I am a 33-year-old that is actively saving and building toward a passive income stream enabling me to either retire early or shift to a nonprofit career instead of my current job in tech. 

I have about $200,000 in taxable investment accounts, $120,000 in liquid savings, and own my home with a $240,000 mortgage and about $300,000 in equity. My 401(k) and Roth are both maxed each year and have a combined value of $70,000 right now. 

I currently make around $120,000 a year, and my long-term partner adds about $40,000 to shared income, but we are not married and file separately. 

I have a dividend portfolio providing $5,000 a year in passive income, with a goal of growing that to $15,000 in the next few years. I want to achieve financial independence by 40, which I am currently defining as more than $20,000 in passive income and my mortgage paid off. 

I also have some chronic health issues that require regular and expensive medical care — a gold or platinum plan under the ACA is essential. 

My question is: how do you advise calculating the passive income needed for early retirement, in my 40s instead of 60s? What asset level would be considered “safe”?  

I expect to have some income after leaving tech, whether from consulting or nonprofit work, but want to be effective in securing my passive streams. 

Appreciate any input, and thank you!

A curious investor

See: I’m a 39-year-old single dad with $600,000 saved — I want to retire at 50 but don’t know how. What should I do?

Dear Curious Investor, 

Financial independence is such a great goal for anyone to have, and I’m so glad to hear you’re already diligently planning for the income streams you’ll need in this early or phased retirement. 

Before we get to that though, I’d like to start off with your healthcare, as that will be a critical factor in how comfortable you are when you leave this job. We don’t know what the future will hold for health insurance in this country, so we can only operate under the assumption that it looks similar to what it is now. That being said, although you said a gold or platinum plan is essential, punch in the numbers for the policies available in your area but look at your options as if you were already 40 or 41 years old (as opposed to trying to see what’s available to you at your current age), said Tanja Hester, a MarketWatch contributor and author of “Work Optional: Retire Early the Non-Penny Pinching Way” and the new book “Wallet Activism” coming out in November. 

Hester, who retired at age 38 and is familiar with navigating the healthcare system as a financially independent individual, said sometimes, people find they don’t actually need the gold or platinum plan. “If you can build into your budget the healthcare expenses, a lot of folks come out ahead when you get a lower premium in exchange,” she said. Now this does not mean that’s the case for you — if you need it, you need it, she said — but look carefully at what is covered for medications, doctors, services and so on. By the same token, two plans could look completely identical, but the more expensive plan could actually end up cheaper if it covers prescriptions you need, for example.

In short: don’t just assume the most expensive plan is the best plan, but also don’t count it out when you take into consideration all of the medical expenses you will need to pay for in your lifetime. 

Insurance policy aside, try and make health expenses a line item all its own when you’re figuring out your budget for this next phase of your life. It’s hard — healthcare costs rise every year, and they tend to exceed typical inflation rates. “It’s harder to model but important to plan for,” Hester said. 

Although there’s time until you need a plan under the Affordable Care Act, future legislation may change the system as it stands now, understand that income level affects the subsidy level, so the amount you have in taxable income from dividends and interest plus withdrawals from tax-deferred accounts will matter, said Marco Rimassa, a certified financial planner and president of CFE Financial. 

Now, on to financial independence. You defined it for yourself as having more than $20,000 in passive income and a paid off mortgage. That definitely sounds good, but keep in mind you may very well be spending that much money (or close to it) on healthcare alone, so whatever you do on the side — be it consulting work or a job in a nonprofit — will have to help carry you through the next few decades of your life. 

“Early retirement requires more active participation in the process than traditional retirement,” Rimassa said. “The early retiree needs to be more active in monitoring their financial situation and adjusting to changing circumstances.” 

You asked what asset level would be considered “safe.” That’s really hard to say as no investment is 100% safe, Rimassa said. There are also many variables that go into what amount of money is enough (and what isn’t). He would suggest you use no more than a 3.5% withdrawal rate because of the longer time horizon you’d require, and it should really be closer to 3% for that extra cushion. Whether that’s feasible depends on a wide array of factors, including your housing and utilities costs, what you spend on groceries and healthcare, the type of lifestyle you want in this financially independent/future early retirement chapter and so on. Don’t incorporate your home value in this portfolio level unless it can be realized, such as through downsizing or using a HELOC, he said. “Note that the income need also should include relevant taxes,” Rimassa added.

Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey 

“Retirement is about income, not assets,” said David D’Eredita, founder and investment adviser with Rise Private Wealth Advisors. He suggests mapping out your core living expenses and lifestyle expenses (you may have to use estimates as you aren’t planning to make this change for another seven years) and then making a mock retirement budget. “Make sure you can cover your core with stable, reliable passive income sources,” D’Eredita said. “The 9% or 10% high-yield junk bond will never make you happier than the pain you’ll feel when it defaults. Save the plays with higher risk for the dollars allocated to your lifestyle expenses.” 

Be honest about what you think you’ll spend in this next chapter, too — “every day is Saturday, which is why many spend more money in retirement than they planned,” D’Eredita said. 

As for the investment vehicles you should use to maximize your savings in retirement (whether that’s at 40 or 60), D’Eredita suggests prioritizing more money in a Roth account as it will be tax-free dollars you can rely on in the long-term and there’s less concern about tax rates impacting your retirement. Also remember that some money in your retirement accounts, such as in a tax-deferred 401(k) plan, have more rules around when you can withdraw the money (typically age 59 ½ years old). Roth accounts allow you to withdraw your contribution before then.

If one is available to you, consider investing in a Health Savings Account. They’re often tied to high deductible health plans, but they offer triple tax benefits (tax-free contributions, investments and withdrawals if used for eligible health expenses). You don’t need to use the assets in the year you contribute to the plan either, which means you can keep the money growing in the account until you have health expenses you want to pay for — even if that’s after you’ve left your job. 

As far as the long-term outlook goes, remember that what you do now will affect your Social Security in the future, such as the duration of your work history and your earnings. Only use estimates of future benefits you feel confident you’ll see in your old age, and perhaps even underestimate it so you’re not relying on more than you’ll get, D’Eredita said. “Be careful you don’t plan on a Social Security income that won’t come to fruition,” he said.

Also see: I followed the path to FIRE — and learned that early retirement is the wrong goal 

I just want to mention one more thing about your plans for financial independence — prepare for the transition. Even if you do expect to work in some capacity after age 40, know that it may all look and feel a lot different than what you’re experiencing now. Your withdrawal strategy will be key at that time, Hester said, but your mentality around distributions may need a while to adjust. For some people, the shift from being super savers and seeing those account balances grow and grow and grow to then taking money out can be hard. 

Keep your partner in the loop with all of this as well. An early or phased retirement, especially at a young age when most other people in that demographic are still working, can produce tension or resentment, so communicate clearly and effectively and keep your significant other involved throughout your planning. 

Lastly, don’t necessarily wait until this deadline to start doing the things you want to do when you reach financial independence. If you plan to split your time between consulting and a hobby, start that hobby now, Hester said. If you want to do more socially or environmentally-minded work, see how you can get involved in that field before you reach your goal at age 40. 

“If one chapter ends and the other begins, that’s a much harder transition,” Hester said. “Carry into the next phase. That’s a much better formula for the transition.” 

Readers: Do you have suggestions for A Curious Investor? Add them in the comments below.

Have a question about your own retirement savings? Email us at [email protected]

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