During the third quarter of 2018 we continued to make good progress in our pursuit of financial independence and early retirement!

Our efforts were helped by the strong stock market. The S&P 500 delivered its best quarterly returns in almost five years during Q3 18, climbing by more than 7% during July, August, and September! The Dow Jones Industrial Average rose by 9% during the quarter, while the Nasdaq 100 rose by over 8%.

Those great returns from the market gave our finances a boost, and we made progress on the Net Worth, 529 Account Funding, and Passive Income goals we are tracking to measure our progress. We even hit one of our short-term financial goals a quarter early!

I. Net Worth: 85.9% of Goal (+2.6% during Q3 18)

Three months ago, I noted Q3 18 might be a more difficult quarter for our net worth, as our spending was likely to be a bit elevated because of travel for summer vacation and a couple of home maintenance projects we had planned.

The good news to report is that we did take a couple nice trips during the summer to see the sights, relax, and visit family, and we were also able to get a couple of projects off of our to do list over the past three months.

The better news is that despite the higher expenses we incurred, our net worth still climbed during the quarter, boosted by the strong returns from the stock market.

When all was said and done, our actual net worth (excluding home equity, 529 accounts, and potential Social Security benefits) rose by 3.2% during Q3 18, moving us 260 basis points closer to our FIRE goal. Our short-term goal last quarter was to get to 85% of our net worth target by the end of 2018, and I’m pleased to report that thanks to the great returns in the market, we hit that target a quarter early! As of September 30th we were 85.9% of the way to our target net worth!

Since we hit our short-term net worth goal early, we need to set a new target. I’m not expecting any special boosts to our net worth over the rest of 2018, but I do expect to get paid my annual bonus for this year during the first quarter of next year. Both my department and our company are having a good year, and I’ve contributed to several special projects in addition to my day job, so I’m hoping to receive a nice bonus for my efforts in early 2019.

Consequently, our new short-term net worth goal is to get to 90% of our target net worth by the end of Q1 19.

II. 529 Account Funding: 53.2% of Goal (+4.0% during Q3 18)

We once again made progress towards our funding target for our children’s 529 accounts during Q3. The total value of our 529 accounts climbed by more than 8% during the quarter, pushing us 400 basis points closer to our goal. We are now 53.2% of the way to our target, with our ending balance on September 30th boosted by both good investment returns and additional contributions to the accounts during the quarter.

We plan on using the 529 accounts to begin paying for college expenses in less than seven years, so capital preservation is becoming increasingly important to us as our children get older. I think we are likely in the later stages of the great bull market and economic recovery the U.S. has experienced since the financial crisis. But I don’t know if we have five days, five weeks, five months, or five years left, so I’m certainly not going to abandon the market entirely.

We did move to a slightly less aggressive asset allocation in our 529 accounts about a year ago, and we’re unlikely to move back to the most aggressive asset allocation in these accounts until we experience a major market correction I just can’t help trying to take advantage of. Since we don’t plan on touching any of our retirement assets for around 15 years, we haven’t materially changed the asset allocations in our 401(k) and IRA accounts.

Although we have made excellent progress on our 529 account funding over the six quarters I’ve been tracking our progress for Retiring On My Terms, we’re barely halfway to our goal, and I’m increasingly concerned we won’t be able to reach this goal by our target FIRE date. 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 near-term goal for 529 funding continues to be getting 55% of the way to our ultimate target by the end of this year. After some great results during the third quarter, I’m confident we can achieve this goal – barring a material downturn in the market!

III. Passive Income: 33.0% of Goal (+1.9% during Q3 18)

While the probability of hitting our passive income “stretch goal” by 2021 remains pretty close to zero, we continued working on it during Q3.

Our approach during the quarter was multifaceted. We made small additions to four existing stock positions in our brokerage account; added a new position in a company with a solid dividend; purchased a high quality corporate bond with a yield in excess of 4%; and reinvested the proceeds from a couple one-year CDs at rates that were more than 100 basis points higher than those we received a year ago.

The end result was increasing our expected annualized passive income by more than 6% between July and September. Our efforts improved our funded status by 190 basis points during Q3, to 33.0% of our target, up from 31.1% as of July 1st.

It’s great we’re moving in the right direction, but with less than three years between now and possible early retirement, the math is not on our side to achieve this goal. Realistically, it will be a victory to get to our target FIRE date with enough passive income to fund half of our anticipated lifestyle. But we don’t plan on giving up on our more ambitious goal without a good fight!

Our short-term passive income goal remains getting to 35% of our long-term target by the end of 2018. To achieve this, we’ll need to continue finding the funds to invest in a few more dividend stocks and corporate bonds over the next three months. We also have another CD coming due in November that we’ll likely be able to roll over at a materially higher interest rate, which will help on the margin.

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 less than three years away from our Target FIRE Date!

While our quarterly improvement has generally been modest, when I look back at where we were when we started documenting this journey, we have definitely made substantive progress on each of our goals! If we continue making progress at the same rate we have thus far over the next 11 quarters, we’ll get to our target FIRE date with a net worth in excess of our goal, be around 90% of the way to our 529 funding target, and generate enough passive income to fund more than half of our anticipated early retirement lifestyle!

Realistically, however, our progress is likely to slow over the next couple years. While I’d love it if the equity markets just keep climbing higher, at some point we’re likely to experience a correction, and it will probably last longer than the brief downdraft that occurred in late January. There are also no guarantees I’ll keep earning roughly the same amount as I have over the past few years.

That said, if I were a betting man, I’d still wager we can reach our Net Worth Goal sometime in 2020.

I remain cautiously pessimistic about reaching our 529 Account Funding Goal by our Target FIRE Date in mid-2021.

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!

Thanks for reading, and I look forward to providing our year-end 2018 update in three months!