Q2 2018 Financial Scorecard: Three Years to Financial Independence?
It has now been well over a year since I started Retiring On My Terms and began chronicling our quest for financial independence and early retirement.
This marks the fifth quarterly financial scorecard I’ve posted on these pages. I’m pleased to report we made good progress on each of our financial independence and early retirement goals during the second quarter, increasing our Net Worth, 529 Account Funding, and Passive Income.
The S&P 500 climbed by nearly 3% from the beginning of April through the end of June, which provided a nice tailwind for our finances. That said, we still have A LOT of hard work ahead of us if we expect to achieve our Target FIRE date of Friday, July 2, 2021!
I. Net Worth: 83.3% of Goal (+3.4% during Q2 18)
The second quarter of 2018 generated the largest quarterly increase in our net worth since we started tracking our progress on our FIRE goals last year!
The good results from the stock market helped move our finances in the right direction, as well as a couple one-off items that also increased our net worth.
Like most Americans, my employer does not offer a traditional defined benefit pension plan. However, in addition to the 401(k) plan I participate in through them, they do offer a supplemental cash balance pension plan that I am a participant in. During the second quarter, the company made its annual contribution for 2017 to this account for me, which gave our net worth a small boost.
Since I have been with my company for over five years, I am 100% vested in the contributions they have made for me to this plan over the years. Although I’ll be unable to access the funds until I reach traditional retirement age, they are mine, so I include them in our net worth. While this cash balance pension plan is a far cry from a traditional pension, and probably won’t ever pay for much more than a trip or two to the grocery store each month, it’s certainly better than nothing!
I also received a small amount of deferred compensation from four years ago during the second quarter. While most of my annual bonus is thankfully paid in cash, a small portion is deferred over time to encourage employee retention. So a little piece of my bonus from several years ago was finally paid this spring.
But the stock market was the primary driver of the increase in our net worth, helped by a more normal level of spending following our family trip to Walt Disney World over the winter. Our financial results in Q2 were also helped by the fact our income tax bill this year was lower than normal, since we qualified for the federal solar investment tax credit after installing solar panels last year.
When all was said and done, our actual net worth (excluding home equity and 529 accounts) rose by 4.3% during Q2 18, moving us 340 basis points closer to our FIRE goal. Over the past year, our net worth has climbed by 14%, and we’re now 83.3% of the way to our target net worth, up from 73.1% a year ago!
Over the second half of 2018, we’re unlikely to get any special boosts to our net worth. It’s just going to be my bi-weekly paycheck for the next six months, offset by our spending. We’ll be traveling a bit for vacation when I take some time off later this summer, and are also working on a couple of home maintenance projects, so our expenses are likely to trend higher during the third quarter.
Even so, I think our short-term goal of getting to 85% of our net worth target by the end of 2018 is within reach – as long as the financial markets continue to cooperate!
II. 529 Account Funding: 49.2% of Goal (+4.3% during Q2 18)
We once again made progress towards our funding target for our children’s 529 accounts during Q2.
The total value of our 529 accounts climbed by almost 10% during the quarter, pushing us 430 basis points closer to our goal. We were 49.2% of the way to our target as of June 30th, which unfortunately means we missed on our short-term goal of being halfway to our long-term target by mid-year. We got close, but didn’t quite make it!
Our 529 accounts did not perform as well as the broader market during Q2, so most of the growth in the value of these accounts was fueled by additional contributions, rather than investment returns. Fortunately, our home state offers an income tax credit on a portion of our contributions, so we remain incentivized to continue funding our college savings plans.
We plan on using the 529 accounts to begin paying for college expenses in about seven years, so capital preservation will become increasingly important to us as our children get older. Because of this, we’re unlikely to move back to the most aggressive asset allocation in these accounts, unless we experience a major market correction I just can’t help trying to take advantage of.
Over the course of the past year, we increased the value of our 529 accounts by 47%, which moved us from 33.5% of our target a year ago to 49.2% of our target today. However, we still have more than half of the work to do to hit our 529 account funding target, and I’m increasingly concerned we won’t be able to reach this goal over the next three years. We’re going to need many more quarters with both strong investment performance and additional contributions to have any chance of achieving this goal.
Positively, we’ll have several more years after our target FIRE date before our children will actually start college. Negatively, our income will be much lower if I do retire early from my current job, so we’ll be more dependent on market returns than additional contributions to continue growing the value of the 529 accounts before we start using the money to fund their educations.
Our new near-term goal for 529 funding is to be 55% of the way to our ultimate target by the end of this year. Since we won’t be able to get there solely by additional contributions, we’ll need a good boost from the market in the second half of the year to achieve this goal.
III. Passive Income: 31.1% of Goal (+2.3% during Q2 18)
After a couple of disappointing quarters, we made better progress on our passive income goal over the past three months.
Several stocks we already owned increased their dividends during Q2, and we added to a couple of positions in dividend paying stocks and bought a couple corporate bonds to increase our passive income stream. The ultimate result was hitting our short-term goal to get to 30% of our long-term passive income target before the end of the quarter!
As I’ve noted before, our passive income target is our “stretch goal” on our path to FIRE. I don’t think there is any way we’ll be able to fund our anticipated early retirement lifestyle solely through passive income by 2021. We’d have to increase our net worth by an insane amount over the next three years, and invest most of that money into dividend stocks, bonds, and cash flow positive real estate, to have any chance at achieving this goal.
That said, we did made substantive progress on our ambitious long-term target during Q2, as our expected annualized passive income rose by almost 8% since the beginning of April.
As with our 529 account funding goal, we have a very long way to go with our passive income target. Our efforts improved our funded status by 230 basis points during Q2, to 31.1% of our target, up from 28.8% as of April 1st. A year ago, we were at just 23.3% of our target.
It’s great we’re moving in the right direction, but with just three years between now and possible early retirement, the math is not on our side to achieve this goal.
Our new short-term passive income goal is to get to 35% of our long-term target by the end of 2018. To achieve this, we’ll need to find the funds to invest in a few more dividend stocks and corporate bonds. A couple one-year CDs I opened last year are scheduled to mature over the next three months. I plan to use a portion of those funds to purchase attractively priced dividend stocks, while reinvesting the remainder into new CDs, which are likely to pay almost 100 basis points more than they did a year ago.
IV. Target FIRE Date – Friday, July 2, 2021
Another quarter of tracking our financial performance for Retiring On My Terms is in the books, and we are now just three years away from our Target FIRE Date!
While our quarterly progress has generally been modest, when I look back on where we were a year ago, we have definitely made substantive progress on each of our goals!
If I were a betting man, I’d still wager we can reach our Net Worth Goal sometime in 2020.
As I mentioned earlier, I’m now more pessimistic about reaching our 529 Account Funding Goal by our Target FIRE Date in mid-2021 than I had been previously.
And simple math continues to tell me our stretch goal around Passive Income is not achievable within our timeframe, but that doesn’t mean we won’t keep trying!