One of my biggest concerns about early retirement was running out of money.
What if there was another massive correction in the stock market like we saw in 2008-2009 and 4Q2018? What if my rental properties went vacant for an extended period of time? What if Financial Samurai died? What if I accrued unexpected medical expenses? What if I underestimated how much I needed to be happy? Such worrisome thoughts can paralyze even the best of us.
Whether you decide to retire in your 60s or in your 30s, I’m here to say the fear of running out of money in retirement is overblown. The media, money managers, and government officials, most of whom are still working, have fear mongered the general population long enough!
As someone who left the working world in 2012 at the age of 34, let me explain why your retirement life will probably be just fine.
Making Your Money Last In Retirement
1) You will need less than you think.
My biggest surprise since retiring has been how much less I need to live a comfortable retirement life. Like any good retiree, we plan for multiple scenarios over an extended period of time before making a decision. I spoke with at least three dozen retirees about retirement spending and they all said they are spending much less than they anticipated. For myself, on average I’m spending 30% less than projected.
It costs nothing to play tennis at a public park. There are plenty of cheaper food alternatives once you no longer have to work in an expensive downtown area. You can read all the latest magazines at your local library, surf the web, and enrich your mind with classic literature for free. Take one look online and you’ll find a plethora of free activities.
2) You don’t need to save for retirement once you are retired.
What many retirees “forget” is that once they reach retirement, they no longer need to save for retirement. It’s not so much forgetting, but being so accustomed to saving for so many years that you just can’t stop! For example, if you’ve spent a lifetime maxing out your 401k, you’ve suddenly got $18,500 a year more in gross disposable income.
For the life of me, I cannot stop trying to save at least 50% of my after-tax income, while also contributing as much as possible to my Solo 401k even though I’m supposed to live it up more in retirement. After aggressively saving since your first paycheck, saving just becomes part of your DNA due to an unknown future.
3) You will adapt to different income levels.
For the first two years after I left my job, my annual income decreased by 70% – 80%. Yet looking back, there were minimal lifestyle changes. I still lived in the same house that I had been living in for seven years prior. I still stayed in the same house in Hawaii for the past 30 years every time I visited my parents. I also drove the same paid off car for a couple years until I bought a new compact car because my old car could no longer pass the smog exam.
Yes, I had to cut back on eating steak for a couple years. But I replaced $50 dry-aged steaks with $2.5 In N’ Out cheeseburgers. Yum! Instead of eating sashimi, I ate marinated tilapia. Still quite tasty.
Just like the lifestyle of a one percenter is not much different from the lifestyle of a middle income person, as long as you have the basics covered, the lifestyle of a lower income person isn’t much different from a middle income person either. The lower income person has a harder time saving for retirement, which ironically gels well with a retiree who doesn’t need to save for retirement.
As long as I have food, shelter, clothing, dental floss, companionship, and internet access, I’m 85% of the way there. For most of you, it’s going to be the same thing. The joy of doing anything you want, whenever you want more than makes up for a lower income.
4) You will be in a lower income tax bracket.
The great thing about making less money is that you’ll be in a lower income tax bracket. Therefore, you’ll have a relatively higher amount of disposable income for each dollar earned. In 2019, not is federal marginal income taxes lower than before the Tax Reform bill was passed, corporate tax rates and small business pass-through income tax has fallen to 21%.
It felt wonderful going from a 39.6%, 35%, or 33% marginal income tax bracket (depending on my deductions and bonus) to a more reasonable 24% tax rate for a couple years. Just imagine killing yourself at work for 70 hours a week to give over 50% of some of your income to a fiscally irresponsible government. No thank you.
Further, check out the long-term capital gains tax rates. Pretty reasonable nowadays for those of you who are earning passive income.
The double benefit of no longer having to work and paying less taxes will make you much happier. You’ll actually start feeling like you’re getting your money’s worth.
5) You will find many ways to make money.
Lower your price from P1 to P2 and demand for your labor increases from Q1 to Q2
If you retire with only part of your living expenses covered, logically you’ll need to come up with a solution to cover the “income gap” required by your desired lifestyle. Throughout our entire careers, we are always asking for more. Thus, in retirement it’s often hard to accept less. But once we learn to control our egos, a bevy of new income earning opportunities materialize.
Since retiring, I’ve done consulting with four financial technology startup companies at an hourly rate 60% – 80% less than what I used to earn at my full-time job. Initially, it felt odd making so much less. But I soon got over it because the experience was fun and I was learning something new. I even let some people who had no idea what they were doing, tell me what to do!
Then I really squashed my ego and spent time driving for Uber for $25 – $35 net an hour. One time I picked up an ex-client at his place in Pacific Heights. Perfect. I wanted to see if making a living driving was possible. It’s hard, but doable. The experience was good and driving added about $5,000 more gravy to my plate in 2015 and 2016 before I decided it wasn’t worth it anymore.
If you don’t have a car, not to worry. Recently, I hired some “Taskers” from TaskRabbit to help transport some furniture from a buddy’s place to my house this past weekend. After paying a 35% (!) commission to TaskRabbit, the Taskers still made $54 an hour. You can be a dog walker or a pet sitter on Rover.
If you’re allergic to all animals, don’t worry. You can always sign up to be a greeter at Walmart or flip burgers at McDonald’s while also eating free food. You’re not too proud to work a minimum wage job are you?
If you are willing to swallow your pride and make much less than you once did, you’ll have no problem making up the income gap between your covered expenses and your desired lifestyle.
6) You have more to offer than you think.
When I left finance, I thought I ‘d be done for good because I didn’t think I had any transferable skills like a software engineer or electrician. When you’re used to doing one thing for a large portion of your life, you begin to doubt your versatility. Every colleague I spoke to felt the same way, which is why so few ever leave.
Having transferable skills is overrated. All you really need is to be: 1) likable, 2) trustworthy, and 3) consistent. To make life easier, build a higher EQ. Anything technical can be learned on the job. Think about how much you remember from high school and college. Not much! The CEOs earning $25 million a year aren’t coding or rewiring your house. All they’re doing is managing people, building business relationships, and being a good ambassador of the firm.
Given you’re close to or already retired, what you’ve got more than most is experience. Experience cannot be taught or bought. Acquiring it takes time. Your experience is extremely valuable. I never anticipated companies approaching me for online marketing consulting work. But at least eight firms have done so because over the last nine years with little budgeted, I’ve organically built my own platform into something significant. For any startup that wants to build its brand online, this is valuable experience.
7) Your existing assets have upside.
You might have a business that invites couples into your home to learn how to cook. Why not expand and shoot videos of the cooking sessions to sell online?
You might have rental property that hasn’t been spruced up in a while. Perhaps if you did some minor remodeling, you could get a much higher rent.
Your investments might not be properly allocated based on the current state of the economy. Perhaps instead of having 50% of your assets in a Treasury bond yielding 3% in a bull market, you could double your money by allocating more to blue chip dividend stocks that pay more than a 2.8% yield and provide stronger capital appreciation. Or perhaps instead of having 100% of your net worth in public equities, you should be more diversified in order to not get pummeled during the next downturn.
I’m currently bullish on real estate in the heartland of America between 2019 – 2025. As a result, I’ve been aggressively investing in real estate crowdfunding projects in Texas, Nebraska, Colorado, and Utah through real estate crowdfunding. With lower valuations and higher rental yields, I strongly believe the trend is for more workers to work out of lower cost of living cities thanks to technology. I’m shooting for a 8% – 15% return on my investments as real estate is my favorite asset class to build long-term wealth.
It’s rare that all of our assets are fully optimized. We can probably all do some fine-tuning to make our existing assets generate more income. It’s just a matter of taking the time and expending the energy to make it happen. Don’t let a steady paycheck make you comfortably numb!
8) You can always tap your pre-tax retirement accounts early.
If you so happen to retire before the age of 59.5, you can follow Rule 72(t) and withdraw money from your pre-tax retirement accounts penalty free provided that the holder take at least five “substantially equal periodic payments” (SEPPs) or until age 59.5, whichever is longer e.g. someone retiring at age 50 would have to take 10 SEPPs.
According to the IRS, the maximum you can borrow from your pre-tax retirement account such as a 401k is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less. For example, if a participant has an account balance of $40,000, the maximum amount that he or she can borrow from the account is $20,000.
Finally, you could simply pay a 10% early withdrawal penalty if you were absolutely desperate. Luckily, if you incur unreimbursed medical expenses that are greater than 10% of your adjusted gross income in that year, you are able to pay for them out of an IRA without incurring a penalty.
9) You can create your own destiny.
Let’s say nobody at McDonald’s is willing to hire you. Why not be your own boss? Startup costs are extremely low nowadays. All you’ve got to do is throw up a site for less than five bucks a month and you’re literally in business.
After retiring, I wanted to take Financial Samurai more seriously. So I committed to writing at least three posts a week by spending 2-4 hours each morning before tennis. I didn’t know exactly how I was going to build the business, but I knew that if I kept on writing, opportunities would arise. After a full year of sticking to my plan and publishing my severance negotiation book, the traffic on this site grew as did its income.
My story is a classic case of “do what you love to do, and the money will follow.” To maximize profits, I should spend more time optimizing this site. But why bother when this site’s income is already a bonus? I’m having too much fun to go back to a stressful work mindset.
The key is to just start your own site / business endeavor. You don’t need to have all the variables pre-mapped because as you tinker, your variables will change. Overanalyzing a situation will make you do nothing.
10) Plenty of safety nets.
Let’s say even with the use of free financial tools online to manage your net worth and forecast your retirement cash flow, you miscalculated how much you need in retirement. For whatever reason, you’re also unable to generate the required extra income to make up the shortfall. Your savings are depleted, your passive income streams dry up, your business ideas all suck, and nobody likes you. Not to worry! You’ve still got family, insurance, and the government to help out.
Plenty of government safety nets
If you just can’t make it on your own, there may be a family member who can lend a helping hand. If your parents are no longer living, perhaps you have a sister, brother, nephew, or niece who will provide shelter until you find work again. I know if anybody in my extended family needed help, I’d do so without question.
Finally, if you’ve just got nobody, the government has programs that can help you with food, employment and shelter. Yes, Obamacare is coming under assault, but as someone who has paid $700/month/person for his own healthcare since 2013, I can’t imagine healthcare costing much more under Trump’s plan. It is extremely unlikely you will plunge from being able to retire to becoming homeless with all this planning and support.
YOU’RE STRONGER THAN YOU THINK
If you’ve been able to entertain legitimately the idea of retiring early, then you probably also have the intelligence, courage, and game plan to adapt to any unexpected changes that happen after retirement.
Change is scary. But the fear in your head is almost always greater than the reality. Just make sure you have something you enjoy doing once you pull the ripcord. You might have so much free time you won’t know what to do with yourself!
Recommendation To Build Wealth
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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.
Updated for 2020 and beyond. The 4Q2018 correction is something to pay attention to. Things are chugging along well in 2019, partially thanks to a collapse in interest rates and potential trade negotiation deal with China in 2020, along with the presidential elections.
It’s a while since you posted this but I just had to say thank you for this article! I just found out yesterday that I am being laid off which at 62 means early retirement. I’m still terrified, because losing that safety net of a regular paycheck is scary, but your article has me feeling a little better.
My parents had $1M in an IRA in 2014. By 2018, my father passed away, and my mother is left with $400k in the IRA, a $70k unpaid tax bill we just found out about, and a $200k home equity loan. Some people may spend less in retirement, but others spend more than they expect. In two years, my father took out $500k from the IRA (hence the tax bill) and I just am at a loss for how their financial situation went from rather good to not so great in just four years of retirement. So your advice may work for some people, but it’s important to note others spend MORE in retirement than they do when working. They have more time on their hands and as long as they are in good health (or in the case of my father, bad health, with a terminal illness, and wanting to spend all that hard earned money before he died!) then you might end up spending more.
LOL!
Well, it appears that someone is having a serving of crow pie, hmmmmm?
I guess your investments weren’t so conservative after all, were they?
Enjoy going back to the daily grind.
You are the poster child for your DIRE movement. Folks who have FIRE’d successfully are doing just fine through the current market turmoil because they did invest conservatively. It’s weeded out those who were full of themselves, thinking they were so smart, they were qualified to give others financial advice.
https://www.marketwatch.com/story/an-expected-obliteration-of-financial-assets-threatens-to-kill-fire-movement-2018-12-18
Dogen himself is about to head back to work after seven years living the FIRE life so that he can “buffer the expected obliteration of my finances.”
His takeaway: Don’t allow FOMO over FIRE push you into making irrational decisions you may regret. This climate will punish you for that.
“If you are wise, you will embrace the realities of DIRE as the world heads south,” he said “Giving priority to caring for your family and delaying a super early retirement is the responsible thing to do.”
For sure! As the leader of The DIRE Movement, I’ve got to lead by example!
Always got to think several steps ahead BEFORE one’s finances get severely hit. Hope people are still hiring after I decide to apply in September 2019. That’s when my boy will be old enough to go to pre-school and I’ll have more time, whoo hoo!
Pretty cool MarketWatch feature of Financial Samurai though right? It’s great big media is paying attention.
Sam
FINALLY…someone speaks the truth! Don’t believe the hype america…corporate america and the fat cat executives wouldn’t have anyone to feed off of if everyone was FiRe.
Get out and enjoy life people.
According to this article you still have to work. Flipping burgers or a door greeter at Walmart. That’s not really retired now is it?
I enjoy reading about retirement on FinancialSamurai! I’ve visited the sight a number of times this year as I contemplate retirement. I’ve been through 3 financial planners that all say I don’t need to show up for work tomorrow. So, it’s very affirmative, but yet I still find myself second guessing my decision….why do I do this to myself? Here’s the data:
I’m 57 years old, want to retire in 1/19. My income is $235k/yr. I’ll receive a pension of $91k/yr and have $2M saved in my combined 401k and 457b. We have no debt. Home is paid and worth $900k, (2) 2015 cars paid off. A big retirement benefit I have is my health insurance premium is paid for with a $1000 family deductible. My wife has never worked, doesn’t qualify for SS. My 2 sons (34, 32) are very successful, growing their own families and no chance of them coming back on my payroll.
I made a budget and found my fixed monthly expenses (electric, gas, water, sewer, cell phones, cable TV, etc.) are $1200/mo. I added my annual bills (real-estate taxes, home/auto insurance, etc) to this for a total of $34k/yr before food/gas/entertainment. So, I’d like to think I could live on my pension, but for analysis purposes want to be comfortable pulling $100k/yr from my IRA once I turn 59 1/2. That would be a $180k/yr retirement….seems way more than I need, but I’m an Engineer by background and have analyzed this with every permutation of assumptions possible…driving the wife crazy!
So what the heck is wrong with me?….I can retire very confidently and comfortably right?
Ok, so the #’s are getting to me….4% draw on a $2M 401k is $80k, or up to $100k/yr would get me $!80-190k/yr retirement income.
Yeah me too! I own a large apt building in North Jersey. I’m bringing in about 25000 a month . The building is paid for last year but I still have high re tax bill. I’m 27 single and live rent free. I would like to retire cause I hate my teaching job but need health insurance. What should I do???
Retirement is a paradox. Leave your job and find something you are passionate about.
Great blog! Thanks to the author for generously sharing his knowledge.
“Indeed, money doesn’t buy happiness — but it can buy you time and experiences.”
Excellent point and experiences can make you happy. But if experiences and everything else money brings does not makes you happy, well in that case, as someone once famously said, money will at least help you be miserable in comfort…
That is a great article, calling out the retirement fear mongers for what they are.
I retired at 57 and have been spending about $2000/month, including unsubsidized Obamacare and rent. For those of us without substantial nest eggs that choose not to work, retirement simply requires tracking expenses and income. It can work, especially if you can delay drawing SS until age 70.
This is a good article and as an early retiree (age 53) I agree with all the points above. The only thing I’d change is one word in the first point. I’d change the word “will” to “may” when talking about how much money one will spend in retirement.
While it is true that one could cut back on certain luxuries and make do with less expensive options, I question why someone would want to retire early with that as part of their plan? After all, you only live once.
For my wife and I, we choose not to retire early until we had enough money where we could maintain our pre-retirement lifestyle (plus ramp up travel extensively). We do what we want, go where we want and eat where/what we want without any constraint as to cost because our retirement budget allows for that. While we could spend “a lot” less than we do, we just don’t see that as an attractive alternative. Having lived many years with very little money and now many years with enough money to do what we want, we would choose the latter option every day of the week.
So as someone who is walking down the retirement path, I’d recommed folks delay early retirement until they have the funds to support the kind of lifestyle they dream about when thinking early retirement. Stay an extra couple of years if that means your retirement years can be everything you dreamed they’d be. If you end up like us, you may even find they exceed every expectation you’ve ever had.
I agree. My wife and I could retire on rental and investment income. We are 32 and 33. BUT, we would have to live on ~50k a year and keep an eye on travel expenses/not buy a boat in the spring. Knowing that we don’t have to work is pretty powerful. We continue to work our flexible jobs because we enjoy it and it allows us a certain lifestyle. #leisuretimekills
This statement in the article is somewhere between misleading and inaccurate:
“If you so happen to retire before the age of 59.5, you can follow Rule 72(t) and withdraw money from your pre-tax retirement accounts penalty free provided that the holder take at least five “substantially equal periodic payments” (SEPPs).”
In order to be penalty free, the SEPPs must continue for a minimum of 5 years or until age 59.5, whichever is *longer*. So someone retiring at age 50 would have to take 10 SEPPs.
I recently signed up for the Financial Samurai. When I read your first article, it was apparent to me that we are likely kindred spirits.
Since leaving corporate America a couple years ago, I discovered a passion for the entertainment industry. To that end, I started my own successful voiceover business. And I also began pursuing an acting career….with some success. I have been cast as a principal actor in two feature films (one at the Sundance Film Festival), a few TV shows, several commercials, and hundreds of voiceover spots. So, there is life after or in “early retirement”. Starting a business is not an easy road, but being your own boss makes you work even harder to achieve your goals.
Prior to retirement, I was a big fan of the book “How to Retire Early…and live well….on less than a million dollars”.
Thanks for the input. I’m even considering starting my own blog….?
Hi Sam,
I’ve never responded to a blog in my life, but when my son who is trying to help me prepare for for retirement referred me to you I just couldn’t help but comment. the articles and advice is just great and reassuring, you speak in plain laymen’ s terns and form the heart. I have so much more confidence now from hearing you and all the other bloggers comments. As everyone knows this can be a very daunting endeavor to say the least. your site really provides us unknowing ones a great road map to follow. thanks to all of you in the pre- RT community for you input .
Glad you found some comfort! Here are a couple more articles you will enjoy reading:
Overcoming The One More Year Syndrome To Do Something New
Early Retirement Five Years Later: Reflections on Life After Work
Good luck! The fear in your mind is worse than reality.
Say ‘hi’ to your son for me.
I’m 56 and ready to retire as my husband is older and we want to be sure we have time to enjoy retirement together and travel for a few years before physical limitations could kick in.
My husband is 69, good health, and wants to work maybe one more year full-time and then find a part-time job paying around 25-30K. I make around 100K now (field is PR, large global company), full benefits. He makes around 65K and since he’s on my health plan at work, he only needs to have Medicare Part A. Combined pre-tax retirement assets are at around 1.4 million, 75K left on mortgage, no other debt.
My problem is I do not enjoy my job, dread getting up and going to work, but am TERRIFIED to quit a secure and well-paying position just because I don’t have a clue what would make me happy in retirement in terms of a hobby, part-time gig, non-profit work (w/a little pay perhaps) or even a lower-paying full-time gig, which I’m over-qualified for in most cases. And don’t want to go from one, high-paying, senior level corporate job with long hours, high stress, to another. And the low-stress part-time jobs I think I’d enjoy are becoming obsolete, like library assistant or law office receptionist.
My company re-organizes a lot, so could get laid off at any time, which would make the decision to retire for me. Am trying for age 60, but I’m not sure I can last that long.
I’m so glad I found your blog as it is giving me a lot to consider and think about.
I think it’s better for most people to work at something and stay occupied. I find I am most productive in general when my schedule is full with lots of things. Also given unlimited time to pursue hobbies they aren’t quite as fun as when they are escapes or distractions from work.
A lot of this advice seems oriented toward people who make six figures and plan to retire early. Most of them seem to work stressful jobs. I would want to quit that too. I work an easier job and like the people I work with, but I only make about $50k. My benefits however are really good and it feels like I get more vacation time than I can use, and my schedule is flexible which lets me pursue a part-time low-paying job that I enjoy and hobbies on the side.
I could see myself doing this for the rest of my life and enjoying myself. Is this wrong? Should I be pursuing higher income work that I don’t enjoy as much?
FinSam, Nice article, just what’s always on my mind. I left the corporate world in 2010 and moved to a modernized city in China (lower health care costs, lower monthly expenses, etc.). After six years of working at expenses level, and watching my US Assets grow, I’m looking for the right time for my wife, daughter and I to return to the US, and stay FI without having to work at all. Health Insurance was a major concern as I remember paying COBRA payments over $1000 a month at one point in the early 2000’s. Also worried about University costs 10 years from now, can my portfolio possibly grow faster than they do…
You see, living in China and not spending money is easy, but during the 2 months we come back to the US in the summer, watch me walk through Home Depot, WalMart or a Supermarket, I’m like the deer caught walking in the middle of the highway. All that stuff you can buy, and in one place.
Last year I worked (for myself, ha) every day of the week, what am I doing? I just can stop it and relax. That’s the worse trade off, work all day, save no money, no boss to blame. Well, I’ve sold the half of my business that was losing money and draining time, now I’ll only work 5 days a week… The decision to make: Should I ratchet myself to zero, then move back to the US, or just make a cold plunge to the no work, walk around WalMart without my wallet, enjoy the free time lifestyle?
Well thanks for listening… JG
Congrats on all of your success and your retirement. What age do you think early retirement is possible? How much should you have in your bank account / net worth before you consider this retirement? What about people with kids? Or women who typically spend more on things to just look societally acceptable as they get older (now women don’t HAVE to spend more on these things but are more likely to – guys get away with spending next to nothing.) I can’t remember – do you have a partner and do they earn any income?
This is SO good. Part of our motivation for taking a year off was to test out early retirement. Some things you just don’t know for sure until you try. Part of the test was to not save this year… and I hate it. Hate it. I had no idea that would be an issue. Our spending has dropped quite a bit too. We cook from scratch more instead of Costco pizza. And there are so many amazing things to do for free, that we don’t really have time for the more expensive entertainment. We also have time to learn to fix things ourselves. Which is part fun, part cost saving. Mr. Mt just bought a blow torch and learned to solder. He was really happy about his fun new tool, and I was happy we have a new outdoor faucet. =)
Thanks for the article. My wife and I will be retiring next year as the last of our debt is paid off(not including mortgages). We have 4k/month of profit from our properties and have a few online business ideas that we are getting going now for some additional income. My concern would not be running out of money, it would be not being able to qualify for a mortgage. I know we want a single family in the burbs and maybe a lake house.. Who knows maybe a 4th rental prop. By quitting too early are we shooting ourselves in the foot for future purchases?
Hi Sam,
You are right. It is overblown. I go to MSN and Yahoo Finance websites daily as a habit. I am disappointed that 25-35 year olds are financial advisers.
They cannot be.
They have not reached a stage in their life to support their old parents. They have absolutely no idea what it means to raise a child through HS or College.
But they quote numbers as to what Fidelity says an average 401K saving is? And write a few paragraphs around it.
Really?
When one’s parents cannot walk by themselves. When you child gets admission in Stanford, and you plan to pay for it.
No one who is financially prudent, enjoys the money and what it can buy. Will a person like me get happiness with a BMW 7 Series? If I could, I would have bought it long ago.
We belong to a breed, who does not enjoy what money can buy, but to feel financially free.
As you’d grow older one day, you’d realize that your parents’ medical needs, emotional needs (forces you to travel), your kids HS, College (Stanford or Harvard if they get admitted) – are the events you are planning for.
Its not the goal, but the means or the journey to be prepared – which makes us who we are – financially.
We can. Is the feeling I always want to have, when it comes to finances.
Regards.
Actually if your kid get admitted to Harvard or Stanford it would be to your advantage to have as little income and assets as possible. They have amazing financial aid. I think if your family makes less than 50k a year you pay nothing and they keep the fee at 10% of your household income for incomes between 50k and 250k. After that amount they don’t give you any aid and you have to pay full sticker price.
Hi David = Thanks for sharing those facts. There is a reason that folks who make > 250K do not feel rich. The system does not help them, and they are not making millions like the top rich. The system helps to a point, and people like us are crushed in between, to a point that we may even think about making less than we can! Perhaps, I should leave my job and take a less than 50K job while my kid is in college, to qualify so I could still come out better financially. It does not make sense. The upper middle class has to choose to become poorer, or be unfairly treated like rich.
interesting take re: upper middle class choose to be poorer vs. unfairly treated as rich. Sam, there may be an article hiding there – “Strategically reduce your income during specific life events”
Strategically, every parent who has a high schooler should look to lower their income to as close to $0 to get grants and aid. Morally, it’s up to you.
I wrote about the cost of Princeton University when I visited last year: https://www.financialsamurai.com/average-student-loan-debt-is-at-a-record-high-no-big-deal/
A lot of private schools really are very generous with lower income families. They try and charge the rack rate to wealthier students.
In this case you’d have to stop working a few years before they apply to school and be pretty sure they were going to college. Or you can just save more money and pay for it…
I went to a talk at my local university by a literature professor from Harvard. It was about different philosophies on when you should transfer your wealth to the next generation. Some cultures think you should give most away before you die and others think you should wait. He talked about how Shakespeare’s King Lear was a warning to not give away too much too soon. The best joke of the presentation was when he said that his employer was the best in the world at getting parents to part with their wealth for their children.
“There is a reason that folks who make > 250K do not feel rich. The system does not help them, and they are not making millions like the top rich. The system helps to a point, and people like us are crushed in between,…”
Seriously, no family in this country who is making 250k a year should feel “crushed”. Jeesh.
That’s not even a “first world problem”.
It’s a “Top 1.5% first world problem.” Cry me a river.
If you can’t make ends meet and save money on that income, it’s your own fault.
We make less than that, live very well, own 6 houses (4 outright and one at 80%), and have a 60+% savings rate on our after-tax income. And have a good-sized stock portfolio, too.
And if we had learned how to manage our savings and invest them properly when we were young, we would have at least double that.
Totally right. Good work on the 6 houses.
You may enjoy this post: https://www.financialsamurai.com/should-your-financial-adviser-be-smarter-and-wealthier-than-you/
The funny thing about financial freedom is that once you’ve got it, you ALSO start taking it for granted. Then you start wondering what else can your money buy, so you test the waters slowly about spending more than you normally would.
Very good post!
I also tend to overthink this aspect, but what happened in the few (not so few, actually) cases I’ve thrown myself into the void of uncertainty has always been happiness and more money.
We spend a life saving and investing and spending less than we earn than we’re scared by having our Nest Eggs depleted. It doesn’t make sense, that’s why people like JL Collins claim to withdraw 5-6% of his NW per year.
The two factors I see at work here that prevents a newcomer to be more aggressive are:
– you have a family, thus there are unpredictable expenses and you can’t go turbofrugal as you wish
– you’re scared that the job market won’t hire you back in case you’d need.
These fears are all true. And the job market may very well not hire you back. But the consulting opportunities in your field are MORE than you know. Lots of employers are much happier to hire consultants than FTimers.
I’ll have to check out JL Collins again. I read his stuff, and it was kinda dry, so I stopped. But will give it a go again as you are the 3rd person to mention him recently. Personal finance has to be entertaining for me, otherwise I’ll just nod off.
Here’s my take on the ideal withdrawal rate in retirement.
I have been struggling with the retirement decision. I have a defined benefit plan and can start taking reduced ss survivor benefits at 60. My employer will still pay half of my health insurance til I an eligible for Medicare at 65. I keep running the numbers and with a 3% withdrawal of my 401k, mutual fund and savings plus my dbp I can match my current gross less the difference in taxes and my annual retirement savings if I retire anytime after my 60th bday. My coworkers say I should put in the additional three years to max out my dbp. Your blog offers a different perspective. Thanks for the insight, I am good to go.
I enjoy when people who are saving little for retirement tell me that we might run out of money if we retire early. We’re very close to reaching financial independence (have 90% of funds). However we won’t pull the plug right away, unless works gets annoying, since we want to save for a few other goals (funds to help parents, funds in case we want to buy a house in the future). If we had to retire today we could, we’ll just move to a less expensive area and try to make some sort of income to cover the 10% of missing retirement funds.
Sam,
I love reading sh*t like this!
I followed a similar path as you. Shoestring budget. Kept most my pay over many years. Invested ferociously. Sacrificed materially and career-wise more than most are willing, and only those who have done so may understand. Ensured I waited until I had an extra financial buffer in-addition to making my financial retirement goal. Retired at 40. My sentiments are as you state in this article. I realized I spend even less than I thought I would in retirement and worry more than a healthy amount about protecting myself. But then again, that worry/obsession is what lead to my early retirement success.
The market will eventually turn downward, and a healthy dose of worry can lead to making steps now to protect our future. This article is a good and uplifting reminder to keep that worry at a healthy amount.
Great read.
Hi Matt,
Congrats for retiring early and sharing your thoughts on how much less you need to spend in retirement to be happy. How many years have you been retired now? And what do you do with all your free time?
Sam
Sam, I’ve been retired a bit over a year now. Similar to you I stay active and am far healthier than in my corporate days, play sports (golf and ski primarily), workout, keep even closer ties with family, travel a ton, take an occasional college course just out of interest in learning, research alternative revenue streams, make appropriate cost/benefit upgrades to my home, continue my hobby/passion for learning more about personal finance, etc.
Bravo Sam. These days I find posts on the psychology of money/retirement much more interesting than the nuts and bolts of saving/investing. I’m 2.5 yrs from retirement at 42 yrs old with a Military pension/Healthcare and I still fight the occasional nagging thoughts of “will we really be ok” and “have I planned enough” or “have I cut back my spending enough.” I think these are all realistic concerns that should be addressed, however, I usually end up with the conclusion that all will be ok, we’ll adapt to our situation and get a fun, part time job if absolutely necessary. Our plan is to focus on raising our young children daily and indulge in simple pleasures like great coffee and tasty, healthy food, go for long walks, search for real estate deals and whatever else happens to catch our attention at the time. Focusing all my energy and attention on all of these things, solely, is intoxicating to think about. Thanks for the post of encouragement from your real-life experiment!
You’ll be OK, especially with a Military pension. Many ex-military folks I know w/ pensions retire early and go on to get another job they like or consult on the side. It is a great life after those 20+ years of service.
Folks should really consider the military as one option for early financial freedom!
See: https://www.financialsamurai.com/financial-benefits-of-joining-the-military/
Hey Sam
You mentioned in this post that people often forget that they don’t need to invest a portion of their income post-retirement. Given the frugality that I see on your blog, I’m curious – do you still invest some of your cash flow?
Yes, I can’t stop. I continue to save/invest 50%+ of my after tax cash flow in various assets.
This is from Point #2
“For the life of me, I cannot stop trying to save at least 50% of my after-tax income, while also contributing as much as possible to my Solo 401k even though I’m supposed to live it up more in retirement. I tried blowing money on mid-life crisis cars this year, but both my low-ball offers were rejected. I tried spending more while I was in Europe for three weeks, but couldn’t stomach paying more than $250/night after taxes and fees for a hotel. I still can’t convince my dad to get cable. Old habits die hard!”
Even after all the calculations and realistic worst case scenarios, a part of me still feels saving and investing is the right thing to do. So what I’ve slowly begun to do is live it up more. It helps the older you get b/c you realize you don’t have much time left.
I love how you say “As long as I have food, shelter, clothing, dental floss, companionship, and internet access, I’m 85% of the way there.”
Seems like when you’re working full-time it’s that other “15%” that sucks you dry.
I know we were spending much more on mindless, escape the world entertainment.
Yes, the remaining ~15%… striving for the marginal desire for even more joy sometimes blows up in our face.
If you are in a habit of saving money, then you have this buffer equal to your savings if you decide to downshift. For example, if you are saving 50% of your after tax money and find yourself working a job that pays 50% less, your lifestyle is basically exactly the same!
I don’t know or even worry if I’ll run out money during “retirement”, but it’s not a calculation I run. My only job for now while accumulating is to stack as much dollars and the the market do the rest.
I had always planned to live strictly off social security when I’m 62 anyway and that’s my ultimate goal. I love what I do so I don’t see myself fully “retired”, but I’ll probably work part time in my usual accountant capabilities.
Interestingly enough, I’ve nerve thought of myself in terms of “class”. I could move to a poorer area and be decidedly upper class or live in a richer area and be lower class, thus “class” is never truly attainable anyway. I think the trick is to just throw the idea of “class” out all together and instead shoot for “enough”. Enough is absolute and doesn’t vary based on location, only person.
Few people understand the concept of enough, hence the shortage of retirees. Good enough is the reason why you can enjoy In N Out over literally any other food. It’s really no less healthy than a mound of steak, and far cheaper. I’ve definitely been thinking of the concept of enough lately and also came to the same conclusions about being 85% there. I think the other 15% is mostly comprised of having a fulfilling goal that’s irrelevant to the monetary reward received for doing it, unless monetary reward is a direct indicator of how well you’re doing (it’s not always)
““He who knows he has enough is rich. Perseverance is a sign of will power. He who stays where he is endures. To die but not to perish is to be eternally present.” – Lao Tzu
There are so many places to relocate to in order to save money and experience new adventure.
What portion of fortunes have been created in the past 50 years? I don’t know, but through the hammering of taxes, free education, and new money, what is really left of class, anyway? People get too wrapped up in it.
“To die but not to perish…” I like it. Krishna said, “Make yourself alike in pleasure and in pain” in order to achieve happiness.
One thing Sam didn’t mention is Social Security. With people needing less money than they think, as long as you have the required credits you’ll have guaranteed income after 62 if needed. So, when projecting how long you need your savings to last.
Also, Social Security credits are easier to earn if you make less money. The benefits for pulling 70 hour weeks vs. 7 hour weeks really aren’t there. Even a simple retirement job will set you up well in that system.
But what a boring life! I can understand financial independence at a young age, but actual retirement? I hope to love my job until I die, but if I don’t then I’ll try to love retirement. Once I’m that old I hope to be skillful enough to have a very high chance at success at either of those alternatives.
Anyways, I’m still young and have only really read about Social Security. I’d love to be corrected if I’m wrong.
I don’t understand your logic in assuming you’d despise retirement at old age but love it when younger? I actually see it the opposite way – the younger you are, the more vigor and potential you have to conquer the world. It feels pretty crappy to waste that on pulling out of the game too soon. The older you are, the more refined you are, thus your free time will be directed in ways that are very meaningful to you.
That’s OK, I’ll explain my logic. There’s a shifting subject. When I assume that people want to retire, I’m talking about people reading this blog thinking they might run out of money (like the people who might be interested in the subject of the article).
Then, I talk about my own point of view. Not everyone is going to be in a position to love their job. For the lucky ones who are, it’s not as important to save for retirement. If you are already outside the “salt mine”, then there are fewer reasons to try to escape.
If you no longer desire a lifestyle that meets any of the common descriptions of retirement, the problem of money in retirement is eliminated. You can work on both ends of this goal: if you want to maximize your happiness, you can either find work that makes you more happy or save money in order to work less in the future.
So, the point of the light-hearted comment I made is that you must be a huge bore if you cannot imagine work that you’d actually enjoy and instead chose to play the Social Security game until you are a big winner. But, if all you wanted was to retire early, there is a way.
I liked what you said about refinement. As you age and become more refined, your earning power also increases. Why not enjoy life while you have vigor instead of killing yourself working, vs. making it big early and then making more meaningful contributions when you are older? Ultimately, I don’t think you can actually choose one of these or the other. Take the Financial Samurai, for instance. He punched those 70 hour weeks like a champ, and now he shapes the future by teaching us. If the way we get to early retirement is through hard work, hard work will stop after retirement. Compare this life to a person who pulled out of the game early. The key difference between someone who quits early and our Financial Samurai is that Sam loves honest, hard work. And someone who loves hard work makes big impacts throughout their life regardless of how much they are being compensated at any given time.
Financial independence is a different topic. Financial independence is like the difference between going to out-of-state networking events in either a private plane or a bus. One is clearly better than the other. Which one do you take? ;-)
Great article. I’m 60 and plan on retiring in five months and fourteen days. I’ve been saving approximately half my income for the last four or five years and before that was maybe at about the 25-35% level. I remind myself all the time that I live on 50% now and living on that or less will be easy peasy in retirement. It helps that I have a defined benefit retirement plan. I run all the numbers all the time and believe that I have more than enough saved, particularly with my pension as my bedrock. But still, the thought of not working and not having an income is pretty scary.
It’s scary, but I really think you will be just fine! And a couple years into retirement, you will kick yourself wondering why you didn’t retire earlier. You’ll wonder what all the fear and fuss was about.
A 50% savings rate is great. If you’ve done that for 5 years, that means you AT LEAST have 5 years of living expenses saved up. W/ all your other savings, Social Security, and your defined benefit plan, I don’t see you ever running out of money if you maintain your lifestyle.
Some of the above is valid, but as an actual retirement-age retiree (68, minus 5 weeks) I have a different perspective. Significantly, those of us at this age still have the likelihood of Social Security, but I have chosen to live off my retirement portfolio until 70 when I will get the maximum benefit and most likely can pay all my fixed expenses from SS. This means that I am now withdrawing more than the so-called “safe” withdrawal rate, but when I hit 70, I will probably be withdrawing less. Come 70.5, however, I will also have RMD (required minimum distributions) from my IRA, so it makes sense to use the portfolio as my primary source of income until 70 because that will reduce the RMD amount.
A valid point from the above is that you’re no longer contributing into your retirement accounts. But if you’re on Medicare, you still have your monthly premiums and they ain’t cheap. Plus you may have out-of-pocket health expenses that are not covered (for example, Medicare doesn’t cover any dental, and when teeth break down in old age and you need root canals and/or implants, that ain’t cheap either). I could never itemize medical on Schedule A before I retired; now Medicare premiums and other unreimbursed expenses make medical deductions the new norm.
It’s a good idea too to eliminate all debt by retirement age. My mortgage is now paid off, I owe nothing on the car, and basically I have no debt at all.
As for going back to work and earning income after standard retirement age, that may not be easy if you’re facing age discrimination. And you have to budget yourself regardless. The temptation can easily be to spend too much, what with vacations and dinners and concerts and all. No matter how good your portfolio looks now, it has to last the rest of your life. Moving a higher percentage of your assets from stocks to bonds and/or cash makes sense, because while you may not be making all the gains from stocks you might, you are preserving capital.
In my case also I have a cushion, which is that my parents (both still alive, 91 and 95) have assured me that I will see a decent inheritance. For obvious reasons I try to manage my finances as if this weren’t the case, but it does provide a degree of security I might not have otherwise.
Good points. Thanks for sharing.
For medical, I guess it’s because I’ve been paying my own medical of ~$700/month for the past 4.5 years (6 months was fully paid for after I left as part of my severance), I just see it as an expense like it always was.
For age discrimination, I believe it. I wrote a post about it a while ago: https://www.financialsamurai.com/over-the-hill-age-discrimination-in-the-workplace/
So, to counteract age discrimination, I just become my own boss and started Financial Samurai! No more discrimination on race, age, or whatever. Love it!
And regarding SS, even better. I don’t even mention it in this post, but I do believe it will be there for those under 40. Just perhaps 70% of the original amounts. If we can survive until 65-70, then we’ll get an additional income bonus. And this means, there is even LESS to fear about running out of money in retirement!
At what age did you retire? And did you ever fear running out of money?
Thanks for the reply, sorry for my delayed response. I think that unless you’re truly a mega-millionaire or better, there’s always grounds to fear running out of money. Especially if you’re hit by catastrophic illness that is not covered by insurance. Medicare as it happens does cover some very expensive surgeries costing $1 million or so, but if I need long-term nursing home care that could be a major financial problem for me. (In NY, however, if all my assets were depleted, I would be covered under the state’s Medicaid. Not a pleasant prospect, however, and even my parents, who live in another state, are getting frail and are thinking of moving to an assisted-living facility. They chose, however, as did I, not to purchase long-term health insurance – which is very expensive and I’m not convinced provides real benefit.)
The other major issue that anyone in standard retirement age has to consider is taxes. I am living right now off my tax-deferred IRA, which I started in 1982. I have a small Roth, but I mainly leave that alone. Basically, I withdraw from my IRA once a month, and I try to withdraw on days when the market is up, so I’m minimizing the amounts I’m taking out. In effect, I pay myself whenever I decide I want to. I also have to monitor my FD and NY withholdings, so I don’t put aside too much or too little. My first year of retirement, I withheld too little for the federal; my second year, I withheld too little for the state. This means I really have to prepare a running tax return each month, especially towards year end, so I’m not hit with any surprises.
This is one reason I recommend that younger people put money in a Roth rather than a tax-deferred. While it’s true that mathematically the tax results are the same, if you use the Roth, you cover the taxes at a time when you’re working and you theoretically have an indefinite potential for earning W-2 income. And then when you retire (assuming standard retirement age), you have no tax issues with the Roth. The Roth has other benefits: it is not included in the formulas for taxing SS benefits or Medicare premiums, and there are no RMDs with a Roth. And tax on SS especially is a very complicated formula that could hit you hard if you don’t plan carefully.
I would love to save in a Roth 401k and Roth IRA but I need the tax benefit. I did do the Roth 401k at my last few jobs because my salary was not that high and I was only saving 10-15% of my income. Now that I am about to switch careers and make a higher salary I am focused on maxing out my contributions to both the 401k and IRA. I also want to save for a down payment on a house and I don’t see how I can do that if I have to pay tax on all my income.
But aren’t we covered for disaster with insurance? I just spent 30 minutes reviewing all these new healthcare plans, and even the worst ones cover have a limit of like $15,000 max max out of pocket.
BTW, I’d LOVE to have a guest post from you about your thoughts on retirement and how it is as a classic retiree. The post can contain thoughts on where you disagree with my beliefs and what you think is a better way etc.
Please consider it! Your comments are always very thoughtful. I can help you edit too for flow and structure.
Thx
I’ll see what I can do. But since I have a Ph.D. in English and taught college writing for 12 years, I think I can handle myself!
Working in the Healthcare, specifically in clinical research at an academic medical center, there is more to consider than out-of-pocket maximums.
Commercial health plans can and will have more stringent restrictions on services than CMS (Medicare, Medicaid, etc.). You could hypothetically be diagnosed with cancer or having to go through tests to determine whether the disease is present and/or staging. Your insurance can potentially deny the reimbursement of these services, depending on their (insurance) guiding plan document and policies. Those costs that are then passed on to you do not count towards this 15k out-of pocket maximum.
Yes, you can and likely would appeal the denial, but the denial can stand. Not all standards of care are the same amongst all of the potential payers of health claims.
I watched a family member recently go through this with testing, where the insurance company denied reimbursement on off-shoot tests for a potential prostate cancer biopsy. Their appeal was denied and it wasn’t cheap by any means, regarding what they have to pay.
There also many procedures, up and coming, that are not being covered by commercial insurance. Many of which are cardiology/vascular related and approved therapies. Commercial insurance can consider things still “experimental” even though CMS payers and FDA have issued approval. This can go on for years after the approvals and the device/procedures have become standards of care. *Experimental in quotes because of how their policies reference the services/procedures/devices, even though the regulatory bodies do not see them as such.
I could go on and on. I would suggest not looking at health plans as all inclusive and always be ready for a big hit to the wallet, even if your out-of-pocket maximum looks manageable. Once you hit Medicare age all or most of this becomes irrelevant, because Medicare becomes the standard for coverage of care for the most part.
Hey Sam,
Nice points and very true. Often for people in their 50s trying to retire they are putting big amounts towards investing and big amounts towards their mortgage. Once they’re retired they don’t have either of those expenses – even if they live exactly the same.
Do you want to be able to spend more, Sam?
Sure, I have this desire to spend more, but I’m always being THWARTED! Check out these two posts:
1) Desire to buy a mid-life crisis car: https://www.financialsamurai.com/post-brexit-couldnt-buy-a-range-rover-so-i-bought-an-suv-worth-of-stocks-instead/
2) Desire to buy a Hawaiian dream home: https://www.financialsamurai.com/a-race-against-time-buying-a-dream-home-with-my-parents/
I’m not going to stupidly spend my money and pay any price. I still want a deal. But I’ve tried to make reasonable offers to no avail. How do people spend so easily on things they don’t need?
While I’d hesitate to depend on other people (look at Penny, all young and naive!), I do think this entire post is so important. We spend all this time dancing around and coming up with excuses, but we’re much more resilient and life is often a lot less worst-case-scenario that we give credit.
I agree that many fears about retirement are overblown. I recently read an article that the reality is most retirees have TOO much money in their accounts during retired because they naturally become conservative. The rule of thumb that you may need 80% of your pre retirement income or more is total bull. People are not robots and will not just mindlessly spend the same amount of money they always have.
That is exactly right. People are not STUPID robots. If money is going to be tighter due to some upcoming expense, one naturally adjusts LOWER their spending like a rational person.
I used to buy into the 80% value years ago (and saw articles pushing 100-120%) but then considered it was likely derived from people not needing to save in their retirement accounts to the tune of 10-15% plus not having to pay SS and Medicare anymore. So looking at my own anticipated situation post retirement income I wouldn’t be spending money on:
6.2% Social Security
1.45% Medicare
15% 401K
10% Mortgage
8% College Savings for Kids
5% Various Direct kid support (cell phones, car insurance, activities, etc.)
That would leave us with needing something like 54-55% to keep living our current lifestyle. So I still plan for 80%, just as a buffer, knowing that the reality will likely be between the two, probably in the 60% range. Heck if it was just me I’d downsize significantly and could likely live off a much lower amount, but I don’t make all those decisions alone. My bigger issue is making sure we don’t inflate the lifestyle post kids and mortgage.
I don’t think you will inflate the lifestyle b/c you will have decades of financial habits under your belt you won’t be able to change. It is EXTREMELY difficult to spend more frivolously even though you easily can.
I’ve definitely found this to be true in my 3 years of early retirement. Very easy to pick up a few bucks here and there from random gigs that come my way, and I accidentally lucked into enough income from my blog such that I don’t have to tap my portfolio beyond pulling some dividends from the taxable account. I get job offers of some variety every few months, so if I ever do need some real supplemental income I can’t imagine it would be that hard to come by. We could also work a part time minimum wage job and come close to covering our entire barebones budget if things got really tough.
I estimate that I’m 5 years from retirement, but that date was picked with the goal of $10,000/month in passive income. My concern has always been that I won’t have enough money for a long retirement, but I won’t realize it until I’m 10 years into retirement, at which point it’s MUCH harder to “get a real job” again.
However, reading articles like this help put my mind at ease just a little bit. I don’t have especially expensive tastes, and I like the idea of making a little money here and there using my existing skills (software engineering). An extra $1,000/month in extra income could probably make a really big difference in retirement.
That is a risk, being 10 years in and THEN realizing you don’t have enough. But if you retire early (you didn’t mention your age), all you’ve got to do is survive until 60 to tap your 401k and IRA. Then all you’ve got to do is survive until 65+ to start collection Social Security, which is a bonus I haven’t even mentioned!
I could probably retire now and get a side job, but then I wouldn’t be able to spend as much on food and entertainment, use a cleaning service, or have much help in terms of child care. I feel like I’d still work just as hard, only more of my work would be house work instead of intellectual work. Since I like my job and the hours are so reasonable, the allure of early retirement has come and gone for now. A few years ago and with a different job, totally different story. So I guess I’m saying that another nice life path besides early retirement as you outlined is to start with a big job (big salary and prestige but demanding hours), then transaction into an easy/lifestyle job (decent salary, great hours), then eventually, retirement. The only thing I feel like I’m missing with my lifestyle job is more vacation time, but I feel like that could be arranged (at a cost).
Hi Sam,
I like how you identified so many free activities, especially because I take advantage of some of them now, which means I’ll probably continue to in retirement. I do believe that some of the best things in life are free. That to me is spending time with friends and family & doing whatever. In terms of saving, I’m building up to maxing out my 401k. If I have $$ left over, I’d like to leave it for my kids and/or charity!
Since I’m a 23-year-old entrepreneur, I saw this post as another sign that I have the green light to take risks and build businesses because the fear of living out on the streets with no food is overblown. If my businesses completely fall, then I could always bartend, be a pet sitter, or umpire to scrape by around $30,000 a year until I’m back with another venture. It’d be unfortunate, but not the end of the world.
And I know some people in their 50s who are debating whether they should retire that I’m going to send this to. Quality post, per usual.
I think I am probably saving too much out of fear of running out of money in retirement. But it is always good to have more money than you can spend.
I want to point out that once you retire, you are likely in a lower tax bracket, especially if your main source of income consists of investment income. So tax expenses will be lower when you retire too.
Ah yes, good point about lower tax bracket! You are exactly right. Let me add this point to the post. It actually felt kind of amazing going from a 39.6%, 35%, and 33% tax bracket (Depending on how much I made and my deductions) to a 25% marginal tax bracket. It finally felt like a reasonable amount to pay. Paying a lower tax rate has made me much happier. I don’t feel like I’m killing myself to let the government waste my money anymore.
I don’t budget, but I’d bet I’m in the Jacob @ ERE level in spending. Scooter gets 85MPG, and my big expense is potatoes at the $.99 store.
And income is well into the 6 figure/yr range.
Even with the 4% withdrawal: Studies show it works almost all the time (96%). By just being flexible with withdrawals when market is down, easily makes it ~100% safety, barring some catastrophe.
Wow, that sounds promising! I love how you don’t just focus on having enough money, but also on resilience and non-monetary assets you will always have.
An active retirement may just be possible, considering this!
An “active retirement” is exactly what modern day retirement is like thanks to technology and healthier, longer lives. The world is smaller, cheaper, and more accessible now. We don’t have to wait until 65 to get a pension b/c there is none! We can leave early and earn money doing what we love to make up for the income gap.
I loved points 1 & 2! I adore my job and voluntarily work 50-60 hours a week on average (paid overtime is a great salve) but am still actively drooling over retirement.
My basic plan is based off the old 1950s tripod. Own a home, have a pension, and savings (fortunately I have a job that still offers a defined benefit and plan on utilizing it!). I’m also happily working towards passive income on the side, welcome to the 2010s.
Looking at my monthly budget I’m always waiting for my Ira and 401 k earning potential (at a low interest rate) to combine with my defined benefit pension for 100% income replacement. I forgot if the house (3k/mo) was no longer an issue and retirement savings (another 3k/mo) were no longer occurring my actual living “income” is significantly less than I’m planning for. Thanks for the reminder, Sam!
I don’t think this changes my anticipated retirement date, but it does add a layer of comfort in over planning instead of failing to plan. The 6 P’s return:
Prior Planning Prevents Piss-Poor Performance!
Ha! Never heard of the 6 P’s.
That’s great you love working 50-60 hours a week at your job. Chances are, that enthusiasm will fade over time. The key is to develop some passive income streams w/ a plan that can provide a livable income stream when that day comes you want to do something else.
I think the key is adaptation. If you can adapt, you will be fine. Early retirees saved a lot and we always keep our eyes open for opportunities. If our retirement fund start to run low, I would work harder for a few years. The main problem is that people expects to maintain exactly the same lifestyle after they retire. For 99% of the people, that’s not practical. Most of us will have to make some changes after we retire.
Adaption is key indeed. Some sacrifices do need to be made early on. But if you can find a way to earn some money doing what you love, perhaps there won’t be any sacrifice for the rest of your life!
You won’t believe how many people have told me that I would need less than I thought in retirement.
Your Money or Your Life says the same thing — and lists lots of ways you will spend less in retirement (many of which you mention above).
Personally, I didn’t use any rules of thumb but built my own personal budget to see what I thought I’d spend in retirement. I took into account many issues like driving less (less gas, etc.), no need for drycleaning (t-shirts and shorts don’t need it), and food costs (leftovers at home now).
And since I live in a vacation spot, there’s tons to do for FREE!!!
That’s pretty cool you live in a vacation spot! I’ve always wondered where people who live in vacation destinations go on vacation. Hmmm. And the answer is: everywhere. I really love Honolulu, SF, and Lake Tahoe. So that’s where I decided to set up shop.
I am not retired yet, but I plan on retiring with perhaps even a little less than I need. I feel the added uncertainty might keep me motivated during retirement.
I completely agree with most of your points, especially the final one that if you’re able to seriously consider early retirement, you will almost certainly be able to make it work once you’re committed.
You will also be amazed how little money you need once you retire, assuming you get everything in order. I explored that in detail here: fiscallyfree.com/2016/05/retirement-planning-step-3-determine.html
One final note from someone who works at a car company. We haven’t recommended 3000 mile oil changes for years, but that number is stuck in everyone’s head. Most cars can easily go 5000, 7500, or even 10000 miles between oil changes these days, thanks to more precise manufacturing and high-tech synthetic oil.
Thank you for sharing your experience with us. This is a great article for early retirees like myself.
Today is day 4 of my early retirement. My retirement came earlier than I planned out (2016 vs. 2019). I am new to this territory and don’t feel comfortable yet. However, I planned my early retirement and conservatively studied our incomes and expenses many times. But I don’t have a few million and really need to watch our expenses.
My wife and I plan to move to Mexico within a few months. We plan to attend a culinary school for 2 or 3 years in Mexico and then will see what will be next for us.
Congrats! 3 years earlier is quite a lot earlier. What was your catalyst?
Another great post, Sam. As a fellow 30-something early retiree, I agree with you about reality v. perception.
We have spent far below our sustainable budgets in retirement. And it’s happened without any real effort. Those financial independence lifestyle habits that help people retire early also enhance other life outcomes – so we’ve had no compulsion to change them, and our spending remains low while our lives remain rich.
My wife and I have even had conversations about how we could increase our spending – Is there some extra thing or service we could buy to make life even better? We haven’t found anything yet.
The psychological side of ER is nevertheless daunting at times. To go from building, building, building wealth and watching those numbers jump every month to suddenly not… No matter how certain the math is, that old lizard brain is a powerful tangle of fearfulness waiting for the bottom to fall out.
My belief about combating the lizard brain: As you say, find something you love to do. Or maybe lots of them. And do them with the same vigor as your pre-retirement work. Even if the payoff isn’t in dollars, it’ll be there in spades.
It’s true, to go from building wealth to drawing down wealth can be daunting, which is why the ideal withdrawal rate in retirement touches no principal! I made it a mission once I retired in 2012 to make enough passive income to never drawn down principal. So far, so good. But eventually I will need to, otherwise, the government will tax 40% of it away. That would be a crying shame.
Well, we disagree about the ideal withdrawal rate.
The statistics are undeniable: A 3.5% withdrawal rate pegged to inflation, pulled from a portfolio with ~75% equities has never run out of money in fewer than 50 years. In virtually all cases, the portfolio grew in nominal value, and it usually grew in real value over the 50 year term. The effect of low interest rates is unimportant as long as the portfolio carries minimal cash and bond exposure. And the portfolio’s health for >50 years can be ensured if withdrawals are modestly reduced during market downturns.
Nevertheless, if you’re concerned about estate tax issues, I’d recommend talking to a tax attorney about estate planning. I’m not sure if you have heirs in mind, but if you do, you’re behooved to get started with tax-exempt gifts and other vehicles early. It’s a small up-front cost to create an estate plan that can save hundreds of thousands if not millions in death taxes. Which, yes, are an absolute crying shame.
I tried “retiring” for a year to work on my passion. I made it work, established passive income and learned a lot outside my field. Found out how boring not working was and went back to work.
The year without work, I lived well without spending much money. Ate out 2 or 3 times a week. Took 3 hour walks. Had enough entertainment (internet is truly amazing). And caught up with friends. You really don’t need much money to be comfortable.
But now I’m back at work and I realize how much I love it. The respect. The money. Socializing. I’m never going to retire.
And it doesn’t hurt that I get free dinners at upscale restaurants. Today will be at a 5-star steakhouse.
Tell me more about this respect thing you mention. Why did you feel you got less? Who is respecting you more now that you have a job? I think the desire for respect is a very interesting subject to delve into.
From my perspective, the lack of respect might have been more empathy from people who saw me as unemployed and wanted to help me get a job again. I always had to explain that I was off on a new adventure to travel, write, and build my site. Most probably saw my explanation as a euphemism for being unemployed, which is normal. But I’ve found that after 5 years of not working, people actually now believe what I told them when I first left.
There’s a lot of respect now, and curiosity of how they can also make a change.
You have a lot of respect now. You run one of the top personal finance websites, which is an awesome accomplishment. But for every website like yours, there are hundreds more in obscurity.
And if you remained in finance, as a managing director, you would have been stressed out for sure. But since you would have been high up in a very hierarchical system, you would have the respect of everyone from the interns to VPs. That’s a lot of people.
When people introduce you as Sam, managing director of Goldman Sachs or whatever firm, that’s instant respect too.
After I quit, did I get less respect? Sure. I am in a very hierarchical industry as well, with a profession that identifies who I am. It’s not my decision that it defines who I am. That’s how people introduce me to their acquaintances and friends — by what I do.
For me, the respect is a very small benefit. Going back to work is more about doing something meaningful & enjoyable and not being bored.
Very interesting. Thanks for sharing your perspective. May ask how old you are?
I remember caring a lot about respect in my 20s even though I probably didn’t deserve a lot of respect because I didn’t do much of anything. But once I hit 30 I felt that I had earned enough respect. Now think back to high school, where prestige and recognition matter so much. As you get older, you stop caring imo.
I really think the feeling of respect is more state of mind. You just hang out with people who you like to hang out with who treat you well like you would treat them. Perhaps it is the ability to choose who you hang out with and work with that is one of the best benefits of being financially independent.
The powerful need to be respected (by others,) is based in insecurity or lack of self respect. If you respect yourself and have confidence in who you are and that you have value without the need to be propped up by others admiration, then you are free to run your own life. The amount of money you have is irrelevant at that point.
Alex, Thank you for sharing an important perspective that I also believe in. Respect and meaningful work, even considering at times stressful projects and sometimes frustrating meetings, are overall good reasons to remaining employed. I view Financial Independence as important, but it’s corollary Early Retirement, as entirely optional. FI can actually make you a more satisfied employee, you don’t need ER to prove you are FI. Sam’s case of high pressure Wall Street finance firm is different but all management jobs aren’t of the same type.
Alex, curious what your side job was that you set up when you tried to retire before?
I plan to have an active retirement or at least a semi-active one. I think that can help a lot with mental health. I don’t want my mind to go soft. One of my other goals is to also stay as healthy as I can now so that I hopefully have fewer health problems when I’m older and thus lower expenses. I don’t see myself spending a lot in retirement. I think I’ll want to simplify my life even further too.
Good reminder on health. It’s easy to let ourselves go as we age!
“All you really need is to be: 1) likable, 2) trustworthy, and 3) consistent.” This is so true. People like hiring me because I’m all of those things. I happen to be competent as well, but being liked is far more useful to me than knowing what I’m doing. I watched it happen for years and was frustrated by it, but then I learned that most of likability is under my control. We had a similar approach on my tennis team in high school – we’d rather be lucky than good.
Fear is a funny phenomenon. It can exist entirely in one’s mind yet seem entirely real in the moment.
As you said, most people just need a reminder that they are stronger than they think. Retirement, and early retirement, for that matter, aren’t permanent.
My aunt and uncle are FI (and then some!) and have been for decades, most likely. My uncle retired several years ago, but my aunt, a pre-school teacher, is just now proceeding with retirement, and she is 70! Why did she choose to work so long? I can only assume that fear was a big part of the equation.
I have learned a lot about how NOT to retire from watching them and evaluating their example. Though they can afford to do practically anything they want, they’re obviously afraid that their assets will dry up. In my opinion, that is no way to live.
The thing is, not many people are “retirement experts” since you just just retire once or at most a handful of times. Further, not many people will then write about their firsthand experiences. Most retirement articles are written by people who have never retired and still need to work!
I’m telling folks straight up that most folks who are able to retire. will probably die with too much than run out of money.
Did you ask? Just curious. I know a woman who was a teacher who retired, missed being around all the kids, and went back for additional years. I know people who have retired, swearing they’ll never work again, who don’t need the money, and see them coming back because they had no idea what to do with themselves when not working. Maybe it isn’t fear about money at all?
If you like working with kids then being a pre-school teacher could be a very fulfilling job that you wouldn’t want to leave even if you could. Not everyone hates their job. I think Gallup found about 2/3 of people hate their job so there is that 1/3 out there who are happy working.
Hi
You can cook own delicious/healthy food too, now that you got more time on the plate, literally (typo in article “downturn area” — “Downtown area”) – cut down on that Cholesterol !
Yes — you don’t (need to) drive as much, don’t “snack” as much – and may even burn little less $$s on those “pretentious” Starbux caffè latte you have to carry with you to desk to show off !
Talk to your Auto insurance guys – most likely there is a special “class” of driving “recreational driving (or what ?)” – now that you typically don’t commute – and expected to drive under 4000 or 5000 miles / year. Your Auto insurance costs should come down much — but you gotta make the call and explain.
There are many states allow you to brew your own beer too. If you live in LAX area – you can be barista – check for that next “acting/modeling” opportunity, ain’t that be much fun projecting yourself on big-screens across the globe :-)
Write a book – or e-book with your experiences., everybody’s experiences are valuable – with some writing/picturing/art/fun skills. Or do a “how-to” videos .. and post’em on your site.
Thx
SC
#4 strikes a chord. While I’m not retired yet, I will be very soon. I’ve been working hard at the blog and lately, freelance offers are coming fast and furious. It took over 3 years of hard work to build up to it, but I don’t regret a thing because I truly enjoy writing.
SO, writing in retirement won’t be working. It will be following a passion that just happens to pay me. Life is good.
It’s amazing how many endless freelance writing opportunities there are one you start a blog. If you want a writing gig, let me know! I just got another consulting opportunity and one of my tasks is to hire a team of writers for this insurance company. LMK!
I just tetired from being an Occupational Therapist. I came about your articl while pondering what to do with my time. I am 55 with a small pension due to IMRf. I was tired after 24 years of public school nonsense! I was thinking of the starting a blog writing about quirky things such as supporting my hubby at home full time by mowing and gardening and cooking mote which I. Love! If you could use my insights I am here! Give me an assigned task. I may also be interested in buying cheap realstate for possible rental income. Kerry McCracken
What is your current net worth? I tracked down the post where you gave an update of your passive income being $175k annually which is really awesome, but I can’t seem to track down a definitive figure on where you peg your net worth. The last post indicated your portfolio is sitting at 1.5 million roughly and that you expect it to grow to 3.2 million in 11 years. Is that your entire net worth? How come you expect such a drastic increase in such a low-interest environment?
6-7% market returns are pretty standard for a 10 year time horizon (doubling time)
Sam has a significant real estate portfolio as well. If you read back through some of his older posts you’ll see that he has a vacation property in Tahoe and at least one rental property in SF (his old house). He also has bonds, CDs, and some private equity investments.
Read his recent “Financial Checkup” post from a few days ago for more details.
Thanks for reading my previous post. Actually, the conclusion from that analysis is that the retirement planner is too aggressive based on my investment allocation. Therefore, I need to be more conservative in spending compared to what the retirement planner says.
Tell us about yourself and let us know how much a net worth you think you need to retire.
My wife’s parents retired early – both had decent paying jobs and are in their early 50s. However both are now working about 30 hours a week at jobs for less than half of what they were previously making. I see your points about not being above minimum wage jobs and I totally agree with them – but I don’t get why people would leave a job to make a lot less to work 75% of the time they “freed” themselves from.
Maybe it’s boredom? If anyone has done something similar I would be curious to hear the reasoning.
I don’t think they enjoy the jobs they are doing either – seem more stressed than anything.
Their previous jobs were not high stress – long hour jobs. Pretty standard 40/week
I guess the question is if they are working 30 hours a week at low-paying jobs because they have to, or because they want to.
I think your point is a good one – why leave a job where you’re making good money and working 40 hours a week to go to a job where you’re not making 1/2 as much and only working 10 less hours per week? I can understand changing to a low paying job and only working 10 hours week – you’re willing to make less to get a lot more time.
Maybe they pulled the plug and headed to retirement before they were really financially ready?
Don’t worry. Nobody would retire from their job to work a worse job with less pay.
You would only do so sometime down the road if you miscalculated how much you needed in retirement. My point is the title of the article: you don’t have to fear running out of money in retirement b/c there’s plenty of money making opportunities.
I’d ask them straight up why they are working those jobs! Boredom and a desire for human action and purpose have a lot to do with working lower income jobs in retirement. Uber is pretty fun due to the interaction w/ random folks I meet. Fun way to practice pitching FS too!
Sometimes it’s simplicity. When I was in college I worked every weekend as a bartender in a friend’s parent’s restaurant that was very popular. The job was stressful because:
a) it was my friend’s family business and I wanted to help my friend and his family as well as have a job
b) by working weekends I was working the busiest nights
c) because I was a friend of the family I often did things that an “employee” wouldn’t be asked to do, often technically unpaid.
d) dealt with a lot of “family” drama on a nightly basis, especially when things got busy.
Then I graduated college and started the job search, and after a month on not getting anything I decided I could use some spending cash and went to work as a stockman at K-mart, picking up weekends and some weeknights (leaving time to set up and continue interviewing). What a difference! I went in, punched a clock, hunted down a manager, asked him what he needed done, and did it. No serious thought, no expectations, no decision to be made, no overwhelming rush of customers, no family screaming at each other back in the kitchen about who took who’s dish for that table, etc.. I was actually working more part time hours than before but it was a breeze.
My point being, if you are at a position where you have to make a lot of critical decisions, are getting squeezed by both underlings and upper management, are put in uncomfortable and highly volatile situations, then working a job at half pay where you aren’t worried if they fold, aren’t worried if they fire you, aren’t worried if their concept plan fails, aren’t worried about planning for next month, and most importantly…can leave the job behind the minute you walk out the door instead of dragging it home with you, well, that is a refreshing change of pace.
I fully agree with u. I am in exactly this situation now. Being cornered in between and I am not fully rested during nite time. I think my physical is taking a toll and I decided that enuff is enuff. Probably will do some part time job and semi retire with more time to pick up some courses that interest me. I have some passive income so should not be too much a problem to maintain a decent lifestyle. Most of all, I will have more time to travel and explore the world :)
Hey Sam – thanks for the ER booster shot this morning! After waking up that I’m actually “FI” this spring and accepting it and turning down another full-time job offer, I have really downshifted to just a few online adjunct gigs – along with some part-time consulting. Both of these part-time gigs are by choice and it is fun to try some new things, while padding the bank account. I also get more offers for work now that I am “ER” than ever. It is just work turning things down! We are also doing things like you mentioned, including updating our rental units and increasing rents.
Another added benefit is the time we have to save money in other ways that we didn’t when we were working! I have time to shop insurance rates, make home cooked meals, stop at the library to get books, mow our own lawn & take care of our own pool, walk to the store/bank rather than drive, and learn some how to do some DIY projects and then shop good deals online. We are saving (or not spending) on so many things it’s incredible. And we’re de-cluttering too – which can bring in some $. I feel like I am MAKING MONEY to stay home and I’m home with my teens during the years before they head to college – which is priceless to me.
I can always find work – and I think I would actually enjoy some different jobs if I needed to take them. I have worked hard to build my EQ – but I could substitute teach, waitress, bartend, lifeguard, work retail – as long as I can work with people I’ll be fine!
It’s not easy changing though (and since I was just “mocked” on a forum the other day for failing “ER” because I choose to do some side work at this point), don’t let people play with your plans and desires either! Just give it a go and do what you want to do – especially as you transition out of full-time work!
You got mocked? Oh no! It happens a lot against those who’ve retired by those who haven’t retired. It’s hard not to feel envy, especially if you hate your job. But if you love your job, you would never mock anybody for no longer being employed!
Great article Sam and good reply to Vicki. I am voluntarily employed in a full time management job but that doesn’t mean I don’t have my bad days. I wouldn’t envy or mock an ER person ever as it is their prerogative. I actually wish them well. But I do wonder why many ER folks have to vilify the corporate world. Yes, one might have had bad experience that motivated to reach ER, but most of the vast 99% employed folks out there have to make peace with their jobs. A full time job defines and structures their life, which unlike the disciplined ER folks, would otherwise make many become lazy slobs on the couch. The ER folks are in some ways the real 1%!
It’s funny but the mocking actually came from someone who has FIRE’d (supposedly). I was commenting to another poster who was also doing some consulting and had found that she was struggling with even that level of commitment now that she was FI (similar to me). The commenter said to both of us that “just face it – this is a failed FIRE attempt if you can’t just let go and retire” Guess that person thought his definition of FIRE was the only one that mattered :)
This is a great blog topic as I’m sure it’s on many people’s mind. We strive to reach retirement, but then what happens? You hit it on the head… YOU’RE STRONGER THAN YOU THINK! We plan ahead in terms of investing and making money, but we can also plan ahead to get an idea of how much money we expect to need in retirement. Things will adjust, yes, lifestyles will be different. It really comes down to understanding what you want retirement to be like and how much money you’ll need.
I’m glad you highlighted the ability to earn even after retirement. I believe we’ll follow your advice from points 4-6 and continue to earn money in some form – not because we need to, but because providing value is something we inherently want to do.
I’ve seen other articles describing the Affordable Care Act as a great benefit to those retiring early! Helping early retirees was probably not top of mind when the government passed the bill. :)
Running out of money early is a real scare for us. We’re on a path to hit financial independence or early retirement within six years, at the age of 33, based on what is probably my overly conservative analysis. I did factor in that we won’t be contributing to savings but I probably am underestimating our ability to decrease our expenses further once we have more free time and no 9-5’s.
The ACA has allowed many people to jump ship and be freelancers/entrepreneurs or just simply free from a job they hate. I’ve spoken to countless people who say they remain at a job they dislike due to the benefits.
The ACA is not always kind to entrepreneurs…My wife and I are self-employed, live in California and make too much for a subsidy, but not enough to afford to pay the monthly premiums. Housing is a major expense and takes up a good portion of our income. We didn’t have to pay the penalty on our 2015 taxes because the insurance was considered unaffordable…. : )
What were your premiums? I’m paying about $1,500 a month for two for a platinum plan. That is obviously not subsidized.
Could you guys not afford to pay b/c business was tough in 2015, but not tough enough to get the subsidy?
Before the ACA, we paid $400 a month for two people. After the ACA, it is $800 a month for a bronze plan. Similar deductibles.
We made double our income a few years ago and it has been decreasing since 2013. We sell retail on the internet and have been in business for 8 years. It is getting increasingly harder to compete online with large companies that have smaller profit margins and better buying power.
Increasing our income with another business is the next step.
BTW, love your site…been reading for years.
I’m with you Sam. I haven’t retired yet, but I’m only 31 years old and make enough side income where I could probably do so comfortably (mainly because of my website, my rental property, and my debt-free status). With basically no bills, $2,500 a month goes a long way!
Still, just like you I’ll over-plan just in case. My wife and I want at least 5 rental properties before we pull the plug on Corporate America.
Sam, this is an inspirational post! I’ve always thought that if I could cover 1/2 my expenses with side hustle income, I could double or triple it if I quit my day job. I’m sure there are many opportunities that present themselves once you have the free time to take advantage of them!
My wife and I are very frugal. Before we met and after we met and got married, we individually and collectively always spent less than we earned. We have lived in the same small ranch house for a long time, driven our cars for a very long time before replacing them, never incurred even one penny of credit card interest in our lives, etc., etc. Now as our kids get closer and closer to college age, it looks like we’ll be ever to pay for their tuition at a state college with no loans. On the contrary, we see many of our peers who kept trading up to bigger and bigger houses, cars, etc., etc. With that, these same peers now have their hair on fire about not being able to pay for their kids education and retire. Saving for retirement isn’t that hard, but people seem to make it hard on themselves.
Haha, Sam… love how you replaced dry aged steak with In n out burgers!
Great article here. I was pretty apprehensive about taking an early retirement, but it’s the best thing I’ve ever done. I can’t place a price tag on watching my young children grow up each day.
I was pretty worried we’d be drawing down on principal after my first year, but it’s actually ended up quite the opposite.
Of course I can’t change future market corrections, so if worse really came to worse, I could always survive off the dollar menu at my local McDonald’s.;)
McDonald’s? No! Ha. This bull market has really helped a lot of people in retirement not have to go back to work. But things will get dicey as soon as the economy turns for the worse.
I think as an early retiree, I’m much more sensitive as a result to the ebbs and flows of my investments. And that is understandable because I don’t want to go back to work. As A result, I invest conservatively as a minority investor and then Invest A result, I invest conservatively as a minority investor and then Invest aggressively in things which of a high correlation with effort, such as my time writing on Financial Samurai.
Sam,
Ran across your article while panicking about never having enough money to retire , I do not have the millions they suggest and talking to everyone makes me feel even worse on what I have . This helps me in thinking it can be done! Do what I can and then just make up the rest.
I am dong this as a shout out. I can retire from nursing or try to get a job that is less stressful. Everyone wants full time. I get SICK working full time. My husband takes every CENT I make. Somehow he found a way to declare me DEAD in INDIANA. A dead nurse can’t work. I don’t even have headlights or money of own, I stay home and literally HAUNT my own house. All he care is that the GHOST of his wife makes him his dinner, cleans his house and takes out the trash. What should I do? I want to travel with those who work and have $$.