As more people look to retire early (<60), more people are looking for shortcuts in order to get to early retirement quicker. Silly terms like Coast FIRE have been created to help people far away from retiring feel better about their progress.
It’s understandable that in this day and age of instant gratification, young folks nowadays aren’t willing to grind it out for decades like previous generations.
Instead of building a large enough passive income portfolio to cover a comfortable lifestyle, I’ve noticed more people are willing to retire early to live in or near poverty!
I can empathize.
When I was 25, the 9/11 terrorist attack happened. This terrible event ignited my quarter-life crisis. I seriously thought about retiring with ~$400,000 due to some lucky investments and moving to Hawaii to become a fruit farmer on my grandparents’ under-maintained farm.
In exchange for clearing brush, watering trees, and doing general upkeep on the house, I could live for free and make some extra income selling mangos, papayas, and pomelos down the street. The farm was only about eight acres in Waianae, a rougher part of town.
Then I slapped myself silly and told myself to buck up. Throwing away a perfectly good career in finance so young was incredibly stupid. So I gutted it out for another 10 years until my investments could generate about $80,000 a year and cover my desired living expenses in San Francisco.
Defining Poverty By Household Size
Back in 2001, my $400,000 could have generated about $20,000 – $24,000 a year in risk-free income. If I sold $10,000 worth of mangos a year, I could have led a relatively comfortable life in Hawaii given I didn’t have dependents or rent to pay.
Although having a nice tan and washboard abs would be nice due to surfing every day, I wanted more. I wanted to one day to take care of my girlfriend and maybe even start a family.
Today, that $400,000 would only generate about $8,000 – $9,000 a year risk-free given the 10-year bond yield has fallen from 5.5% down to ~2%. Therefore, there’s no way $400,000 is nearly enough for a single person to live on today unless they want to live in a cave or move to a developing country.
Let’s look at the official Federal Poverty Level (FPL) in the chart below. The baseline federal poverty level is under the 100% column.
If you make $12,140 or less as a single person, you are living in poverty in America. If your family of four makes $25,100 a year or less, your family is also living in poverty.
The Federal Poverty Level Limits
The federal government provides healthcare subsidies for households who make up to 400% of the baseline federal poverty level. In other words, if you make 400% or less of the baseline federal poverty level, you are considered poor enough to receive federal assistance.
The household income levels between 300% to 400% of FPL seem comfortable as long as the household doesn’t live in an expensive coastal city like New York or Los Angeles.
For example, I have to imagine a couple with two kids making between $75,300 and $100,400 is going to be able to live a decent lifestyle in the heartland of America where I’ve been investing in real estate.
Just recently, the University of Texas, Austin announced families earning less than $65,000 would not have to pay tuition starting in 2020. Meanwhile, families making up to $125,000 would also receive some type of tuition subsidy. Hooray! Let’s hope this trend spreads across the country.
However, I’m not here to argue which household income levels should receive extra assistance from the government. The government, with all its data and wisdom, is the decider of who is poor and who needs help.
I’m here to highlight how big of a retirement portfolio you need to retire early in order to live in or near poverty, which the government and I define as between 100% – 200% of FPL.
Any household income under 200% of FPL seems really tight, no matter where you live in America. I’m confident all of you agree.
How Much You Need To Retire To Live In Poverty
Below is a chart I put together that shows how big of an after-tax retirement portfolio you need by household size and percentage return if your household income is 100% and 200% of FPL.
In order to retire early and live on a household income equal to 200% of FPL and a conservative 2% rate of return or withdrawal rate, you will need to amass $1,214,000 as an individual and up to $3,374,000 for a household of six.
If you are OK with living in abject poverty (100% of FPL) and expect a conservative 2% rate of return or withdrawal rate, then you will only need to amass $607,000 as an individual and up to $1,687,000 for a household of six.
If a couple wants to have two children and earn up to 200% of FPL in early retirement, they need to amass between $1,004,000 to $2,510,000 in their after-tax portfolio based on a 5% to 2% withdrawal rate and so forth.
Given the 10-year bond yield is at ~2%, I wouldn’t withdraw or expect a return of more than 4% from your after-tax retirement portfolio if you want to stay retired. A 3% withdrawal rate or expected rate of return is a more responsible percentage.
Personally, I like to match my withdrawal rate to the risk-free rate of return so I never run out of money. Once you achieve financial independence, you never want to go back to the salt mines.
As an early retiree, you best hope interest rates don’t go down much further. Otherwise, most households will need multi-million dollar portfolios, not just million dollar portfolios, in order to retire early and live in or near poverty.
Is It Worth Living In Poverty To Retire Early?
For the first 13 years of my life, I grew up in emerging countries like Zambia and Malaysia where I was surrounded by poverty. Some of my best friends in Kuala Lumpur would share one room and a bathroom with three other family members.
Seeing so much poverty for so many years made me focus on school because I was afraid of becoming poor. When I came to America in 1991, I decided not to take my good fortune for granted.
Even though money doesn’t buy happiness, money has to at least cover all our basic living expenses before we can really believe in such an ideology. I personally would not be willing to retire early if I had to live in or near poverty.
Although my work was stressful, it enabled my wife and me to own a comfortable home in San Francisco, take 5-6 weeks of vacation a year, drive a safe vehicle, and raise a family.
For the now three of us to live off only $41,560 a year (200% of FPL) would require us to leave San Francisco and start living with my parents in Hawaii to save on rent. Although plenty of readers have stated they have no problem living at home with their parents as adults, we do.
Our parents value their privacy. We’re all set in our ways. Living together for an extended period of time would be difficult.
Improving Retirement Life
One alternative to living a more comfortable early retirement is having a higher withdrawal rate. But this is very difficult to do for us because we’ve been in the habit of aggressively saving and investing for so many years. In fact, the proper safe withdrawal rate in retirement is lower due to lower rates.
The other alternative, which is what I think most early retirees do nowadays is freelance or take on odd jobs to make up for the earnings shortfall. Where things can get hairy is when the early retiree spends endless hours trying to make extra income because their investment portfolios are too small.
They’ve essentially traded one job for another.
Although we’ve lived entirely off our investments since 2012, I’ve been accused of not really being an early retiree because of the size of Financial Samurai. That’s totally understandable, which is why since 2013, I haven’t told anybody in real life that I’m an early retiree. I just tell them that I’m a writer or a high school tennis coach.
But isn’t it funny that if Financial Samurai was much smaller, I’d get more approval from the Internet Retirement Police? The lesson is to never stick out because a hammer will try to bang you down. In real life, you should be as stealth wealth as possible.
Retiring With Poverty Income For A Family Of Three
Here’s what I think our budget would look like if our household of three lived off 200% of FPL in early retirement. There is no way we could only live off $20,780, or 100% of FPL.
Looking at this 200% of FPL budget makes me a little angry because I want better for my wife and son. I’d like at least a two bedroom apartment, which would cost us closer to $3,000/month for an apartment 45 minutes away from downtown SF. I’d also want to spend about $500/month more for food, $50/month more on my son, and $100/month more on travel.
The major action step to take before deciding to retire with only $41,560 a year in investment income is to completely pay off a property to reduce living expenses. Owning estate really is your best friend in this near poverty retirement living scenario.
After going through this exercise, I’ve concluded that my family of three would need to earn at least 300% of FPL ($62,340) in early retirement to feel reasonably comfortable. At a 3% safe withdrawal rate, we’d, therefore, need a portfolio of at least $2,078,000.
Be Patient With Early Retirement
Instead of rushing to retire as soon as possible, go through the numbers and see if everything makes sense. To give up a well-paying job in a bull market to live like a pauper is probably not ideal.
One of my early retirement regrets is retiring too soon. I would have been financially better off if I had accumulated several more years of income. It’s only after you’ve permanently left the workforce for a while that you realize how truly long post-work life is.
For those people willing to live in or near poverty to retire early, I say more power to you. Living a simple life without much desire or possessions is the key to enlightenment according to the Buddha. Just know that there’s a chance your expenses will increase as you age. Worst case, you can always just go back to work.
The math really doesn’t lie, no matter how our emotions make us feel. If you can survive off poverty wages until Social Security kicks in, you’re golden! At the end of the day, it’s up to each of you to figure out what works best for you and your family.
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Readers, would you be willing to retire early to live in or near poverty? Why or why not? What is the lowest FPL level you’d be willing to accept to retire early? How much money are you trying to accumulate to retire early? Do you think young folks retiring with the amounts in my chart are making a mistake?
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