reach a sustainable amount of dividend income, and not just hit the numbers.

    I personally calculate organic dividend growth rates for holdings at say 12/31/2014 to see how much my total dividend income would have increased by if I had done nothing for 1 year. I agree that keeping yourself honest with yourself is really important

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