Since becoming obsessed with personal finance and setting the goal of achieving financial independence (FI) by 35, one question I’ve struggled with is how to invest for the years prior to 59 ½. One strategy I’ve researched to achieve financial freedom while still young is through a bridge fund.
I love both my 401(k) and Roth IRA accounts.
You can’t beat the free money that companies match or the elimination of taxes on the gain after you qualify for withdraws. The challenge is that these tax sheltered accounts are meant to be used after the age of 59 ½ and have huge penalties for early withdraw.
The Bridge Fund serves to (you guessed it) bridge the gap between those who retire early, prior to having access to retirement accounts at the age of 59 ½.
If you participate with this blog frequently, you know that my wife and I have targeted 35 as our FI age. Of course, we plan to continue working after that, but we look forward to the freedom and options that come with financial independence.
To be financially independent means that we should have enough passive income, or returns on investments to cover our basic expenses.
Many personal finance blogs recommend saving/investing 25 times your annual expenses with a 4% withdraw rate as the target for Financial Independence. Others believe that these figures don’t take inflation into account and as such are flawed. I take a somewhat different approach.
Since I’m not planning to hit the beach after the age of 35 sipping Bahama Mamas for the rest of my life, I don’t need the full 25X expenses invested prior to hitting my FI goal. My plan is to reduce that to 15X.
Our expenses are about $30K per year, so 15 (x) $30,000 = $450,000. This amount would allow us to withdraw $18K per year at a 4% withdraw rate which equates to 60% of our annual expenses. Currently we are investing in an asset mix of Vanguard index funds. I’m also experimenting with Betterment on a small scale.
In addition to investments, we plan to have rental income coming in by the time we hit FI. Our properties won’t be fully paid off by that time, but we will have considerable principle with a positive cash flow. The conservative estimate would be $1,000 per month rental income after mortgage payments, taxes, repairs, some vacancy, etc. for an annual income flow of $12K.
This Bride Fund Matrix is intended to be a combination of rental income with investment withdraws which equates to ~$30K, or our annual expenses.
Is your Bridge Fund Matrix Feasible?
“Those who fail to plan, plan to fail.”
Reading my strategy may seem very simple, and I’ll be the first to admit that life rarely goes as planned. However, as the old adage above states, you have to plan and work towards that plan in order to achieve your goals.
My wife and I are totally in agreement with these goals, and use the motivation of freedom or at least choices to allow us to make sacrifices to reach FI.
Keep in mind that this bridge fund doesn’t take into account my IRAs or 401(k). These funds are meant for use after 59 ½. I’ve already built up a nice nest egg within these retirement vehicles, but will scale back to only the matched amounts for the next 10 years prior to FI. I expect these funds to continually grow for the next 34 years before I access them. I’ll just keep adding to them and sit back and let compound interest do its work.
Just in Case
As mentioned above, we will likely continue to work after 35. I don’t think life would be very fulfilling for me without having a purpose and “getting my hands dirty.” With that being said, my income level would no longer be the primary driver of career choice, and we would be immune to potential layoffs. In short, we would have options.
As we continue to work, doing the things we love after the age of 35, we would likely continue to contribute to our investments, and may not even need to access this Bridge Fund. The plan is to continue to grow this fund, even up to and after we have access to our IRAs and 401(k). Adding more to these investments will help to reduce the reality of inflation.
Man, I love compound interest.
What do you fellow PF nerds think? Are my assumptions way off key? Would you do anything different, or do you already have your own bridge fund under construction? Share in the comments below!
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