Early retirement is a dream for many, especially for professionals like pharmacists. Nicole and her husband, both 35, have amassed about $2 million in investable assets and aspire to retire in their early 40s. Their goal is to reach between $3 million and $4 million by then, emphasizing the importance of strategic financial planning to mitigate risks during retirement.
To achieve their target, they aim to have $250,000 in cash, a key component in implementing the bucket strategy to handle the Sequence of Returns Risk. This risk refers to the potential negative impact of withdrawing funds from investments during market downturns, which can jeopardize long-term financial stability. The couple is keen to know the best methods for accumulating this cash without liquidating their existing investments.
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Strategies for accumulating cash
The most straightforward approach to gather the necessary cash is through disciplined saving over the next few years. By consistently redirecting their surplus income, they can gradually build the cash reserve they desire. Nicole and her husband diligently maximize their contributions to their tax-protected accounts and save approximately $40,000 annually in their taxable brokerage account.
Investment options for cash accumulation
In the past, they have invested excess funds in index funds and bonds. However, they are now considering a shift towards saving in a high-yield savings account or a money market fund. This pivot allows them to accumulate cash without needing to sell off existing investments, which could disrupt their portfolio’s growth potential. Currently, they have $67,000 in cash, and by saving an additional $40,000 each year, they can reach their cash target in about four years.
Understanding the implications of early retirement
Retiring in one’s early 40s is an ambitious goal, necessitating a high savings rate. The path to early retirement focuses less on the returns from investments and more on the percentage of income that is saved. For instance, saving 50% of their income could lead to retirement in roughly 17 years, while a higher savings rate would expedite this timeline significantly. Nicole and her husband have clearly demonstrated their commitment to saving, achieving multimillionaire status by the age of 35.
The freedom of financial independence
Financial independence does not necessarily mean ceasing to work; rather, it offers the flexibility to pursue passion projects, part-time work, or volunteer opportunities without the pressure of needing a paycheck. Many individuals experience the benefits of financial independence long before they formally retire, enjoying reduced stress and greater confidence in their financial decisions. It’s essential to recognize that the ultimate goal is financial independence, while early retirement is just one of many possibilities.
Final thoughts on cash savings
To reach their cash goal, Nicole and her husband should focus on channeling their taxable account savings and any dividends into cash. With current high-yield accounts offering approximately 4% interest, this strategy not only protects against the Sequence of Returns Risk but also ensures that their overall investment portfolio continues to grow. If they maintain their current financial trajectory, their $2 million in assets could potentially grow to between $3 million and $4 million within the next 5 to 7 years, even without aggressive investing.
In summary, if selling investments to build a cash reserve is off the table, redirecting savings into cash is the way to go. By focusing on their cash accumulation strategy, Nicole and her husband are well on their way to achieving both their cash target and their retirement aspirations.