Living A Middle Class Early Retirement Lifestyle With $5 Million

Living an average middle class early retirement lifestyle off $5 millionIn a previous article, I highlighted how generating passive income allows both my wife and I to be stay at home parents for our son. Our goal for the first five years of his life is to stay retired so we can spend as much time with him as possible before he goes to kindergarten. Given the economy is booming, we've often been tempted by attractive job offers, but we've refused!

According to every child development book we've read, the first five years of a child's life are the most important years. They are the foundation that shapes children's future health, happiness, growth, learning achievement at school, and relationships with people.

At birth, the average baby’s brain is about a quarter of the size of the average adult brain. By the end of the first year, the brain doubles in size. It keeps growing to about 80% of adult size by age three and 90% by age five.

Given this knowledge, we figured we might as well go all-in as parents since we intentionally decided to have a child. Yes, we are sacrificing our careers and lots of money for our son. But there comes a point in everybody's life where they must decide how much is enough.

We have a strong philosophy that there's always another dollar to make, but never another second to create. So we said screw the money. Let's focus on parenthood.

Budget For A Family Of Three In San Francisco

In my after-tax investment amounts by age for a comfortable retirement, I included an aggressive after-tax investment chart for those who want to retire in an expensive city like San Francisco or New York. Let's review the aggressive chart again as a refresher.

Aggressive After-Tax Investment Amounts By Age Chart To Retire Early Comfortably

If you retire at 40 with $2,500,000 in after-tax investments, you'll only be able to generate $100,000 a year in gross income. With the high cost of housing and the need to save for your child's education, $100,000 is not enough. In fact, according to the Department of Housing and Urban Development, $100,000 a year is considered “low income” for a family.

I spoke to the financial aid office of multiple private grade schools, and they all give financial aid for families who make $100,000 a year or less per child.

To give you an idea of what $200,000 a year in passive income can cover, here's a rough budget after analyzing our household expenses after our son's first full-year of life.

Early Retirement Case Study: $200,000 In Passive Income For Family Of Three In San Francisco

Passive Income Analysis

With hardly anything leftover, $200,000 is the comfortable minimum we need to earn in retirement to never be forced to sacrifice 12+ hours a day in the office again. At a 4% withdrawal rate, this means we need to have at least $5,000,000 in after-tax investments.

We are hell-bent on never going back to work again, which is why we have become more conservative with our investments since leaving working 2012 and 2015, respectively.

Our ideal passive income is $300,000 a year to give us more breathing room. We might want to get a larger house one day. Education and healthcare costs continue to spiral higher. Further, we don't plan to do staycations forever. Eventually, we'll want to take a family trip to Hawaii and do some international travel once he's old enough to remember.

If all goes well, we'll achieve the $300,000 a year in passive income by the time our son goes to kindergarten in 2022. Even if we fail, having a target date and reason to earn money will help us get closer if we had no date or reasons.

Budget Analysis

Kids ($36,000/year)

We are spending and saving roughly $36,000 a year for our son.

The 5 hours a week of childcare assistance is extremely important so that my wife and I can remain sane. Being stay at home parents 24/7 is no joke. But it's getting easier as our boy sleeps better through the night. Taking care of him is more rewarding now that he's able to communicate better.

We take our boy to swim class twice a week and gym class once a week. On the other days, we go to the California Academy of Sciences Museum, where we have an annual family membership for $150.

After superfunding my son's 529 plan in 2017, my wife contributes $15,000 a year. I inputted $24,000 to account for my superfunding line-item, so technically we have $10,000 more a year in cash flow than the budget states. But my $70,000 had to come from somewhere, hence the $25,000.

Our hope is that our son wins the San Francisco public lottery and gets to attend a great local school for free. But since we know the odds are stacked against us, we will be diligently saving for private grade school tuition until we find out where he's going in 2022. Let's hope making him a 529 millionaire is not necessary.

Property Costs ($4,628/month)

Having a gross monthly property cost of around $4,628 for a single family home in San Francisco is reasonable believe it or not. The cost is lowly largely because we downgraded to a 40% cheaper home in 2014. Otherwise, our cost would be closer to $8,000/month.

We live in an average three bedroom, two bathroom home with about 1,920 square feet of living space and a 250 square foot deck we built off our master bedroom. The house is easy and inexpensive to maintain. With a 2.5% mortgage rate, we're holding on for as long as possible since the risk-free rate is over 3% today.

If we move back to Hawaii, we are deliberating buying a home that's twice as expensive near or on the beach to live out our remaining days. If this happens, maintenance cost will go up. One house we liked had a $450/month gardening bill. Hence, we're not sure whether we really want to go big on housing when renting is probably a better option based on my BURL strategy.

One positive about buying in Honolulu is that the property tax rate is only about 0.27% versus 1.24% in San Francisco. In other words, even if we buy a house triple the cost as ours now, our property tax would still be lower. We'll make the decision by 2022.

Healthcare Premiums ($1,700/month)

Before our son was born, we were paying around $1,350 a month. I guess we're getting better value now that we are seeing a pediatrician every three months and an opthalmologist every three months.

Seeing our healthcare costs reminds me to go visit my primary care physician for an annual checkup, get some chiropractor sessions in, and see a physical therapist for my knee. I want to get my money's worth!

To counteract high healthcare premiums, I suggest starting a business and writing it off as a business expense to any revenue you generate. This way, you'll save your effective tax rate.

Food ($2,000/month)

We value our time more than anything. As a result, we are happy to pay $5 for food delivery and save 1-2 hours cooking in order to spend more time with our boy. Food is the one area where we could cut our expenses by $500 – $1,000/month if we ever get desperate.

San Francisco consistently ranks as either the best or second best city in America for food. We also have a huge variety of healthy food selections, hence we're not considered one of America's obese cities. Combine our food selection with the ubiquity of food delivery companies and we can't help but continuously order great food every day.

We also supplement our grocery shopping with Amazon Prime about once a month as well. I like to go grocery shopping because I'm better at picking out fruit than the delivery guys.

Non-essential Expenses

We hardly ever buy anything new clothing. There's no need since we don't have to look good in front of anybody for work. We always just dress casually and regularly wear clothes that are over 10 years old. If we need to look fancy, we'll wear our old work clothes that still fit 10+ years later because we have maintained our same size (benefit of eating healthy food).

My tennis club expense is the best $400 a month I could spend. It provides a physical and social outlet two to three times a week. I've met a good number of people who have become friends or strong acquaintances. To clarify, the $400/month isn't just the membership fee, but regular tennis racket stringing ($45/month), a new can of balls each time I play ($4/match), beer, food, and snacks.

Finally, we've decided to stay local for the first two to three years of our son's life. We have so much of San Francisco, Napa/Sonoma, and Lake Tahoe to explore as a family. I've literally been waiting 11 years to be able to one day bring our little one to our place in Squaw Valley, Lake Tahoe. My wife and I are traveled out and he won't remember much before three years old anyway.

The X Factor

So far, I've shared with you what $200,000 in passive income can cover to allow for my wife and I to be stay at home parents. Some of you will think we are too spendy, especially those of you who live in a lower cost area of the country and/or don't have kids. That's fine, since we all have different ways of living.

But clearly this is not all the income our household generates since we are constantly saving and investing our online income to increase our after-tax investments. Generating online income is the only way we'll have get to $250,000 – $300,000 in pass income from our current $200,000 in passive income today.

Every single early retiree I know does something they love that generates some type of income. They have the energy, enthusiasm, and expertise since they are still relatively young. My activity so happens to be writing on Financial Samurai since 2009. It's like a habit I can't quit, much like exercising 3 times a week.

The other X Factor is taxes. In my chart, I've highlighted an effective 27% tax rate to be conservative. But if I crunch the numbers a little harder, I should be able to reduce my tax burden by 5-6%, or by $10,000 – $12,000. In the world of taxes, it's always best to be more conservative.

Retire Rich And Early

Generating $10,000 a year in supplemental income is like building your after-tax investments by $250,000 at a 4% withdrawal rate. Don't be afraid of running out of money in early retirement.In a world that is moving towards freelancing and online work, the ability to make supplemental income is easier than ever.

Pursuing something you love to do while making money is the dream scenario. This pursuance is what early retirement allows you to do. Once you have enough passive income to cover your general living expenses, you will logically never quit until you find that dream scenario.

Do not confuse early retirement with doing nothing. I'm busier in early retirement than while I was working because I have an endless amount of things I want to do because I can.

Recommendation To Help Retire Early

Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

Personal Capital Retirement Planner
Is your retirement plan on track? Find out for free after you link your accounts.