Personal Finance

I'm 42 with $2.5 million in index funds and we're not sure how much we spend per year and need help getting organized

Rich Duprey

Published: January 18, 2025 5:22 am

Having organized financial records and a clear understanding of your annual spending is crucial when planning for early retirement. It allows you to accurately forecast how much money you’ll need, considering inflation and potential lifestyle changes. Without this data, you risk underestimating expenses, leading to financial shortfalls.

Moreover, detailed records help in strategizing asset withdrawal without incurring unnecessary taxes or penalties. Knowing your spending patterns enables tailored budgeting and investment adjustments. This organization can also be vital for estate planning, ensuring your wealth is managed efficiently after retirement or in case of unforeseen circumstances.

The situation

Unfortunately, a Redditor on the r/ChubbyFIRE subreddit finds himself seems to be in the exact opposite circumstance. He is 42-years old, married to a 34-year-old stay-at-home mom, with a 2-year-old son and a newborn daughter and lives in a low cost of living area. He has managed to save $2.5 million in index funds and keeps one year’s living expenses in cash. 

While his business nets him $275,000 to $300,000 annually, he has little idea of his actual yearly spending because he lacks clear records. He estimates it at $85,000, though he expects it to increase. 

Post-retirement at 50, the Redditor expects to have an annual income of $120,000 though he understands he will need higher withdrawals to cover taxes. Currently, his business is a solo operation, unsuitable for selling or hiring. What he needs is a way to get his records organized, to better plan for his early retirement.

Planning for success

I’m not a financial planner, so these are only my opinions, but preparing for early retirement is not just about saving enough money. While the Redditor has done an excellent job on that front, it’s also about having your financial house in order. Here he is stumbling.

A successful early retirement starts with careful organization and disciplined record-keeping.

It is critical you understand where your money goes. This means tracking your expenses with precision. 

Time to take action

The first thing to do is gather all your financial documents — bank statements, credit card bills, utility bills, and receipts. Use budgeting software, apps, or a simple spreadsheet to categorize your spending. You might discover you’re spending more than you thought on discretionary items or notice patterns that can be optimized. This is fundamental because your retirement plan hinges on how much you’ll need to live on annually. If you’ve been guessing your expenses, now’s the time to turn those guesses into facts.

Next, organize your income. If you’re like many people considering early retirement, you might have multiple sources of income including salary, investments, or a side business. Document how much each contributes and how stable these incomes are. This helps in planning not just for today, but for the years when those streams might dry up or change.

Your investments need special attention. Ensure you have a detailed record of all your assets, from stocks and bonds to real estate or retirement accounts. Understand the tax implications of each, as this will affect your withdrawal strategy. A comprehensive investment ledger will also help in rebalancing your portfolio, ensuring it aligns with your risk tolerance and retirement timeline as you approach your exit from full-time work.

Don’t overlook estate planning, either. Early retirement often means you’ll be managing your assets for a longer period than traditional retirees. Draft or update your will, consider setting up trusts, and make sure beneficiaries are correctly listed on your accounts. This isn’t just about after you’re gone; it’s about ensuring your financial plan can stand strong against unforeseen events.

Last, automate where possible. Set up automatic savings into retirement accounts or investments, automate bill payments, and use tools for reminders about tax deadlines or account reviews. Automation minimizes human error and forgetfulness.

Key takeaway

Getting organized for early retirement ultimately means creating a clear, action plan from your financial chaos. It’s about ensuring you can confidently step into retirement, knowing every dollar is accounted for and every decision is informed. It can help plug any holes in your plan.

Once you have your financial house in order, it’s time to visit a qualified financial advisor to review your work and ensure its on track with your vision. He can help create a personalized action plan tailored to your individual needs.

This process might seem daunting, and it likely will be when creating order from a mess, but it’s the groundwork that will make your retirement not just possible but enjoyable and secure.