Being frugal is a good habit to adopt if you want to build more wealth. However, it is very hard to frugal your way to early retirement. Instead, it’s much better to try and earn more income since the upside is limitless. You can only save so much!
Surprisingly, I didn’t receive much pushback from my post, The Amount Of Money Needed To Retire Early And Live In Abject Poverty.
Almost everyone got the gist, which was to help you question whether the pursuit of early retirement is counterproductive if you have to live like a pauper. Instead, perhaps finding a job you actually enjoy doing would be a better use of your time.
Yes, a couple of readers jabbed at me using the words “coastal elite” as a pejorative term to say how out of touch I am that 200% of FPL is a near poverty wage. But come on, this isn’t politics. It wasn’t I who set the rules. If you find the FPL levels insulting, call your power-hungry Congressman or woman!
The government says that if you earn up to 400% of FPL, then you are considered poor enough to get healthcare subsidies versus paying extra to subsidize others. In general, it’s better to give than to receive. If we all become takers then our country is screwed.
I also acknowledge in the post that earning 300% to 400% of FPL seems totally fine in non-coastal cities.
In this post, I want to highlight some disconnects perhaps some of you who are thinking of living off 200% of FPL or less aren’t recognizing. Let me set the stage with one reader’s budget.
My main goal is for all of you to focus on generating as much wealth as possible through income and investments. After the pandemic scare, it’s more important than ever to look for investment opportunities.
Relying on just your day job, when millions lost their jobs, is not the smart way to go.
Hard To Frugal Your Way To Early Retirement
Here is reader Joe, a 23-year-old living in a rural town in Pennsylvania. He rents and has two roommates. He believes living on 200% of FPL is just fine. His plan is to frugal his way to early retirement and explains his budget below:
The “do-ability” of retiring at 200% of the poverty level is not so bad if you live in a poor area. Not all of us are coastal elites. Consider that $25,000 a year goes a long way when rent is $650 a month.
Here’s my monthly budget:
Rent: $650
Car insurance: $ 48
Gas: $ 65
Phone: $ 30
Food: $150
Grooming:$ 20
Misc: $100
Health: $ 72
Gaming: $ 65
Booze: $ 50
Total: $1,250
Obviously, healthcare would go up upon retirement, but miscellaneous and gas costs would go down. This budget is $1,250 a month of spending. If you earned $25,000 a year, that would net to about $22,500 which gives you $1,875 a month.
That’s $525 of fun money, which is pretty sweet. I mean, you can go to dinner at Applebees for like $25, go bowling for $5 an hour, etc. There’d be money for vacations too.
First of all, I commend Joe for living so frugally and appreciating his lifestyle. So many of us seem to not acknowledge how truly great we have it in America. Even with a 200% of FPL income, you will still live much better than millions of others across the world.
Joe reminds me of my situation when I first got a job in NYC. I shared a studio with a friend for two years before moving on to share a two bedroom, one bathroom apartment with two others.
For more details, see: Housing Expense Guideline For Financial Freedom
Living frugally from the beginning helped me save and invest aggressively for the rest of my life. Once you get your costs down, your wealth really begins to compound through consistent investing.
There are just several problems with Joe’s budget that needs to be addressed.
Frugal Budget Early Retirement Disconnect
Here’s where I think Joe and others who think living off 200% of FPL are mistaken when it comes to early retirement.
1) “Living in a poor area.”
When there is more wealth, there is better infrastructure, better schools, better restaurants, more entertainment options, more free activities, and less crime.
Rational people will choose to live in better areas the older and wealthier they get, not poorer areas. At the extreme, you’re not going to want to continue living on a drug-infested block once you can afford to live in a gated community. Heck, some may want to travel the world.
It’s easy to slum it when you’re 23. By the time you’re 50, you’re going to find it harder to continue sleeping on a cold cement slab. I swear, Applebees will start tasting disgusting after your 1,000th visit.
2) Thinking you’ll only have yourself to take care of.
When you’re 23 and single, it’s easy to think your budget won’t change because you’re only responsible for yourself. It’s also easy to feel invincible. But as we know, there are plenty of people in their 20s who can’t even take care of themselves because their parents still are.
But guess what? Life happens. Your parents may get sick and need financial assistance. They may also need your time, which would reduce your potential for making money. You could get sick as well. You might even find someone who you care about and want to start a family. Going from taking care of only yourself to taking care of two or more people can be a tremendous financial burden.
Although 200% of FPL income increases with household size, the corresponding increase in income is often insufficient to match the increased stress of raising children. You will also want to give everything to your children, which could easily surpass the federal government’s increased FPL budget.
Life is not static, no matter how hard it is for you to see the future.
3) You can’t retire early because your income is too low.
This is the biggest disconnect of them all. People who live super frugally today, mostly because they have a modest income, think they can retire early because of their frugal budget. Let’s review the Retiring Early To Live In Or Near Poverty chart again.
Let’s say you really do end up retiring early with only yourself to take care of. To live off 200% of FPL ($24,280) as a single person, you need to have between $485,600 – $1,214,000 in your taxable investment portfolio based on a 5% to 2% return or withdrawal rate.
Now let’s say you’re Joe, who happily makes $25,000 a year in gross income and lives with two roommates in a poor area. He gets to spend $525 monthly on fun activities. However, what if Joe had no fun and instead invested 100% of his fun money in order to retire early. How long will it take for Joe to amass the needed $485,600 – $1,214,000 to retire?
Using a 4% withdrawal rate and a 7% compound return on his $6,300/year in savings, it would take Joe 30 years of no fun to retire early. For only then will he have enough to spend $525/month on himself.
But there is another problem which is that after 30 years, his $525 today will only have the buying power of $225 using a 3% inflation rate.
Sure, living off 200% of FPL is more doable once you no longer have to save for retirement or pay a mortgage. But it’s hard to ever get to retirement or own a paid off house on such a low income in the first place. No rational person is going to retire from a much higher income to then live so spartanly either. To frugal your way to early retirement sounds like a good plan, until you actually try it.
The Better Early Retirement Strategy
Of course, Joe isn’t going to be stuck making only $25,000 a year for the next 30 years. In fact, he mentioned in a follow up comment he makes about $35,000. But if he’s already got the mindset that earning 200% of FPL is good enough, then chances are he won’t be taking further steps to try and supercharge his income.
The key is to make as much money as possible while also keeping expenses as fixed as possible. So long as your earnings are growing faster than the rate of your spending, you’re winning. And so long as you diligently invest more of your savings every month in a risk-appropriate manner, you’re really going to win out in the long-run.
I really want to encourage readers to develop an abundance mindset. Don’t settle for living on the minimum. The desire to frugal your way to early retirement is a scarcity mindset.
Instead, strive to earn more so you can not only retire early but also have the optionality to live it up.
Know that the amount of money you can make out there is endless. There’s only so much cost you can cut. Instead of retiring early on a meager portfolio, find a job you enjoy. Keep on working until your portfolio can generate at least 300% of FPL in passive income.
Do not underestimate the cost of healthcare and family. Because they are your most important assets, you will spend any amount of money to keep them strong.
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Readers, what other disconnects do you observe about the Financial Independence Retire Early movement? Have you tried to frugal your way to early retirement? Why not go for unlimited upside instead?
Sam, this is so true! What a great article. I think young people don’t consider things like getting married or having children. I was also a super frugal saver when I was in my 20’s and living with my parents. But then life happened – I fell in love, got married and now I have a fantastic wife and the cutest little baby in the whole world! They are worth more to me than a trillion dollars. We still save as much as we can, but with a wife and baby there is no way we would be able survive if I was still earning peanuts like back then.
Maybe it would help if people waited until all of their children reach school age, before they finalize their retirement spending budgets and judge others? First things first, as the saying goes :-)
Wonderful! Congrats to you.
It’s hard for a parent to deprive their kids of every opportunity, if they can afford it. Therefore, we tend to spend and push back our retirement savings. It is only logical.
Make it count when it counts the most. We only have a limited time with our kids! None of us parents want to regret not having done everything for our children while we could.
My father in law is 95 with dementia and in a home. His pension is more than enough to pay for his needs. We just sold his lifetime home and as POA I need to put that money somewhere that is safe for the beneficiaries and not risky so they don’t come back at me with any liability. It is essentially their money as soon as he dies. Any suggestions where to put the money to earn something for them ?
I think there’s another critical thing our friend “Joe” who is so happy go lucky needs to consider about his “poor area” utopia. When a recession hits and jobs go away, there will likely be much less opportunity in these regions of the country.
It’s a good point. Check out the list of The Best Cities In The World To Make Money.
You don’t want to be in a smaller, less vibrant area where one plant closer or whatever could wipe out the entire economy.
My company offers a 401k match of 100% up to 3%, and 50% up to 6% which evens out to 4.5%. They also offer a 401k Roth.
I have 9% invested in the 401k and 6% invested in the 401k Roth for a total of 15% of my earnings.
Should I just match the 4.5% for the 401k and take the rest of my earning and look for other investments? Or should I keep saving the way I am.
I know this is a broad question, but I wanted to open this up for conversation since I haven’t found much online.
Many good comments on this. You definitely want to have a good extra buffer in your portfolio/ income stream to be safe as over a long period of time emergencies/ accidents etc very likely will happen (and they cost money to deal with). I like the idea of finding some type of job you enjoy, even if its part time to keep some money coming in. I dont mind working but its the full week heavy grind and commute that wears thin after a while. I think most people have some bandwidth and enthusiasm to work a few days a week if you can find the right situation.
This is truly ridiculous. Despite the obvious – that there are so many bloggers, including Mr. Money Mustache, that indeed “frugaled” their way to financial independence, there are so many horrendous assumptions in this post I couldn’t not respond.
1) “poor” was probably a poor choice of words (no pun intended) but low cost of living areas aren’t necessarily more crime ridden; in fact, I would argue the opposite is generally true. I live smack dab in the middle of Wisconsin, and I can tell you it’s one of the safest places in the US. And I’m in a small metro – safer and less expensive areas exist on the outskirts too.
2) Assuming someone is frugal because they need to be is another silly assumption. My spending is a touch more than the person above, and I earn about double. That’s the point of FIRE – earn more than you spend, the more the better, and the faster you reach financial independence. With more jobs being location independent, living in a LCOL place makes financial sense.
3) Being frugal has not stopped my sense of working to earn more. My pay has increased 80 percent since I started in my field full time not quite ten years ago. I’ve also developed side hustles. Drawing a correlation between the two where none exists is ridiculous.
So far this is the second post I’ve come across on your blog and each of them were eye-rolling and out of touch. I started my own blog for this very reason – for people who live in smaller towns and cities, to give voice to their perspective, because they are lost among these coastal elites. This post just illustrated to me that it’s more needed than I suspected.
Thank you for the follow up. I felt the previous post missed the mark by trivializing the hardships of persons actually living in poverty. This is better, but I still think it is problematic to use the same poverty line, or minimum income as a percentage of the poverty line, for all 48 contiguous states. the cost of living varies widely and that’s before considering each persons comfort level or whether they would rather eat at Applebee’s or continue to work. Just because the federal government does it doesn’t mean we can’t learn from their mistakes.
If frugality to Financial Independence is painful – you are doing it wrong!
Financial Independence is the detachment from other people money – their money can no longer enslave you.
Financial Freedom is the freedom from money itself – money have very little or no role in the true meaning of your life.
On the average, Financial Independence will take 10, 15, 20 to 30 years of planning and execution – it is the first financial mile marker.
Financial Freedom is much harder to attain because after 10, 15, 20 and 30 years of chasing after a number with a vengeance most of us are conditioned and hardened to the only life we narrowly and mistakenly designed for ourselves.
There was a mystical/historical general (220–280 AD in China) who had been conditioned and hardened in battles and forgo the opportunity to have his own family, mate and children. In his 70’s, he begged the strategist to put him in the last big battle because it is the only life he understood after so many years – he died in that last epic battle.
Financial Independence is a worthy endeavor, but the full spectrum of life begins after the Financial Freedom mile marker!
For those who play to retire early with young children, living expenses will increase a lot when one starts a family and when it grows. Back in 2010 when we thought we could retire on $1.5M assets in addition to owning a home without mortgages, our expenses were “only” $60K per year, or $5K/month with a 6 yr old kid.
Now in 2019, our monthly expenses has increased to $14K due to: food/groceries $3K, education $3K, and travel $3K. Our lifestyle hasn’t really changed much, it’s just you’re now travelling at peak seasons which tripled your expenses, and your teenage kid eats like a horse, and even for public schools, you need to pay for books, clothings, dental works, extra-curricular activities like sports, tutoring, amortized college tuition savings, etc..
Even if you can keep the food and travel down, can you really say no when your kid wants to try out club sports, or when the school orchestra goes on the summer tour to Europe? We’re currently planning to retire when our kid goes to college, but even with his tuition and room and board fully saved up, we’ll really have to wait and see how the expenses will look (if they go to out of state college, who’s flying and how often?)..
It’s one thing to plan for income replacement, but people should pay equal attention to their living expense increases if they still have young children.
Am I staring at an elephant in the room? He thinks on his 25k budget that he can retire, but there is zero being invested for said retirement? Regardless of if you’re of the FatFIRE or LeanFIRE mentality, you’ll never reach FI, never mind RE (if that’s even one’s intent) if you don’t put something away. Pensions are going the way of the dodo, and are lucrative for those that have them, and not so much so for those whose benefactor’s go broke and declare bankruptcy. A well-funded 401k with a company match is the best thing to hope for, the closest thing to a pension the current working generations will likely see in most instances. $525 blow money sounds like a lot–and leaves room for lifestyle creep, too. Such a low working income will not equate to much in the way of social security–the other “pension” that may or may not be a reliable source in the future.
There will always be extremes, but I am definitely enjoying the lively discussion and variety of viewpoints!
He actually stated he makes around 35,000 yearly and allegedly invests around $20,000 per year.
Thanks for all your hard work and advice, Sam. You certainly come at the world from a different angle than I do in many regards, primarily the fact that you live in an expensive costal city and I live in a midwestern college town (Bloomington, IN specifically, which – although in an awful red state – is very blue, very beautiful, very safe and a very affordable city in which to live). Another difference is that I don’t see you write all that much about pensions and social security income, which comprises all the money my wife and I need to live on although we do have a 7-figure portfolio (we earn enough from my pension alone to probably never need to touch our investments; we own our home outright on a 3/4 acre lot in a nice neighborhood within the city limits; and have zero debt, all of which makes SS look like icing on the cake).
When talking investments, SS income is often overlooked as a reliable (for now) steam of income that could – were one to live long enough – be worth well over a half millions dollars. And it doesn’t take any discipline or sacrifice to invest the money during ones working years to reap the eventual dividends. That decision is made for you (for now) and, for boomers like myself anyway, who have additional sources of retirement income, it can provide the extra income needed to continue boosting the value of your portfolio.
I count myself more lucky than savvy, and after a 32 year career (I was already working in my dream job as I continued my education during the early years) my wife retired at age 56 (from her corporate job with an extremely generous early retirement incentive package) and me at 57 and we haven’t looked back. Good luck to you and to all your readers out there!
FS has a few historical pieces on pensions and how to quantify.
Don’t remember if there are any on SS but I suspect there is at least one.
Pension value depends on the measure you use for quantifying return. I’d check the financial health of your pension if you have not already.
Personally, our pensions have had reforms that have reduced benefits but solidified long term health of the pension. Some pensions have yet to make reforms and are in substantial danger.
Indiana state employees and state funded university pensions are not the most sound financially compared to those of other states (somewhere in the top of the second tier at around 63% funded – the ratio of assets in proportion to total pension liability) but certainly not in any kind of trouble, and it’s rather unlikely that my state constitution guaranteed pension will be affected during my lifetime.
But if all that changed my wife and I do have a sizable investment portfolio to draw upon, so… I’m not losing any sleep. And in the meantime we’re spending far less than we earn and investing the difference, so the proportion of our passive earnings (specifically stocks, bonds and hard assets such as gold, silver and real estate) will increase compared to my pension earnings (which of course are fixed).
Clearly I would prefer not to touch any of that if possible and leave my two children something to ease their struggles in the rough times ahead but I’m never going to have sell my house, move into a shack and eat potatoes, even in the worst case. [Yeah, famous last words, I know! :)]
We have the same pension constitutional protections where we are.
A very unlikely but not impossible scenario is a state going insolvent. A state would have the ability to negotiate liabilities in that case. That could turn a state pension into pennies on the dollar settlement. It’s a very small probability but not impossible.
Regardless, with your investments it sounds like you have the ability to withstand pretty much any rainy day.
Our household is close to having a paid for home with no other liabilities. We could retire now, but are putting another ten years in and retiring late 50s. Really not FIRE. More like FIRH. Financial Independence Retire Happy.
We enjoy work. We assign 45% to investments, cash, 529 and extra mortgage principal payments monthly. On top of that we are doing substantial ROTH conversions yearly. FS just rolled his eyes.
Our lives are simple, not minimal. We have the ability to help family and friends often.
We have a steady and strong pace set. We are in no hurry. It’s a journey and we Intend on fully enjoying it.
Good comment and a solid plan for now and into the future. That’s the secret more than anything: differentiating between the two yet learning how to maximize potential for both. You can’t live la vida loca for 40 years then expect to continue when the money quits rolling in. Conversely, living like a pauper for ones working entire career while saving everything for retirement will leave you with little to show for your efforts except maybe a bank full of money you don’t know how to enjoy. Striking a balance is paramount, especially in the middle-class world.
As our incomes nudged up near upper-middle-class numbers late in our careers, it allowed for some acceleration in our FIRE plan and landed us somewhere between the two when we finally retired. Neither my wife nor I consider ourselves wealthy, but we will be financially comfortable the rest of our lives.
And we’re the same way: we give to charities and preferred political candidates but also put our two children through college, leaving neither them or us with a dime of debt after the fact. And we like to help too: we bought them each safe, late-model cars when they got their licenses, then again when they got their degrees. Next time however, I’m afraid they’re on their own (I have my eye on an Audi Q5 for myself this time!)
Good luck with your FIRH plan!
I have to say that the FIRE movement can be very tempting. Nowadays, there are so many blogs and videos about how to live frugally and achieve early retirement before 40 or even earlier – who wouldn’t want that? There is no surprise that more and more people having their struggle earning more $$$, decide to cut their spending to an extreme level to achieve their goals and gain financial independence. Even I (being very entrepreneurial since an early age) was initially very interested in the FIRE movement. I liked reading Mr Money Mustache or Frugalwoods. But in the end, my conclusion was the same as Sams – “There’s only so much cost you can cut”! You always have a chance to use your skills and time to make extra money (with enough willpower and having an actual plan). Building business or side hustles is a lot of fun! I also struggled at one point and had no idea how I will increase my income. I always wanted to invest but was 100% consumed by my job. I admire Sam for building this blog while working in finance, I know the struggle. My career started in M&A where I was very unhappy, but I managed to change the company, get better working hours and have time for other meaningful activities! It’s not a success story (yet) but it works for me.
“Financially retarded” refers to my ex-girlfriend. A long story, I won’t go into it here. I’m talking about a woman who couldn’t begin to understand money. Give her $100 and she’d fritter it away at warp speed in the span of a few hours. Her income was at the poverty level, living paycheck to paycheck, and she couldn’t begin to understand my lifestyle. Her worldview came courtesy of modern movies and TV shows. Sadly she’s not unique! She didn’t grow up in poverty either. As I understood it, at one point her parents had a million or so and lost it. She didn’t learn from that. If you read these financial blogs you’ll come across something called Poverty Mindset which is basically the polar opposite of frugality and self-reliance. A relationship between being poor and making poor life choices is another way of putting it. Prepare and save for the future vs. spend it all now and live for today.
There are consequences for our actions. The government wants us to be reckless consumers. Peer pressure and commercial bombardment ensures this ever more so, surrounding us with Wants. Maybe it’s a matter of survival instinct, intelligence, and the ability to break away from the herd. Maybe mental maturity. The ability to override instant gratification for the sake of the future.
Don’t get into the habit of having things done for you. Learn to do things for yourself. The important things. Above all, don’t become wrapped-up in the Image you project. Image leads to narcissism which leads to laziness and the spendthrift mentality we have with keeping up with the Joneses. Something like that.
You just don’t get it, Macarthur wheeler. (I don’t have a fantastic lifestyle only a financially decent one; but that’s a matter of opinion and your mileage will vary!)
My 7-figure net worth was earned through making sacrifices my whole life. Anyone could do this provided that have the willpower and the independence to not follow the herd. Conformity and Status are killing America. I am surrounded by financially-retarded people who “want it all Now!” and don’t want to work hard to get it. I guess you could call this the millennial mentality. I don’t know. If you live a life of instant gratification, not saving, then don’t be a crybaby when you end up destitute in your old age, unable to retire and living in a constant state of financial fear. The requirement that you be a part of the clique of your neighbors is more important than saving for the future. The bitterness, if there really is any, is on the behalf of these people who put down my lifestyle. It need not be big expenses like luxury cars either. A $5 drink at Starbucks repeated constantly adds up. Let me tell you something. My parents would never dream of paying that for a cup. They lived on plain old coffee with a touch of milk added, nothing else, ideally made in a Mr. Coffee machine than a Keuric monster.
Thirsty while shopping? I’d find the nearest water fountain or have the patience to wait a few minutes driving home. The Starbucks crowd may put me down for my lack of their so-called sophistication. As a matter of fact they would conclude that I’m poor and broke, with a low I.Q. to boot! Too bad that we can’t compare net worths. That will never come up. I don’t embrace the status quo luxury items they do so it’s a kind of discrimination. On a larger scale I don’t have a swimming pool like my neighbors because to me it’s a hole in the ground you throw money into. The guy with the biggest hole on the block is king. There are numerous problems I have with Capitalism which I won’t get started on; inappropriate as it is here. The conditioning and conformity process of our culture is my rage, and the inability of people to accept what they reap (or lack thereof) whilst living under it. Perhaps it is a matter of balance. What works for me might not work for you.
I like to look into consequences. I see what drinking does to people around me so I therefore do not drink. I see what overspending does to people around me so I therefore save more than spend. That’s reality for you. Find your own balance.
Great comment. All I can say is DITTO.
There is nothing to get. Living below your means and investing the difference with a risk appropriate asset allocation year after year with compound interest is not an epiphany. And while some people have not applied this simple yet effective financial tactic, it does not mean they are “financially retarded” as you eloquently put it. Nor does it mean that people are following the herd or demand instant gratification. Sometimes life events make it difficult. So you try to get better each day. And learn. And adapt. And be nice to fellow humans.
The theme of the post by Sam is that achieving FIRE is exponentially more difficult on a limited income stream. A person increases their chances over time if they seek to increase the incoming amount of clams. Minimalism in all things makes it tough. Especially if you are responsible for 2 or 3 or 4 other people.
Personal finance educators like Sam and the esteemed Dave Ramsey are positively impacting a lot of people like me and the people you refer to as financially retarded. Sam is making a difference.
Whether you can or can’t, you’re right.
Capitalism is what allows you to choose to live frugally, save, invest, and retire early. It gives you the choice. It also gives others the choice to spend into oblivion. It’s freedom, some people can use it to there advantage and some can’t, but at least you get to decide.
Interesting perspective. As a millennial in a large metro area, I certainly didn’t grow up thinking the same way as Joe. I always wanted to move up and make more money so I could afford finer things I value for myself and my family (travel is a big thing for example). His view may be somewhat simplistic, but we could also treat this as an alternative way of living. Nothing wrong with just wanting to go to Applebees for the rest of his life. I probably will never live this way but I respect his perspective.