There’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 since I graduated from college in 1999. In 2012, I was able to finally leave my day job in finance and I haven’t returned since.
As I look back upon my time as an early retiree, there really isn’t much I would change. Having all the freedom in the world is priceless. You will not regret all the work it takes to achieve financial freedom. But you may regret looking back on your life and wishing you didn’t try harder or take more risks.
What’s important is recognizing your inner frugality, your Herculean discipline, the government’s generosity, and your enormous hustle. There’s nothing better than taking action with your finances and seeing results!
Example Of People Who Have 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 complement your other tax deferred retirement savings.
Example One: Average Jane
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 Two: Floyd, The Go-Getter
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 Three: Felicity, The Talented
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 Savings Chart
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!
Below is another savings good you can follow to help you retire early. I recommend saving at minimum 20% of your after-tax income. If you can save 50% of your after-tax income a year, you should be able to retire after 18 years.
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 Child Tax Credit is worth up to $2,000 per qualifying child. The age cut-off remains at 17 (the child must be under 17 at the end of the year for taxpayers to claim the credit).
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.
As a father now, one thing I strongly believe is this saying: “have children and the money will come.” I have never been more motivated to earn more and provide for my family than after my son was born.
But I will be honest with you guys, we pay a hefty $2,380/month in health insurance premiums in 2020 for a family of four. When the stock market began melting down in March 2020, I felt an uneasiness I had not felt in over 10 years. Retiring early with more than one child is hard!
Not only are we aggressively saving in each child’s 529 plan, we’ve got to pay for preschool tuition and potential grade school tuition of our children do not get into a good public school that’s close by.
What About Inflation Eating Away At Returns?
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 5%? We need to invest and save more! We’ll be screwed!” We won’t be screwed. If inflation ramps from 2% currently to 5% 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, money market savings rates, and real estate also rises.
Inflation is why I’m a big buyer of real estate. Not only does the price of real estate rise and often increase faster than the rate of inflation, rental income also rises with inflation. One of the easiest ways to gain exposure to real estate is through Fundrise, my favorite real estate crowdfunding platform.
With Fundrise, you don’t need to come up with a 10% – 20% downpayment and take on massive leverage to buy a single property. You can invest a small amount in one of their specialty eREITs to give you exposure to specific regions of the country. Fundrise is free to sign up and explore.
Everything is rational folks. Don’t let the inflation pollyannas scare you. Look at the 40-year chart of the 30 year mortgage rate. It’s done nothing but go straight down. But if inflation does tick up, interest rates will tick up, and risk-free coupon yields and dividend yields and rental yields will also tick up. In other words, you’ll be earning a higher rate of return on your income producing investments.
Everybody needs to take advantage of all-time low mortgage rates and refinance now. You can check the latest rates and receive real quotes from Credible, my favorite mortgage lender. Credible has qualified lenders competing for your business so you can get the lowest mortgage rate possible.
What If You Desire To Do Something After You Retire
Believe it or not, some people actually want to continue being 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.
A 4th Early Retiree Example
For 13 years after college, I saved 50-80% 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 downsize, my 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 so much the amount saved, but the annual living expenses coverage saved, since each person’s desirable living expenses are different.
Maybe some people in the Midwest 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! The right dollar amount. It all depends on the individual.
Since leaving work for good in 2012 at the age of 34, I’ve consulted part-time for financial technology startups, wrote a book on how to negotiate a severance that now brings in ~$50,000 a year in passive income, became a championship high school tennis teacher for four months out of the year, and built Financial Samurai into one of the largest independent personal finance sites on the web with over 1.5 million pageviews a month.
Further, in 2017, I decided to sell my SF house I bought in 2005 for 30X gross annual rent and reinvested the proceeds in real estate crowdfunding for less hassle, lower valuations, and higher passive returns. Building passive income is the name of the game in order to stay retired. Below is my latest snapshot.
As you can see from my latest retirement portfolio, my wife and I no longer have to work day jobs again. We can remain stay at home parents because we have saved and invested regularly for the past 20 years. We also find alternative ways to make money in retirement thanks to the internet.
See: Ranking The Best Passive Income Investments
The Sacrifice Is Worth It
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 5:30 am every morning and have me stay until 7:30pm on average every evening. Some evenings, we went to 10:30 pm, which was brutal.
Further, 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!
There is no rewind button in life. Save aggressively, invest consistently, and I’m sure that after 10 years, you will be able to see the finish line.
Recommendation To Build Wealth
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.
Finally, they just launched the best Retirement Planning Calculator online. Unlike other retirement calculators, their calculator pulls in your real data and runs a Monte Carlo simulation to produce the most likely financial scenarios. You can input multiple different expense, income, and life events to see how your finances shape up.
Charts completely updated for 2020 and beyond.
As with most Americans, you don’t understand the inflation devastation that is wreaking havoc upon our shores. Do you want to know the *real* inflation rate in the U.S.?? Look up the Chapwood Inflation Index and you will then understand why saving and investing in fiat currencies is a strategy born of delusion. If you think that inflation is running at 2%, you don’t shop at grocery stores, you don’t eat in restaurants, and you don’t pay rent or pay for health insurance. Convert fake money into real money ASAP. Do what Central Banks do, not what they say.
Not sure why you think I don’t understand inflation. I have the majority of my net worth in real estate, stocks, and business equity is inflating faster than inflation since I retired in 2012.
It’s been a great run thanks to the bull market.
For feedback, did you read my post as saying most folks should keep their money in a bank or under their mattress? If so, I can clarify.
Here are other pertinent posts:
* The Best Way To Get Rich: Turn Funny Money Into Real Assets
* Ranking The Best Passive Income Investments To Retire Early
My latest after-tax (non 401k, IRA) retirement portfolio produces about $250,000 a year in income to fund our retirement. But our goal is to get to $300,000 by 2023.
Hi Sam,
I started noticing your blog and have been reading. Really enjoyed seeing your perspective on various topics you discussed.
However, I have a question on the calculation you gave on your own financial income. For an SF condo that rents out for $3050 a month, you probably won’t get 12 times that as “income” per year given there would be insurance and tax even if it’s mortgage free, not to mention about possible repairs and maintenance.
It would be fine if you want to treat “revenue” (instead of “profit”) as “income”. But I think it’s misleading in the context because you were comparing this amount of money to salaries from full time jobs. Just want to call it out so that your readers aren’t gonna think they can generate the same amount of income for a 100k annual salaried job with 3 of these rental properties.
Thanks,
JK
Nice to have another blog for the upper class.
Why don’t you try something more challenging and describe how you can retire early on $30-50.000?
Why not start one yourself targeting your desired demographic instead of telling other people to do something?
Take action, otherwise, opportunities will pass you by.
Because that is impossible, you will work until you die on your feet.
What a weird perspective and blog! Who TF wants to retire? What a sad prospect, may as well just die and get it over with. You just have to find and follow you passion and it isn’t even work anyway. I’m sure there’s a blog post here about the best way to save money is to stop living.
You are alive but once and anyone of us might die TOMORROW.
A lot of people want to tell their employers to pound sand and retiring early from that career allows them to so they can do what they want (i.e. follow their passion). Most people aren’t good enough at their passion to make a living out of it anyway and i’ts very unrealistic for the vast majority of people. If you respond, I’m curious what you do for a living? I love hearing stories of people making a living at something they love.
Your life is not your job (at least for most people)
Sam – Can you elaborate on your Stocks & Bond passive income of $112,000 per year. Is that all dividend income? Or is that Capital gain? I’m really curious what amount of S&B would be required to throw off that much cash per year? Close to $4mil?
Nice article. Only “certain people” make six figure incomes, though. The economy is organized a certain way so only “certain people” can make it up top. I have not met anybody that has made 100,000 after 20 years.
I love this blog and have learned a lot.
We are age 50 now. We didn’t save much after marrying and what we did save went towards the purchase of a condo (our first home). We had children and many job losses and all of our savings went towards paying bills due to job loss. We’ve had some very lean and difficult times. Even now, in 2018, we both have degrees in good fields but cannot find work. So we both work in retail….Um, yeah.
Obviously, we won’t retire at 40. We did make some good choices when first married by buying bonds and using my inheritance to put down payments on 2 rentals. It has added to our mortgage payments to do it, but we felt it was a good investment.
Ultimately, if we sold our our home to pay the mortgages, lived in one rental and kept the other rental, we’d have passive income of only $500/mth to live on. So, we will probably have to work until age 67 (for full SS benefits), to make $2900/mth. Not bad if inflation and health problems don’t exist (diabetic complications are here along with other issues).
We didn’t save or invest early enough but we’re hoping for the best possible scenario in 17 years.
Hi Financial Sumarai —
#1 – Great Blog.
#2 – Great name you happen to share it with me ;)
#3 – a few questions using Felicity the talented where do you derive the 68k per year in example 3 for felicity? To Summarize you’re concluding with 1.36 Mil at age 40 you will have 68k per year I am guessing from appreciation + 28k in interest/dividends? Can you confirm. If so i am assuming you use the 5% after tax rate of the 1.36 mil of appreciation and 2% for the dividends. Thus never increasing or decreasing the principle base but using the appreciation as money to live off? please confirm.
#4 – I see this was written a few years ago you think this still applies today ?
well, contrary to my previous reply on another topic i’ve read this above and wish i read it first. This is brilliant and i apologies for my abrupt post.
i currently say between 800 and 1000 monthly, am single unfortunately lost my investments after marriage in the Philippines :( so had to start over.
im happy living on 150 2 weeks for food, ive moved closer to my work and use 60 fuel monthly when i cant ride my bike aka CANADIAN Winters!
My rent is in a 700,000 home which is not mine but i have a room for 400!! internet, hot tub, and all utilities.
I prepare all my meals 52 for 8 days on sundays and into containers they go. meat, rice and a veg. (6 meals per day and small meals, whatever food group fits into the palm of my hand i consume per meals)
So if you think you need 150,000 year to save allot you do not, check my current tracking path
44 hour work week, clearing 1300 bi weekly after the man takes his percentage.
expenses are 400 rent, 60 gas, 25 clothing (good will or salvation army) 10 coffee at 711 (no star bucks or tim hortons!)
thats 505.00 expenses
so 1300 -505 = 795 this month for investing, but its a 3 pay month thanks for september being a long month so i get an extra 1300!
anyways you get my point to all who might disgree, it comes down to simply person sacrifice (do i want it now or later)
I felt obligated to reply in length as my previous post was in erros for not investigating FS properly and venting out of frustration. Sorry FS
Retirement saving may be more challenging today than it’s ever been. People are living longer and thus must support themselves for an increasing number of years. Saving for retirement takes discipline, but it can be a great motivator to focus on the fact that the sooner you start saving, the sooner you can retire.
As the saying goes, compound interest is the 8th wonder of the world. I credit my dad for getting me to save at a young age. My wife and I both started contributing to our 401k’s in our early 20’s and 30 years later we both have 7 figure balances and a few homes that are paid for. Retirement is less than 12 months away now and it would not have been possible had we waited until our 30’s to start saving.
Help me out here FS, I don’t quite follow your math for Felicity’s example, which suits my path (or pls link to article explaining). I’m 50 and currently have 1.180M invested 60/40. If I stay in my j.o.b. for another 1.5 years I should have close to 1.4M (yes, high income & big saver!). To retire in CA I need 60k to cover my expenses (still have mortgage & don’t plan to move–yet). I’m slowly dying on the vine at work, but my calculations tell me it’s worth the extra haul since it’s so much in a short period of time before I pull the plug.
Do you think my plan to stay on is a good one or too fearful based on what I’ve got?
It’s hard to give you advice if I don’t know your age, your alternative income streams, and so forth.
Here are the stats:
Age: 50yrs
Income after retirement: only SS (unless I continue working p/t which is fine. SS will be appx 30k/yr if I take in full)
Current investments: 1.18M (60/40)
Equity in condo: 125k
Thanks!
I’d gut it out for two more years. It is you’re working when you know the end is near. Use your sick days, take all your vacations, don’t sweat things too much. And if you really can’t take it, ask them to lay you off with a nice severance package like I did five years ago.
My general recommendation is to accumulate a net worth of equal to about 20 times your average income. And if you cannot do that, then shoot for at least 25 times your average expenses.
https://www.financialsamurai.com/how-much-should-my-net-worth-or-savings-be-based-on-income/
Good luck!
Ok well I’m glad you concur with my assessment. Thanks very much & love the blog.
Things were different back in my day for sure, but I can’t help but respect the time stamps you put in to get 75+ hours a week. That is the age for it though.
My husband and I took a “little longer” to retire because we had kids and all sorts of obligations coming up over the years. Now I can’t help but think that those are a bunch of lousy excuses now!
Since my kids are jealous that we don’t work anymore, I’ll be sure to share this article with them. They could use the help with their math.
Hey, thank you for your blog, it is a very pleasant reading! I’m 24 and just started the financial independence journey.
I have a question for you. I’ve seen in several of your post that you recommend Personal Capital. Aren’t you afraid to give all your financial details to a private company? I’m a bit put off by a possibility of a hack of some sort. Or even, by the saying “If it’s free then you’re the product”…
What made you reassured enough to use it?
Good question. Technically, everything is a leap of faith – be it using your credit card, opening up a bank account and checking online, applying for a mortgage, surfing the web, using a password protector, etc.
A company must do everything possible to protect the privacy of their clients, otherwise trust is gone. The founders of Personal Capital founded a security firm beforehand actually, and are experts in privacy. Cybersecurity is big business right now.
I am reassured because I spent 2 years consulting with them in their office and meeting all C-level management and their employees. I’m also a believer in leveraging technology for everything with benefits outweighting the risks.
Everything in life is about taking calculated risks. For example, I took a risk in buying my first single family home in San Francisco in December, 2014, and it paid off big. My vacation property in Tahoe, not so much!
Best,
Sam
Love reading your posts, this is a great site and I’m going to sign up for personal capital right after this. I had a question on which would be a faster way to retire early:
I’m 31, single, living in the Bay Area, making 105k with a 500k NW (225k invested in Betterment and 165k in my 401K). Since it’s the Bay Area, I can’t afford to buy a house based on my income; I would need to use most of my savings to even barely be able to afford a small house in a not great neighborhood. Right now I’m just living with 2 others to keep expenses down and saving 50% of my post tax income.
Do you think it’s smart to just keep living with roommates and have more savings to invest, forgoing buying a house? I know its recommended to buy a house, but I don’t want to use all of my savings on it — I don’t want to take all my money out of the market to use as a down payment, then I’m losing out on years of it growing via compound interest. Also seems disadvantageous if your first house purchase isn’t for you to live in — the rules seem to be against buying rentals as your first property.
So… yeah, I feel kinda stuck right now. I’d like to own property, but not sure buying in the Bay Area would be the best way to go.
Appreciate your thoughts.
What about people that were not able to land a full time job right out of undergrad (behind a couple years in salary) and that live in very high cost of living city with a lower salary? I would imagine even with roommates living in an expensive city like NYC or SF with an under $50K salary would struggle to save over 50% of their income.
It’ll definitely be tougher and more sacrifices must be made. It’s important at this stage NOT to be too proud to take any job in order to get the income rolling in and the experience developing.
See:
Spoiled Or Clueless? Try Working A Minimum Wage Job As An Adult
Housing Expense Guideline For Financial Independence
Abolish Welfare Mentality: A Janitor Makes $200,000+
Where do you recommend saving this money? Max out 401K first, then something like Vanguard mutual fund? You save after tax in that scenario then pay capital gains taxes on the earnings, but I assume the math still works out?
Good post! For a lot of people making realistic incomes, it seems impossible to retire early. But after looking at the numbers, it is actually achievable to retire after ~20 years without sacrificing too much lifestyle.
One minor point comment is that the math here would be a bit more realistic if it assumed that the money was put into some income generating asset like an index fund. For example, in the “average jane” case her total would be around $900k instead of $580 if she invested in stocks that generated around 6.5% per year.
Hi Luis,
Thanks for reading. I purposefully don’t include any returns for savings to keep things conservative. Hence, if history is any guide, a conceivable 5% – 7% return on savings a year is possible, thereby making retiring early even easier than what I propose.
I just think it’s always better to end up with too much money, than too little since there is no rewind button in life!
Best,
Sam
Related:
How Does It Feel To Retire Early? The Positives And Negatives
Investment Strategies For Retirement Based On Modern Portfolio Theory
The Fear Of Running Out Of Money In Retirement Is Overblown
Sam. Why do you use $18k in your model? Most people can contribute $18k of their personal income plus whatever the company match is.
To stay conservative. But your comment reminds me to update the chart with a new contribution chart with low, middle, and end amounts.
Thank you for this post. Im an immigrant to this country. I networth 700000 in real estate equity and 403b after 16 yrs of work as a nurse. My problem is switching to a cashflow asset instead of just asset that grows.
Thanks for the response. Very sound advice. What do you think about buying a small rental property as an investment and tax shelter if I can get it to cash flow/pay itself even after accounting for some vacancy rates, repairs etc.? This would be using debt but then covering the debt with rental income. Really interested in this. I am working on reducing debt and Im at 3k on cards already. Gracias!
Jorge
Slightly confused…
I have degrees in accounting and data science so I am not usually dense. However, I seem to be missing something in this post.
All of the scenarios end at age 60 as far as I can tell. Also, the net income is a straight calculation off the gross with the effective tax rate. Therefore, unless I am missing something there is no 401k or pre-taxed savings coming off their gross. This is where I am confused with your maths.
It’s great that if they save 55% they will be able to live a relative lifestyle from 40 until 60 without working. However, there wasn’t room in your calculations for other retirement savings to get them from 60 onward.
Therefore, at 60 they have to wait a few years until social security kicks in or else they are just out of money and have to return to work… how does this make sense and how is it sound advice?
age 59.5 allows access to retirement accounts..
I believe the point of the question is that there is no specific mention of money going into any retirement accounts in the examples based off the gross salary and without that you have zero at any age because you have no retirement account.
My only assumption that is not made clear in the article is that the “gross” amount is actually post tax deferred savings. This is implied by the statement “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.” which would indicate that there is planned tax deferred savings going on and not included in the chart calculations. This is likely because what you can put away and company match and how it could be invested would vary and the article point here was to “buy” years of “early” retirement assuming you had planned appropriately for actual retirement.
Just as a rough example assuming no 401K and no company match and just an individual IRA with an assumed inflation adjusted equivalent of $6K per year for 18 years at say 5% yielding about $170K at age 40 then it sits at 5% for twenty more years would give you about $450K at age 60. For the first example that would probably be fine because they would be used to living on $30K a year and once their SS kicked in chances are they would be able to run the numbers and determine when it would be best to take it to maintain their $30K a year. The higher earners would likely have better benefits and higher final nest eggs to draw from.
Sam,
Great post. One thing you have not covered is what happens after 20 years when the savings run out. You mentioned social security. But that is not going to be enough to match the expenses. 401k would be available. If it is around 1.5-2 million, that would help quite a bit.
If you can cover that aspect it will be great.
The other thing not covered is health insurance. When you work, the employer takes care of that. Post retirement, one might have to fork out 24K a year to have decent coverage.
FS I served my country in thr army for 25 yrs but was never financially literate. I am 46 and have a small military pension of 2,100 gross monthly. I work at a non profit making 55k yearly. My wife same age is finally taking off and earning 120k yearly. However, we struggled through life putting kids through school, making bad decisions and now feel as empty nesters that we can finally focus and putting in some financial work. My mortgage is 3300 monthly (yes very close to DC metri area) owing 485k on a 515k loan. We have combined only about 81k in 401k $$.
Owe 35k (2 14k car notes and about 7k in Credit cards).
My plan is to eliminate CC depbt then car notes. Then either ficus on paying house down or increase 401k. Seems we now finally have disposable income but the metro area sucks you in and its hard to live like a pauper but we are begining to try to live below our means. So currently NO savings so that will be another area to work on. Any other recommendations? IVe thought of buying a cheaper home to rent as it woukd be a commitment to save (in ither words, paying the mortgage and having it rented would be mandatory) instead of trying to save via fighting your will. Any thoughts on kickstarting my situatuion? Thx for your blog.
Hi Jorge,
Thanks for your 25 years of service! Amazing work. I think you are in better shape than you describe. A $2,100 gross monthly pension for life is like having $1,260,000 in capital spitting out a risk free 2% yield for life. Well done! Then add on the $175K a year in gross income to cover your expenses and I think you’re doing fantastic.
The no savings is a problem. You need to force yourself to save each monthly until it HURTS. If not, you are not saving enough. Start w/ maxing out your 401k, then shoot to save 20% of your after 401k and after tax income. Depending on your mortgage rate, you can probably pay down a little here and there. It’s not that big for your income.
I’d really get rid of those 7K in credit card debt though. That is a big waste of money paying those usurious fees! You can easily set up an account w/ a digital wealth advisor like Wealthfront and automatically contribute after tax money each money based on the portfolio they construct for you. It’s free for the first 15K, and only 0.25% a year after. The key is to contribute a lot and regularly for a long time. You will see the wealth growth more than you could have imagined after 10 years of consistent investing.
Finally, are you tracking your net worth religiously? If not, check out Personal Capital. They are a free financial tool/app/online that allows you to easily see all your accounts in one place. You should know your asset allocation by percentages, and everything. Once you know where all your money is, you can better optimize! I used to consult with them here in SF for 1.5 years and I think they’ve got the best financial app on the web today.
Good luck!
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