My original yearly income targets were based on being FIRE at 65. Since I’ve been beating those target by a good amount for the last couple of years, it’s time to review the longer term plan and considering moving the target FIRE date earlier. Without further ado, here are my 2018 goals for income and a couple other things…
Goal #1 – Updated 2018 Goals for income
The gray line in the following chart is a very simple projection of my annual living expenses including an approximate 2% adjustment for personal inflation. I round some numbers so it’s not an exact 2% increase.
The solid red line shows historical progress of my yearly income which I originally tracked against the dashed black line. This was a projection of what yearly income I needed to achieve to reach FIRE at 65.
From 2015 – 2017, I was pulling ahead of the FIRE at 65 line by several years and I was increasing my yearly targets above the black line. So 2017’s target was $9,925 compared to the $8,337 plotted in the chart.
With an actual 2017 income of $12,159, it makes sense to recalibrate the projections. So the dashed red line is a projection of what yearly income is needed to reach FIRE @ 60.
For 2108, it’s a target of $13,760 or about 3.4 times my 2018 monthly budget of $4,040. This represents an increase of 13% over 2017’s income. See further below for the calculation if you’re interested.
Achieving the plan
I don’t have a dollar amount of investments as a target. My plan is simply to invest any excess money that I have after paying for living expenses and savings. Then I’ll simply see where I end up. So I view the income projection really as more of a progress indicator of what needs to be done than part of a plan of how to get it done.
On the face of it however, this doesn’t seem a difficult goal as my dividend income in the last three years have seen an average yearly increase of about 30% due to additional contributions and organic dividend growth. So a 13% increase should be easy.
But, over the last year I’ve been slowly moving away from higher yielding investments so the overall yield on my portfolio is decreasing. This includes getting out of high-yield corporate bonds which I was holding in taxable accounts, and adding total market funds to my portfolio for both US and International stocks. This improves the overall tax-efficiency and, I think, will improve the overall return too.
Goal #2 – Lower Spending
This year I’m going to look at reducing my mortgage payment, possibly by re-financing the loan. The goal is to get a new mortgage payment that’s lower than the $850 a month I withdraw from my Income Fund. Currently the monthly payment is ~ $1200 a month (excluding property taxes / insurance).
Goal #3 – Simplify
I also want to consolidate accounts by transferring my Capital One account into Vanguard. And perhaps close a Savings Account. The aim here is to reduce complexity and the number of accounts that I have open.
Ok, so that’s pretty sparse on the goals front, but that’s all I have!
Calculating the numbers
If you’re interested in the calculation for the required growth rate, here’s the detail. I wrote out the steps in deriving the formula.
Predicting future income in my case is really quite easy. I increase my living expenses by about 2% every year. This 2% represents my Personal Inflation which I’m setting in stone, regardless of what actual inflation does. The hard part is to manage the living expenses within that range, so if e.g. electricity prices increase a lot then I may need to reduce consumption or find money in other parts of the budget to compensate.
In my case, my living expenses this year will be $4,040 a month and when I’m 59 they’ll be $5,060 based on a 2% yearly projection with some rounding. $5,060 a month is $60,720 a year.
Now in 2017, I earned $12,159 in dividend income.
The question to be answered is therefore:
How much does $12,159 need to increase by every year to become $60,720 a year in 13 years’ time?
We can answer this question by starting with the formula for compounding interest:
 Future Amount = Todays Amount * (1 + Annual Growth%) ^ Number of years
Future Amount = 60,720
Todays Amount = 12,159
Number of Year = 13
Annual Growth% = What we want to know
Putting in the numbers makes it
 60,720 = 12,159 * (1 + Annual Growth) ^ 13
Dividing both sides by 12,159 gives us
 4.993832 = (1 + Annual Growth) ^ 13
Now to get rid of the “to the power of 13”, we take the natural log of both sides because x ^ y = y * ln (x):
 ln (4.993832) = 13 * ln (1 + Annual Growth)
ln (4.993832) is 1.608203 so the result becomes:
 1.608203 = 13 * ln (1 + Annual Growth)
Dividing both sides by 13 results in the equation becoming
 0.123708 = ln (1 + Annual Growth)
And to get rid of the natural log we added in , we use the exponential function since exp(ln(x)) = x
 exp (0.123708) = (1 + Annual Growth)
which calculates to
 1.131685 = 1 + Annual Growth
so Annual Growth = 0.131685 or 13.1685%
Quote of the day
Success is steady progress towards one’s personal goals.