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.
My Strategy
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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My strategy is actually fairly similar, eerily similar! FI at 35, retirement around 40 for us. The other part of the bridge for us would be accessing the retirement accounts by withdrawing IRA contributions (penalty free) and perhaps a 72t withdrawal strategy. Because the latitude of those options, we will continue to max out tax deferred contributions rather than focus on the taxable “bridge” fund.
Best of luck to you as you continue to grow your assets!
The Green Swan
Great plan! IRA contributions are always an option but I’ll probably try to maximize compound interest by letting them sit. Good luck to you as well! I look forward to following your site!
If I’m reading your numbers correctly, a $450,000 bridge fund (15x expenses) will provide almost $29k in annual withdrawals assuming a 4% return and 25 years. That gets you to age 60, at which point you can start accessing your IRA and 401(k).
Sounds like you should be fine. Might even be better off because of your rental income.
For me, the hard part has been keeping expenses in line as we had kids and our “lifestyle” increased.
You are correct! The hope is that the fund continues to grow over time (or we reduce withdrawals for the hard years).
Yes, lifestyle is going to be the single greatest challenge! Luckily during our FI, we intend to continue working as well which should make up the difference or cover all necessary expenses. That way we can just let the bridge fund continue to grow without withdrawing after we hit 35.
Great write up and also similar to my case. We’re looking at FI at 35, with the possibility of having rental income.
One option we are considering is creating an IRA Conversion Ladder (since we have Traditional IRAs). This would help out our 40-59.5 years, with the idea of drawing down on taxable accounts during the 35-40 years.
Lastly, we also plan on making a contribution somehow, so we will likely receive some type of compensation for our work. The nice part will be, as you put it, we will have more options when choosing the type of work.
Awesome plan with the IRA Conversion Ladder! So cool that we are on track towards the same goal! Can you say accountability partner?! 😉
Sounds good to me!
I also have quite a bit to learn about rental income, as we’re only in the stages now to save up for the condo we currently rent. Nice work building up to multiple properties already!
This is a question that I have struggled with even before I started blogging – so much so that it is the topic for my next ebook. I plan to use a mixture of a 72t, backdoor Roth IRA conversions, Roth principal contributions, and taxable investments to both bridge my early years and still maximize my earning potential.
Great plan! Good luck on you similar journey!
I’m with you. I have not figured out how comfortable I will be with a 20x or 15x fund, but I’m working that out in my head now. I know I’ll want funds I can access before traditional retirement age. I know that I will keep working some, but not full time. I know that I do not intend to have kids. I know that my expenses are low, but I expect them to grow a bit.