How To Retire Early And Never Have To Work Again

Beautiful Sunset In MexicoThere’s nothing better than being free to do whatever you want. However, unless you’re born with a multi-million dollar trust fund, you’ll unfortunately have to work for your freedom.

You can follow my savings guide to increase your chances of a wonderful retirement by 50-65. But, what if you want to retire earlier?  Say at the age of 40 or 45? You’re in luck, because I have a very simple, yet effective plan for you. This is something I’ve been following for the past 13 years to allow myself the option to retire as early as 35-45. I think you’ll like the option as well!

What’s important is recognizing your inner frugality, your Herculean discipline, the government’s generosity, and your mortality.

EXAMPLES OF PEOPLE WHO’VE RETIRED EARLY

Realize that it’s an absolute fallacy you must work until 60-65 to be able to retire. It’s up to you whether you want to have the freedom to do whatever you want. You just have to make some sacrifices.

I will assume that you enter the work force at age 22 after college. All you have to do is work for 18 consecutive years and save 55% of your after tax profits without fail. At age 40, mathematically you have now saved enough to last you 20 more years until age 60. At age 59.5, you are then allowed to withdraw any money from your tax-deferred retirement savings penalty free.

The money you saved in this time period can be spent in full, if so desired, every year until you hit age 60. By the time you are 62-65, you are then eligible for Social Security benefits to compliment your other tax deferred retirement savings.

EXAMPLE 1: AVERAGE JANE

Age Yrs Worked Gross Income Net Income Effective Tax Rate Disposable Income After Savings Savings at 55%
22 0 0 0 0 0 0
23 1 $35,000 $29,750 15% $13,388 $16,363
24 2 $40,000 $34,000 15% $15,300 $18,700
25 3 $45,000 $38,250 15% $17,213 $21,038
26 4 $45,000 $38,250 15% $17,213 $21,038
27 5 $50,000 $42,500 15% $19,125 $23,375
28 6 $55,000 $46,750 15% $21,038 $25,713
29 7 $70,000 $56,000 20% $25,200 $30,800
30 8 $70,000 $56,000 20% $25,200 $30,800
31 9 $75,000 $60,000 20% $27,000 $33,000
32 10 $80,000 $64,000 20% $28,800 $35,200
33 11 $90,000 $72,000 20% $32,400 $39,600
34 12 $90,000 $72,000 20% $32,400 $39,600
35 13 $95,000 $76,000 20% $34,200 $41,800
36 14 $100,000 $75,000 25% $33,750 $41,250
37 15 $100,000 $75,000 25% $33,750 $41,250
38 16 $100,000 $75,000 25% $33,750 $41,250
39 17 $100,000 $75,000 25% $33,750 $41,250
40 18 $100,000 $75,000 25% $33,750 $41,250
Total $ 1.34 mil $1.06 mil $583,275

Jane is a University of Colorado grad who majors in English. She gets a job in Denver as a telecom services provider sales rep.  It’s not the best job in the world given her interests, but it pays the bills while she stays with her parents for the first 3 years to save money. At the age of 25, she moves out and co-habits with her boyfriend, saving money in the process.

From ages 41-60, Jane can spend roughly $29,163 a year until age 60 and never have to do anything at all! That’s right. With her $530,250 saved up, she doesn’t need interest or investment returns to spend $29,163 a year. So long as she doesn’t increase her lifestyle she’s grown accustomed to for the past 18 years, she’s fine. Jane can also earn a risk-free 2% return on her $583,275, which yields roughly $11,500 to go on top of her $29,163 to equal roughly $39,000 in after tax income a year.

If we exclude the interest income, $29,163 a year is not exactly a lot to spend, but during her working years from age 22 to 40, she was only spending about $32,000 a year after taxes anyway. In order to make her money go farther, Jane could move to a cheaper country, live with a working spouse, work part-time, or attempt to invest their money. If she’s been used to living off $32,000 working, suddenly, there are 8-10 hours more a day to make $2,837 a YEAR to close the difference and then some!

EXAMPLE 2: FLOYD, THE GO-GETTER

Age Yrs Worked Gross Income Net Income Effect Tax Rate Disposable Income After Savings Savings After 55%
22 0 0 0 0 0 0
23 1 $60,000 $51,000 15% $22,950 $28,050
24 2 $65,000 $53,300 18% $23,985 $29,315
25 3 $80,000 $65,600 18% $29,520 $36,080
26 4 $80,000 $65,600 18% $29,520 $36,080
27 5 $90,000 $72,000 20% $32,400 $39,600
28 6 $90,000 $72,000 20% $32,400 $39,600
29 7 $95,000 $76,000 20% $34,200 $41,800
30 8 $100,000 $77,000 23% $34,650 $42,350
31 9 $100,000 $77,000 23% $34,650 $42,350
32 10 $120,000 $92,400 23% $41,580 $50,820
33 11 $130,000 $100,100 23% $45,045 $55,055
34 12 $135,000 $103,950 23% $46,778 $57,173
35 13 $150,000 $112,500 25% $50,625 $61,875
36 14 $150,000 $112,500 25% $50,625 $61,875
37 15 $155,000 $116,250 25% $52,313 $63,938
38 16 $170,000 $127,500 25% $57,375 $70,125
39 17 $180,000 $133,200 26% $59,940 $73,260
40 18 $180,000 $133,200 26% $59,940 $73,260
Total $ 2.13 mil $1.64 mil $902,605

Floyd graduates from Virginia Tech and becomes a software Engineer at a small software company in San Francisco. Floyd isn’t the most brilliant of software engineers, which is why he couldn’t get into Google, and therefore doesn’t make as much as his fellow Googlers. That said, he’s making a healthy six figure income by age 30.

With a $902,605 nut Floyd has accumulated over the past 18 years, Floyd can spend a healthy $45,200 a year for 20 years without having to do a thing. At a risk free 2% return, Floyd can earn $18,000 a year to boost his annual spending to $63,200 if we want to get a little more realistic.

Couldn’t you live off $63,200 in AFTER-TAX income in practically every city in the world?  Imagine if you found a spouse who worked, or actually made and saved the same amount of money you did?  You could both live of $126,400 a year quite comfortably.  But, the theme of this post is to retire early and only depend on yourself, so this is what Floyd will do.

EXAMPLE 3:  FELICITY, THE TALENTED

Age Yrs Worked Gross Income Net Income Effect Tax Rate Disposable Income After Savings Savings After 55%
22 0 0 0 0 0 0
23 1 $60,000 $51,000 15% $22,950 $28,050
24 2 $65,000 $53,300 18% $23,985 $29,315
25 3 $80,000 $65,600 18% $29,520 $36,080
26 4 $100,000 $82,000 18% $36,900 $45,100
27 5 $110,000 $88,000 20% $39,600 $48,400
28 6 $120,000 $96,000 20% $43,200 $52,800
29 7 $130,000 $104,000 20% $46,800 $57,200
30 8 $150,000 $115,500 23% $51,975 $63,525
31 9 $150,000 $115,500 23% $51,975 $63,525
32 10 $170,000 $130,900 23% $58,905 $71,995
33 11 $170,000 $130,900 23% $58,905 $71,995
34 12 $200,000 $154,000 23% $69,300 $84,700
35 13 $225,000 $168,750 25% $75,938 $92,813
36 14 $250,000 $187,500 25% $84,375 $103,125
37 15 $250,000 $187,500 25% $84,375 $103,125
38 16 $300,000 $225,000 25% $101,250 $123,750
39 17 $350,000 $259,000 26% $116,550 $142,450
40 18 $350,000 $259,000 26% $116,550 $142,450
Total $ 3.23 mil $2.5 mil $1.36 mil

Felicity graduates in the Top 3% of her class at UC Berkeley and gets a job at the Boston Consulting Group, one of the world’s leading strategy consultant firms. She has a fantastic career and gets promoted every 3-5 years on average until she becomes a senior executive at age 38. She has a couple little ones, and decides to retire at 40.

With a retirement savings of $1.36 million, Felicity can spend $68,000 after-tax a year as she stays at home and spends time with her 6 and 7 year old sons. Felicity didn’t have the best of luck with love, and divorced her $300,000 a year husband soon after the kids were born. They share custody of their sons, and also share the cost of raising them.

At a 2% risk free return, Felicity can generate $27,000 a year in interest income, boosting her annual spending to roughly $88,000 after tax. Felicity was living off of around $88,000 a year in disposable income at the age of 35, so it’s not that big of a stretch for her.

STUDY THIS SIMPLE RETIREMENT CHART CAREFULLY

If You Save This Much Of Your After Tax Income Every Year You Save At This Rate, You Save This Many Years For Retirement After 10 Years Of Saving, You Save This Many Years For Retirement After 15 Years Of Saving After 20 Years Of Saving
70% 2.33 23.3 35 46.7
60% 1.5 15 22.5 30
50% 1 10 15 20
40% 0.67 6.7 10 13.3
30% 0.43 4.3 6.4 8.6
25% 0.33 3.33 5 6.7
20% 0.25 2.5 3.75 5
15% 0.17 1.77 2.66 3.7
10% 0.11 1.1 1.77 2.22
5% 0.05 0.52 0.8 1.05

If you save 50% of your after tax income a year, you only have to work 1 year to accumulate 1 year of retirement savings. If you keep saving at this rate for 15 years, you will logically accumulate 15 years of retirement savings. If you save only 10% of your after tax income a year, you have to work roughly 10 years to accumulate 1 year of retirement savings!

The key here is after tax income and what you live on. The default, base case scenario is that one can live off 50% of their after tax income. Living off less for an extended period of time without making more than $100,000 a year is not very realistic or sustainable.

Use a simple $100,000 after tax disposable income figure, and a $50,000 yearly living expense target for retirement to work the math yourself. Save half of $100,000 = $50,000 = 1 year of retirement.  Save only 10% of $100,000 = $10,000. You need to save $10,000 for 5 years to accumulate your $50,000 annual living expense!

WHAT ABOUT CHILDREN?

Children are obviously a big determinant in whether you’ll have the ability to retire early or not. But, are children really that expensive if you see plenty of couples who earn $50,000 or less have multiple children? The government provides a $1,000/year tax credit per child for middle class families as well.

The conventional wisdom is that if you decide to have children, you should immediately slap roughly 22 years of work to your life.  You want to be able to provide for their living expenses and tuition through college, just in case your child isn’t that gifted to get a scholarship, or work to support themselves.

The good thing is that conventional wisdom is often times wrong. If two parents decide to save 55% of their after-tax income every year after college for 18 years, the “Average Janes” of the world will have $78,000 a year to retire on and provide for a family. The “Floyds” of the world will have roughly $120,000 a year to spend, and the “Felicities” of the world will have about $170,000 a year to spend. Can you make these numbers work to provide for your family? I think so, but it will obviously be much harder if you were a single parent.

What’s even “easier” than both parents saving 55% of their after-tax income is that one parent works, while only one parent saves as aggressively.  This way, the early retiree parent can simply be added on the working parent’s healthcare and all other benefits. Hey wait a minute, I think this is what happens already for stay at home moms or dads! Again, the difference is the aggressive savings plan, so study the chart above once again!

WHAT ABOUT INFLATION?

Inflation is a beautiful thing that scares people who do not understand basic economics. To put it simply, inflation rises when the economy starts to heat up, and falls or stays flat when the economy cools. People often ask, “What happens when inflation hits 8%?  We need to invest and save more!  We’ll be screwed!”  We won’t be screwed. If inflation ramps from 2% currently to 8% in the future, it means the economy is ROCKING AND ROLLING! There is too much money sloshing around the system, and demand is too great, causing prices to rise.

What happens when “prices” rise? Your income and real assets rise. Nominal interest rates also start to rise, meaning the real interest rate return on your investments, CD’s, and savings also begins to rise. Nominal interest rates are generally higher than inflation, otherwise you’d have negative real interest rates. In other words, in a 8% inflationary environment, you might receive a 9% nominal interest rate on your yearly savings account, leaving you with a 1% real rate of interest.

Everything is aligned folks!  Don’t let the inflation pollyanas scare you. Look at the 35 year chart of the 10-year US yield. It’s done nothing but go straight down.  If people want to go more into detail and understand economics, let me know. But before we have an economics debate, please make sure you’ve at least read the basics.

WHAT IF YOU HAVE A DESIRE TO DO SOMETHING AFTER YOU RETIRE?

Believe it or not, some people actually want to continue to be active during their early retirement. Maybe they become park rangers, tour guides, freelance writers, or consultants. If your monthly individual operating expense is $50,000 a year, and you find a job you enjoy that lets you work part-time and make $20,000 a year, then you’ve suddenly bought yourself many more years in living expense coverage.  Or put it differently, all you need to do is be an “Average Jane” in the example above.

There are thousands of things in this world that you can do to make money. And to let your mind languish after retiring from your day job is one of the dangers of early retirement. By making just $20,000 a year in a hobby she enjoys, “Average Jane” increases her disposable income in retirement by 50% to $59,000 from just $39,000 previously.

LESSONS LEARNED AND A 4th EXAMPLE

1) First and foremost, get a college degree because it will help set you free. Without a college degree, it’s unlikely any of these three would land their jobs.

2) The second lesson is that by living below your means, and sacrificing, you can essentially live for the rest of your life after 40 without having to work another day in your life.

3) Third, there will be people who say it can’t be done, but it can be done, because all three examples are real. Furthermore, I am a 4th example!

For 13 years I’ve saved 50-75% of my after tax income, leaving me with roughly 16 years worth of current living expenses (13 years x 1.2 in the chart above) based on my cash savings.  If I decide to sell my house and live in a more cozy 2 bedroom condo/house, the living expense coverage rises to about 25 years. And If I sell my rental properties, the living expense coverage shoots to over 30 years.

What’s important is NOT the amount saved, but the annual living expenses coverage saved, since each person’s desirable living expenses are different. Maybe some people in the Mid West are happy with $3,000 after tax a month to live on, while others in NYC need $10,000 in after tax income to comfortably survive. Shoot, some of you might even want to move to Thailand, Malaysia, or The Philippines, where $2,000 a month in after tax income will let you live like Kings and Queens!  Who knows the right dollar amount. It all depends on the individual.

WHY I SAVED SO AGGRESSIVELY FOR SO LONG

If I wasn’t whipped so hard my first two years out of college, I would never have saved so much. Thank you sir, may I have another!  I worked for a firm that made me get in at 5:30am every morning and have me stay until 7:30pm on average every evening.  Some evenings, we went to 10:30pm, which was brutal. Furthermore, I constantly had to work at least 5 hours a weekend, leading to a total time spent of roughly 75+ hours a week. I gained 20 lbs, was constantly under pressure, and was generally pretty stressed. Despite the pain, the one thing I knew was that if I could just get through these first two years, I would be set.

Given the difficult experience right out of school, I swore to myself that I would save like a maniac to have the optionality of retiring early if I wanted to. I NEVER wanted to go back to that situation again. To be able to have the freedom to answer to no one is priceless. Hence, saving 50-75% of my after tax income is such a bargain for priceless!

Right before my 35th birthday in 2012 I decided to take a leap of faith and retire from Corporate America to travel and work on my entrepreneurial endeavors. It’s been two years now and I love every minute of the freedom. Early retirement is absolutely worth all the “sacrifices” of saving and investing your earnings.

Recommendation For Achieving An Earlier Retirement 

The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.

One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. There is no better free online tool that has helped me stay on top of my finances more than Personal Capital. It only takes a minute to sign up.

Photo: Sunset at Islas Mueres, Cancun.  SD.

Thanks,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. newdad says

    This is great! Now, all I need is a time machine to get back to age 22.

    Cynicism aside, What would you recommend for a guy who’s 42, married, 2 kids, lives in the midwest, no debt aside from mortgage, married income of 90k/yr, and approx. 150k in roth/401k’s? disposable ~1-2k/month being put into a MM savings acct.

    • says

      The good thing, as a new dad, you can get your child to read this post very early on!!

      Sounds like you are doing great. MidWest ic cheap, and a 90K/yr income should be enough yeah? I’d max out 17K in 401K for sure first though… then go from there.

  2. h says

    Sam,

    Your numbers in the last chart are wrong. If you save 50%, then yes you save 1 year of expenses. If you save 66%, you save 2 years of expenses (You’re spending 33% a year, providing twice that in savings). If you save 90%, then you’re saving 9 years of expenses. I think your numbers are wrong because you’re assuming the same fixed expenses regardless of how much percentage you’re saving. Jacob from ERE made this point nicely in one of his posts.

    • says

      What is wrong and what is right?

      I don’t want to live in a trailer like Jacob did, and I’m sure the majority of people don’t either. I assume a fixed operating nut that is good enough to keep one living reasonably well. That is open to determination, but I can say that unless you make a million+, saving 90% of your after tax income is bad living.

      You can save 90% for a little bit, but I’m sure lifestyle and desires will change. People have to be realistic.

  3. Processing Gateway says

    This is a very interesting post. I hope I had to work 75+ hours right after college. Unfortunately on my case, it happened a little late (late 20′s) with additional heap of debts. While my desire to save is huge at this moment, paying debts is I think more important now. What works for me is the “Snowball Debt Plan” by Dave Ramsey.

    I’ll be following your blog.

    Best regards,
    Belinda

  4. spruby says

    A few major misses – health insurance costs (increasing far beyond inflation); plain old ability to procure health insurance if not working – difficult and expensive; reduce skills to rejoin the work force if there is a problem during that 20+ year retirement before social security; and social security assumptions are wrong – minimum retirement age is increasing so you need to cover more years than you calculate; and finally this is targeted to a small population that earns enough money that they can live easily on half – at my salary – $140K – no biggie – if I made $30K – not a chance in hell.

    • says

      Spruby, are you that unhealthy that you can’t get private health insurance for under $1,000 a month? Sounds like you want out from your $140K a year job.

      If one is making only $30,000 for their rest of their lives, you are right. Unfortunately early retirement is not going to happen. A healthy traditional retirement can with aggressive savings.

  5. joe says

    Since savings @ 55% doesnt include 401k (has been said many times). I would like to see your chart for average jane including 401k contributions. Honestly, I dont think it works you would have to assume something like 10% annual growth in the 401k. More importantly it leaves little disposable income (if 10-20% was moved to the 401k). Average jane would have to rent a small house with 10 people for the rest of her life. Or maybe just just marry FELICITY :)

  6. Jez says

    I like this article and although I haven’t read it in full I see a couple of errors.

    1. What about a home? With no paid out mortgage rents are going to soar and you will miss out on paying a reasonable price for a home and having that behind you.

    2. You won’t have much 401k because it wasn’t leveraged and just 18 years of work will put bugger all into it.

    3. The person in the equasion/scenario has failed to hedge against inflation or invest into growth assets, meaning they never leveraged their wealth and it’s just running out

    4. NEVER trust the age pension.. (Unless you really couldn’t give a rats)

    5. There are probably loads more but I can’t be stuffed

  7. Jez says

    I’ll let you into my little retirement plan.
    I’m 32, have four properties, one which my Wife and I live in and are paying off. We plan on selling one investment property within 5 years, paying down (or off) our mortgage, then we’re home and dusted (although can choose to work for a better retirement if we’d like) The equasion looks like tis in 5 years time: Home worth around $900,000 (all in Aussie dollars) 2x investment properties worth (combined) $900,000 and a debt of $700,000 (total LVR of 40%)but rents more than covering the loan repayments and expenses. We then use a line of credit on an investment property but never spend any more than 5% of the total value. If we make more than 5% capital on the investment over a one year period, we’ve made our money back, plus a little extra, if not we consider going back to work (heaven forbid!) but in reality we’d probably work anyway out of boredom. We’d like to purchase more property for a better retirement along the way, the more the better and lets face it: Who wouldn’t like to buy a multi million dollar home? I think it’s really a toss up of: live modestly, retire. Or, live like a king (& queen) work really hard, for a long time but come home to a big beautiful house. I’m torn

  8. says

    Perhaps it is very different in the wild west, or in the golden paved streets of New York City, but here in the hinterlands, or anywhere an educator, or personal caregiver, service worker is employed, they are unlucky to EVER see the sunny side of 75,000 annually – no matter HOW long they work. And lest you point to the Bachelor’s degree requirement – many in food service have multiple university degrees – including advanced ones – and are unable to get employment in their fields. Finally, careers with “ladder” salaries do not give much in raises and career caps are fairly early and are low. Aside from remaining childless and at home when not working, how does the real “average Jane” save more than 10 – 15 k a year? Thank you, Kate

    • says

      Is not the hinterlands much cheaper to live in than NYC? If so, then perhaps $40,000 there is equivalent to $75,000 in NYC and you don’t need to save as much.

      We all have different skills, and I’m pretty sure we can figure out some way to make a side income with the skills we have. We just have to make the effort.

  9. says

    No edit button, so need to note that the sentence ” they are unlucky to EVER see the sunny side of 75,000 annually – no matter HOW long they work” should read with “UNLIKELY” for “unlucky.” Apologies for the typo.

  10. John C says

    Sam are you honestly saying you can discount inflation? Are you honestly advocating in today’s environment with the FED, ECB, Japan CB etc printing billions per month inflation will not be a problem?

    • says

      Yes. Look at the 10-year yield. We’re at 2.75% on 1/24/2014. The 10-year yield has gone down for 35 years in a row. I can see it going to 4%, but not much higher. The markets are very efficient now and policy is becoming more effective.

  11. Dave says

    Editorial comment: Average Jane, 3rd paragraph, you wrote, “… only spending about $32,000 a month after taxes …” I think you meant to write $32k per year.

    Anyway, great post, as several examples to show how saving consistently over a long enough time period can amount to serious bank!

  12. Megan says

    Wow, it must be nice to be an “average Jane” and receive $5-10 thousand dollar raises each year.

    • says

      BART workers in SF are on strike. Many dont have college degrees. Average income is $80-100k and they all have pensions where they don’t need to contribute. You were saying?

  13. Nathan says

    As a young reader (18 months in the workforce) I save ~45-50% of my after tax income. Making 25% contribution to a Roth 401k with a 6% match. The other chunk is cash. I have an interest in building passive income streams but dividends, CDs, and real estate require a large amount of money to be able to live off of. (5.5% to equate $2800/month is ~$611k)

    Not to be intrusive but what % of your net worth came from book sales and stock market unicorns?

  14. Melissa says

    This sounds great & all, but I see your “average” Jane starts out at $35K & is making $100K by the time she’s 40. I certainly wouldn’t consider this “average”, especially not in the Ohio Valley where I live. The average income per capita around here is about $40-$45K, PERIOD. That’s even with a college degree, which I have BTW & still fall into the low end of this average. How, pray tell, do you suggest we save 50% of our income??? I’ve personally nixed out everything extra I can think of including cell phone & cable. I’m also debt free except for my mortgage, & there’s still no way I could save 50%. I’m doing good to save 20% & most months not even that. I even have a 15 yr mortgage on my home & make extra payments so it will be paid off in only 10 yrs. I’m about 3 yrs into it. Bottom line, I feel like I’m doing the best I can here & I seriously don’t believe I could spend much less. That being said, what’s a more realistic plan for REAL average Janes like me??? That’s what I want to know. I should also point out that I have a child & am seeing your chart almost 15 years late. I know I’m not retiring in 5 years & that’s fine, but retiring at 50 is still better than 65.

    • says

      One of the things you having for is a low cost of living. It’s all tied to average incomes so saving 20% is great. Try inching it up by 1% every month. I’m sure you will be able to get to 30-35% savings rate in a year’s time. You will surprise yourself. Trust me! But you got to try!

      Sam

  15. Pigbitin Mad says

    A person making $30,000 will not be making $100,000 after 20 years.

    I actually make less than I did back in 1985 as a telemarketer. The economy is going to suck forever. We can only hope for massive deflation so that my nest egg is actually worth something. (If only I would actually take the money out and stick it under a mattress). As it is $1 million dollars will probably buy a loaf of bread, just like in Germany after the First World War.

  16. Larry says

    Where are you getting the tax rates? 26% max? What about state tax over 10%, City tax, ect. Also, since when is tax rate capped at 26%? In the one example of income rising substantially, the rate will either increase to 36% or the ATR will kick in.

    In all cases, your Discretionary Income after all taxes is inflated.

  17. Nirav says

    If it was this easy then everyone’s life would be perfect! There is no way anyone who makes $35000 can earn $100,000 in 18 years.

    You are better off buying $1 lottery and hope to win Million Dollar jackpot.

    Simply ridiculous strategy.

      • Nirav says

        3% inflation rate is not GUARANTEED by employer. If you are making $35000, there is no way in a million year you can start making $100000 in 18 years.

        Why would an employer pay a person $100000 after 18 years when they can easily hire someone after 5 year to start from $35000 and you can get lay off. There is high possibility that your new employer can start your salary to $35000 again.

        • says

          Nothing in life is a guarantee. You could get fired after two years because your boss hates your attitude, who knows. But you keep going out of self belief.

          If you have the mindset that you can’t even get a 3% raise a year during the upswing in your career, then I’m afraid you have a defeatist mentality which will prevent you from achieving your financial goals.

          What do you do for a living and how old are you? What is your education background? I’d like to understand why you are so pessimistic. Thanks

          • Nirav says

            I am optimistic about my career growth and have gained above average increase. This article is great but not realistic for all.

            p.s: I have subscribed to your news feed, so we’ll be in touch.

            • Taffy says

              A person can definitely increase their income. If a high school drop-out like me can, anyone can. It took a lot of drive and a lot of schooling but it is worth it.

              I did it in 13 years.

              In 2001, at age 25, I made $24,000 a year. After going back to school to obtain multiple degrees and graduating in 2010, I now make $105,000.

              Job 1 – GED – there for 6 years – started at $24,000, top salary was $40,000
              Job 2 – BS – there for 3 years -started at $48,000, top salary was $52,000
              Job 3 – MS – there for 2 years – started at $80,000, top salary was $92,000
              Current job – been there for 1.5 year – started at $100,000, currently making $105,000

  18. says

    I know you have a financial interest in promoting capital, but that doesn’t mean it’s the best tool for tracking budgets and spending – Mint get’s that honor.

    Disclosure – I use both. Mint for the micro (spending), and PC for the macro (investments).

    • says

      I’ve never used Mint, so I can’t promote it. But from what I hear, Mint has a great budgeting tool.

      The reason w/ I like Personal Capital on this front is b/c they use a cash flow management tool. Budgeting is basic, like those who try to get wealthy just by saving money instead of trying to make more. PC is more focused on investing and building wealth through greater assets imo.

  19. MoneyTree says

    Your examples are certainly one way to retire early. It seems to be a pretty difficult way to do it, however. Why not retire in months instead of years or decades?

    Instead of working a job for 10 to 20 years trying to save up a million and live off the interest, why not just self-educate yourself on how to BUY an existing monthly income stream?

    If you are willing to push yourself through a learning curve, you can “retire” in months, not decades. Just buy one multi-unit residential income property with 30+ units and you can earn enough monthly income to pay all property expenses, a manager to run it and all your personal bills too. With a good manager, this type of income can be 95% passive.

    Rentals get a bad rap sometimes because the owners don’t have enough units to afford to pay a manager and to pay others to do repairs. Landlording can quickly burn you out if you try to do it yourself. In my experience, 30+ units is the magic number. I’ve chosen mobile home parks because they provide the most income with the least capital expense. If you self-educate, you really can buy just one property and “retire” as soon as you can complete your learning curve.

    Multi-unit residential rentals are an income stream that you can control. As inflation eats your income, you can raise rents, lower expenses or buy another park. REAL inflation, by the way, is running nearly 10% a year because the Fed Gov keeps changing the formula to make it look lower (ShadowStats.com). Wages, investments and savings will never retain their purchase power while this continues.

    I’ve studied the global financial system for more than 10,000 hours and must sadly report that a massive collapse or massive devaluation of dollars and digits is certain. In my opinion, it’s far better to own real goods and real income-producing property than paper and digits, which are just promises to pay. When the crisis climaxes, the holders of your paper and digits may want to pay, but will be unable due to people being unable to pay them.

    Another advantage of multi-unit residential rentals is you don’t need a ton of savings to buy a large property. I self-educated and learned how to buy my first mobile home park for $1,000 down and closed on the 5th so I’d get the prorated rents for the remaining month at closing. So I was actually paid over $5,000 at closing to take over the park. When you have no money in the deal, your yield is infinite. Ten years later, the park is worth 1,500 times my original investment, which was more than returned to me at closing.

    I now own two parks and my only “job” is to manage the managers. It’s secure, monthly, 95% passive income that allows me to be retired, live my life for “free” and own appreciating assets I can later sell, 1031-exchange or just live well off the rents as the properties pay themselves off. Because of the many allowable tax deductions available from owning rental properties, my taxes are very minimal too.

    Isn’t several months of self education better than the time and expense of attending college 4 years and working 10 or 20 years for someone else? Once you reach financial independence, you suddenly realize your most valuable asset is time. Trading time for money is a spectacular waste of your most valuable asset.

    Buying an existing income stream can get you off the employment wheel THIS YEAR if you focus on self-educating yourself how to do it. Save decades of time and years of stress and just BUY an existing income stream.

    I highly recommend this direct route to living “free” and retiring early.

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