Reader Case: Can We Retire in 7 Years?

FIRECracker
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FIRECracker

FIRECracker is Canada's youngest retiree. She used to live in one of the most expensive cities in Canada, but instead of drowning in debt, she rejected home ownership. What resulted was a 7-figure portfolio, which has allowed her and her husband to retire at 31 and travel the world. Their story has been featured on CBC, the Huffington Post, CNBC, BNN, Business Insider, and Yahoo Finance. To date, it is the most shared story in CBC history and their viral video on CBC's On the Money has garnered 4.5 Million views.
FIRECracker
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After blasting you non-stop with my obsession with Thailand for the past 4 weeks, I figured I should take a breather and do something useful.

So this week we’re going to take a break from the travel series and do a Reader Case.

Now, the reason this particular e-mail caught my eye was the fact that this couple reduced their living expenses BIG TIME and they credit it to discovering the FIRE movement.  Just a year ago, their expenses were a whopping $80,000/year! Now, it’s $55,000/year and they’re even planning to reduce it further to $38-40k/year . Somehow they were able to do this despite living in an expensive area of California. So even before we math this shit up, I have to say, “well done guys!”

Okay, so without ado, here’s their story (edited for brevity):

“My husband (31) and I (28) are on the path to early retirement. We’ve enjoyed reading your blog and are also big fans of Jim Collins. : ) We learned about the FIRE movement in April 2015 when a friend recommended MMM’s blog to us. I became hooked immediately and spent nearly all my free time reading Pete’s blog, as well as jlcollinsnh, and Mad Fientist. My husband is also a convert, and we are in this together. We paid off my student loans in September of 2015, and that really felt like the first big step.

We’d be very appreciative if you would do a case study for us! We think we’re on the right track but it would be great to get another’s opinion.

Gross annual income: $200,000 predictably; both of us make $100k, and my husband does freelance work on occasion ($0-$15k/yr)

Net annual income: $150,000 (estimated; we both got large raises mid-year so we’re unsure how much tax we’ll owe)

Annual spending: $55,000; a couple of things about this:

  • we live in a very expensive city in California
  • we are aggressively paying off our car loan through 2017, so our cost of living will be $43,000 post-2017
  • in 2015 our cost of living was $80,000, so I think we’ve made good strides in this area, though I imagine we could get it down to $38k-$40k with some extra creativity

Debts: Car loan with balance of $12,500, 3.5% interest rate, and payment is $400/mo, but we are paying $1,000/mo

Assets: Car ($15,000) and motorcycle ($5,000); no home – instead we rent a small 1-bedroom apartment within walking distance of our jobs

Investments:

  • $33,000 – joint brokerage
  • $58,000 – my 401k
  • $32,000 – husband’s 401k
  • $14,000 – my Roth
  • $12,000 – husband’s Roth
  • $16,000 – my HSA 
  • Total is $165,000; when we started getting serious about this stuff last April, we had $36,000
  • We are invested in 100% stocks but will probably ratchet down to 75% once we retire

We both max out our 401ks, Roths, and my HSA. Anything extra goes into the brokerage account. I understand it’s better to take the tax deduction and do Traditional IRA contributions over Roths, but since we both are active participants in company retirement plans and our AGI is > $118,000, Traditional IRA contributions wouldn’t yield any tax benefits. So Roths sound like a good deal – we won’t need the principal for 5+ years anyways, and we won’t have to pay tax on the growth.

We keep about $5k in our checking account, and $5k in my HSA’s checking account (anything less and I’d have to pay extra fees to keep the $16,000 mentioned above invested). We have several credit cards (we are into travel hacking) but always pay them off every month. 

We definitely don’t see ourselves staying in our current city in the long run. We’d like to travel and eventually find a home base in an inexpensive US city.

We think that $1,000,000 would be enough for us to retire on and not worry. I’ve run our numbers using several different methods, and it looks like we’ll cross the $1M threshold when I’m 35 and he’s 38.

We want to balance long-term safety with working our traditional 9-5 jobs for as short a time as possible. We both enjoy our work, but we think our future selves will thank us for being diligent now. We want to travel. We’re young but won’t be that way forever. There’s also a chance we’ll want to have kids later, but it’s hard to imagine that right now.

–RetireIn7Years “

Before I even do the analysis, I can see that that this couple is doing quite well, considering they boosted their savings rate from 47% to 63% in just 1.5 years, and are planning to boost it even further to 71% next year. Now, that is some serious bad-assity! And if you look at our “How We Got Here” series, you’ll see that we went from 50% savings rate to 65% and eventually to 78% over the span of 9 years.

So they are following the same trajectory and I expect their savings to accelerate over time. This is what happens when your income goes up over time (due to promotions, raises, etc) but your expenses go down. They will also find that, once they retire and travel, their expenses will go down even further, as we found out from living on $40K CAD/year ($31K USD) while travelling the world.

But of course, speculation is worthless without doing the math, so as we love to say on this blog “LET’S MATH THIS SHIT UP!”

Summary:
Net Income: $150,000
Spending: 55,000
Debt: -$12,500 + 3.5% interest
Investable Assets: $165,000

Given that this couple’s spending will go down to $43,000 once the car is paid off, let’s see how far they are from their world-travelling retirement dream:

Using the 4% rule, they will need $43,000 * 25 = $1,075,000 to retire. Now, here at Millennial Revolution, we advocate having a cash cushion of 3-5 years of living expenses, just in case there’s a market down turn.

But let’s not forget that even if capital values plummet during bad years, the S&P 500 still managed to deliver a 2% dividend return. So taking that account, with a $1,075,000 portfolio, the shortfall they will need is $43,000 – $21,500 = $21,500/year. Over 3 years, that’s a cash cushion of $64,500.

So add that to the $1, 075,000, we get $1,139,500.

How long will it take them to get this portfolio?

Well, assuming they invest their existing $165,000, plus $97,000 in 2017 and 107,000 every year after that (assuming the car loan is paid off), here’s how long it will take (assuming a ROI of 6% which is conservative given their 100% equity portfolio):

Year Net Worth Savings ROI Total Notes
2017 $155,000.00 $95,000.00 $15,000.00 $265,000.00
2018 $265,000.00 $107,000.00 $22,320.00 $394,320.00 Car loan free! Savings goes up $12k
2019 $394,320.00 $107,000.00 $30,079.20 $531,399.20
2020 $531,399.20 $107,000.00 $38,303.95 $676,703.15
2021 $676,703.15 $107,000.00 $47,022.19 $830,725.34
2022 $830,725.34 $107,000.00 $56,263.52 $993,988.86
2023 $993,988.86 $107,000.00 $66,059.33 $1,167,048.19

Seven years, if you include the cash cushion. And given that fact that I’m not building in any promotions, raises, etc, it will probably take less than that.

Our readers are pretty much spot on. By the time she is 35 and her husband is 38, they should have $1.2M in the bank, enough to quit their jobs and travel the world!

That being said, their investment timeframe is only 7 years with a conservative 6% annualized return. A 100% equity allocation may be too aggressive. After all, if stocks rampage ahead, they may get there a few years earlier, but if they tank right at the wrong time it may delay their retirement date. They might want to ratchet down their equity allocation to 75% or even 60%. This will lower their expected return, but they need only 6% to retire in 7 years, and the lowered volatility will increase their odds of hitting that more conservative target.

Lower the net. You don’t need to shoot that high to win the game.

I’m guessing a lot of people want to be in their position right now. What do you guys think? Chime in in the comments below.

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61 thoughts on “Reader Case: Can We Retire in 7 Years?”

  1. I put the numbers in the formula I’m using for myself to estimate my future portfolio value and it returned exactly 7 years as well. I agree with you that it’s relatively close, so the 100% stock allocation might be a little bit too aggressive. If I were them I’d put part of the future savings in bonds, slowly building up the desired ratio of bonds in the portfolio. During the 7 years it might also worth to add a rental property to their investment (they would be able to get one with little or no mortgage, considering their savings), just to be able to rely on more income streams after they leave their job.
    At least this is what I’d do… 🙂

      1. Interesting case, FIRECracker. There is a big difference between risk tolerance and risk affordability (http://tenfactorialrocks.com/right-way-think-about-risk/). Volatility is not the same as risk if they can live on just say, $35k per year with $1.2 M invested in stocks 100%, as long as the investments generate a dividend close to their annual spend figure (either via tactical indexing or diverse dividend growth investing). If they have the tolerance for it, they can continue to be invested fully in stocks. One simple technique I advise is imagine your portfolio is 60% of the peak figure, and dividends are say, only 70% of peak dividends, that is, 30% less (worse than the 25% Div cut by S&P 500 in the Great Recession). If you have a game plan to handle that scenario without selling stocks at the bottom, you will come out way ahead in the long run.

        1. Yeah, I like to call this the “dividend shield.” You will be amazed at how much control you have over your expenses when you globally arbitrage, and if you can get your expenses below the dividend yield of the S&P500 (or if your total portfolio values goes high enough that 2% = living expenses), it actually makes sense to go 100% equity and just ignore the volatility.

          1. Yes, as a multi year global arbitrageur, I am well aware of this. That’s why I wanted to bring this point as it is not what traditional financial planners advise. The price of a ‘smoother’ ride with a sizable bond allocation is that you aren’t able to maximize long term equity performance.

  2. A lot of it is based on luck. 7 years is a very short time frame. If the market continues to do well, they may hit their goal in less time than planned. Or everything could tank at year 6, and even with a healthy bond allocation, they’d still lose a significant chunk of net worth.

    But hey – that’s the great thing about being in your 30s. If things go south, you can always work a few more years and plow money into cheap equities.

    1. If you retire in a market downturn, it can be mitigated with goosing your yield, building a cash cushion, etc. 2015 was a bad year for oil, which was the year that we retired, but it didn’t affect us. Our portfolio is still higher than before we left because of our yield and the ability to control our costs.

  3. The stock allocation is something that is worth thinking about, and I’ll admit I haven’t thought about it too much because I always just assume I have a long time horizon given my age.

    On the one hand, I understand the problem with volatility, but I guess my thinking is, most people can stay aggressive regardless of the time frame when it comes to early retirement since they don’t “need” to retire by then (assuming they have stomach for it).

    In other words, if they get there and find out that they don’t have enough due to market fluctuations, they could just keep working and ride it out. OR, if their expenses are still low, at that point, they won’t even need to save money and could each take a part time job making enough to cover just their expenses (most of us, when we think about jobs, also think about what we need to save too – whereas if you don’t need to save anything, then your paycheck, even if smaller, is suddenly bigger).

    1. Great points! “Most people can stay aggressive regardless of the time frame when it comes to early retirement since they don’t “need” to retire by then” – that’s exactly what I was thinking. I’m 100% equities and staying that way. Planning to retire in 4 years, but if it doesn’t happen I’m still young :). No worries.

      Also a great point about getting a part time job during a downturn instead of staying at your 9-to-5 if you were planning to retire then. Awesome idea! I think I’ll do that if the market is down near when I planned to leave work.

    2. Excellent point. Continue working, take a part time job, or even travel to inexpensive places where the cost of living is 20K and live off the yield. There are many knobs to turn.

  4. How does health insurance factor into an early retirement plan? I know that most high paying jobs have really good health insurance but once you leave the job you are on your own for health insurance. From what i hear from family members who have to self insure that stuff is nowhere near cheap.

    1. One thing they can do to decrease healthcare costs is:

      a) travel insurance (they did mention they want to travel the world)
      b) take advantage of medical tourism (it costs less than $30 to see a doctor in Thailand or Central/South America)

      We have socialized healthcare in Canada, but it doesn’t cover dental. So for that we’re using medical tourism and paying out of pocket. Only spent $70 on dental cleaning for the 2 of us this year. Working out great so far!

  5. Is this analysis in nominal or real terms? If it’s real, then a 6% real equity return is actually too optimistic considering today’s equity valuation.
    If it’s nominal then the equity return is about right. But then your final portfolio value has to be deflated by 7 years of inflation (but you’d also get more savings from pay increases).

    1. It’s nominal terms. However, as you said, I didn’t include a single cent of pay raise or promotion. Realistically, they will likely get at least 1-2 promotions during that time, and raises every year to account for inflation.

  6. Nice case study and kudos to your subjects for getting their savings rate up.

    Personally, I’d keep the 100% equity stance while wealth building and I’d also pray for a market collapse, ideally this year.

    Then they’ll be investing those handsome sums during the market’s recovery and at bargain prices.

  7. I heartily disagree that they should change their equity allocation. Especially as something as extreme as %60/%75. Who cares about volatility when you’re in your 30s? There’s also been at least a couple studies that show that a reverse glidepath is preferable. Or that you should always stick with 100%. Or on a somewhat conservative path, increase your exposure to bonds right around retirement, but then quickly revert back to pure equities once you’re past the ‘dangerous’ part right around retirement.

    http://www.retailinvestor.org/pdf/Glidepath.pdf
    http://www.retailinvestor.org/pdf/SpitzerSingh.pdf
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2557256

    The biggest factor is mental. If you know that you can handle volatility then the evidence points to there being almost zero reason to hold bonds at all. If there is any doubt about what you might do or think if there’s a big drop in equities during your retirement then it’s eminently reasonable to hold some portion of bonds to smooth things out.

    1. Glidepath is definitely one way to do it. That being said, you will really need to feel a market downturn (like we did during 2008) to see what your real risk tolerance is.

  8. I think your advice was spot on in every detail. I especially agree with the idea of them reducing their equity allocation to 60% to 75%. They just don’t need to be that aggressive, and stock market valuations are either kinda high or very high, depending on who you talk to. Nobody thinks the market is cheap right now.

  9. Great case study FireCracker.

    I would caution them that stopping just at 1 million isn’t required. Having a little more “buffer room” isn’t a bad idea….

    Especially when we consider the unknown, significant, and rising cost that is health care in the United States…

    Think about it like a writing assignment back in school — You *can* do the bare minimum and get a passing grade. Or, you can put in a little extra effort to get that ‘A’ grade …which is useful later in life when things don’t turn out as planned.

    Or, as sailors like to put it — Don’t plan for calm weather.

    1. That’s why we advocate having a cash cushion. It helps a lot.

      Although, after retiring we found out that there are a TON of knobs to turn when it comes to cost of living and healthcare.

      When you’re location independent (which they plan to be because they mentioned travel), you can easily reduce costs to below the yield and take advantage of cheap, high quality healthcare in other countries (why do you think so many American retirees go to central/south America, SE Asia for medical tourism?), as well as travel insurance.

    2. Indeed, I would presume that they’d want to build a buffer above their current daily expenses…for example, there’s the potential kid factor in the future. While kids don’t need to cost the earth, there will always be some additional expenses associated with raising them.

      I’m also curious as to why an inflationary buffer wasn’t built into the amount used to calculate what they’ll need in retirement. Perhaps I’m missing something, but it would seem to me that while it may be that they’ll likely be spending $43K/year after car loan paid off in the near future, however in a few years’ time is it not safe to assume that there will be additional pressures on that spend? The paid off car will age and need maintenance and repairs, rent will increase, health care costs will increase etc. Perhaps they’ll find enough additional savings in other areas (e.g. perhaps ditch the motorbike and even the car?) to fully offset the inflationary increases, but perhaps not. Wouldn’t it be prudent to add a buffer as a safety factor to the equation in the event that it turns out to be ‘perhaps not’?

  10. Oh the expensiveness of California, I know that all too well. We’re totally in the same boat and can’t wait to relocate. Just by traveling or moving to a cheaper area when they retire will drastically decrease their cost of living. Good for them for renting a small place! Although, if it is anything likes ours, its still way too much money for rent.

    1. Year-round sunshine don’t come cheap 🙂 But yes, we know first hand the advantages of renting exactly what you need and not being a space hog.

  11. Some thoughts from someone 10,000+ days of internationalization; quant; retired at 40 except 1 yr , though could have younger, 180+ countries lived/worked/biz/invested/traveled ….

    The folks are USA citizens and if they can do their jobs living outside USA , each has ~ $US 100,000 earnings exempted … that’s like , um, a huuuuge savings / gain / extra wealth. Other, perfectly legal, tools/techniques are available to this couple.

    Done this B2B, HNW persons, with top professionals / family office reps involved.

    Investing … consider some investments non-stock&bond-correlated , and there are some rather simple investments with medium yields in emerging/frontier market countries and low time-maintenance.
    Smart-contracts (block-chaining) help with governance.

    1. Thanks for sharing your experience! We’ve met a lot of expats in SE Asia who are doing exactly that–earning US dollars online and spending it in a lost cost locale. It helps if you have skills that allow you to work overseas (like writing or coding).

  12. Great case and I’m inspired in developing a similar model for myself. Question to Firecracker, with the strategy of withdrawing income yearly, how would you manage the tax-shielded accounts as they are heavily invested and limited to withdrawals?

  13. I like it when you do the case studies …. it gives different perspective scenarios from people etc etc etc … I also like that Root of Good fellow who gives a monthly synopsis financial gains and expenditures etc etc … do you ever do a monthly or quarterly report like that … it would be interesting from a Canadian perspective seeing I am Canadian … God Bless, Beijing, China

  14. Thanks for the reply … are you thinking of travelling around the States, Canada or elsewhere next? I have yet to get to Thailand from Beijing … but have been as far south as Shenzhen and Hong Kong several times … which is very nice … I am debating whether to stay put this year, do more of south China and/or maybe Vancouver Island/Victoria/Banff etc area … Vancouver Island has some nice temperate rain forests that are quite magical … before heading back home to the St. Jacobs mennonite / Kitchener area etc where I have family … Algonquin Park or Tobermory is also not so far from there too … too many beautiful places …. I think though Switzerland is still maybe my favorite! Keep posting those updates from time to time …. they are quite super! … from your friendly non-retired … multi-millionaire?…… Canadian teacher reader …. God Bless, Beijing, China 🙂

  15. Interesting article and I’d love to submit my numbers for comment, but I wonder a couple of things… is there any planning for children in this scenario or is that not in the cards? Yearly expenses for this and education planning can be huge. For instance we save 10k/child/year for 529’s.

      1. Thanks for responding, I love the blog. It’s very thought provoking and inspirational and more importantly fun to read. I’m going to take a better look at the websites a little more in detail, but it looks to me like there is no college savings happening. I suppose the question can be asked of whether you should save for your child’s education and the answer may very from family to family… we’ve placed it as a high priority and it’s approx 33% of our expenses… we live somewhat “responsibly” despite our works.

        1. What we found was that after you retire you actually MAKE money in retirement (with side income, living off the dividends and letting the capital values rise, etc). So people are WAY too conservative in how much they think they need to retire. It’s also inconceivable that you won’t earn a single cent after you retire. As well, Canada has the Canada Child Benefit which is another $9000. So all those sources pool together and put into an RESP (20% matched by the government, up to $2500) and invested over 18 years will be more than enough for a kid’s education. And since we didn’t rely on my parents to pay for my university tuition ( we had a co-op programs), I’m not opposed to the idea of working during school to pay for tuition.

          1. Thanks for the reply, fair comments. Maybe the educational costs are quite different for a good school in Canada and the US and affects the savings need mindset more.. or maybe it’s just us 🙂 Best wishes with the blog!

  16. This is a great case study, and an illustration that, just as with the snowball method to pay off debt, reaching FI can similarly accelerate faster than you think simply because of normal life changes. You adjust to spending less, and it immediately feels normal. So you can lean in more. And, hey, we got a raise, or a bonus, or some other windfall…and then that gets invested. And the investments start making money, and that money gets reinvested, and holy shit, we’re financially independent? How the hell did that happen?

    Compounding efforts, yo.

  17. This is a great case study. It is amazing that this couple have put themselves in a position to earn 200k+ annually. Also, they haven’t gotten taken over by the ugly debt monster which eats at the money that can secure your future.

  18. This is an excellent case study. Once I became FIRE aware it took me 10 years to get my numbers and another year of hesitation because it was 2008 and we all remember where portfolios were then. My first early retirement was 7 years ago. Here is what I have found. When we retire young we do so with the same ambition and financial awareness that got us to the FIRE goal. Be aware that padding the portfolio can get out of hand and cause unnecessary delay. Figure out the escape number and remember that the fear erasing asset we own is the financial savvy that gets us to this point. It will stay active and kick in during any seen financial potholes once retired. Also when looking at numbers never underestimate the high possibility of paid opportunity after escaping the rat race. Retirement isn’t the absence of working, it is the absence of having to work. The universe is funny. The less we demand opportunities from it the more it sends our way. Retiring young means many years of options, change, and adventures.

    1. The universe is funny. The less we demand opportunities from it the more it sends our way.

      You know, I’ve noticed that as well. I’ve been getting job offers thrown at me left and right since I left, while at the same time people I know who are desperate for work can’t get a phone call back. Weird.

      1. Wanderer – you write well, and are confident. You are also successful, and don’t follow the herd. These are skills people consciously or unconsciously want.

        I’ve said to my wife – “this guy writes well, brings alternative thoughts to the table, and seems to be a really nice person – I could work with him”…

        Nothing wrong with that! Keep going…

        (I “retired” for a little while, but back working a contract that both the client and I wanted done; each and every day is enjoyable)

  19. I do want to point out, they are saving a lot of money which is great. But how come they don’t just pay off their car loan already? The negative interest of 3.5% on the $12,500, probably does not offset the positive interest on their savings?

    Also, just wanna say love your blog and your mindset. I always read, but I never comment. Thank you!

  20. We won’t be the RE part of FI, but I did calculate our numbers this morning and it looks like we can get to FI 2 years earlier than I thought. Woo hoo. Trouble is I like my job. A lot. And they pay me to travel. Love the fact that y’all are killing it at such young ages. If I only knew what I know now 10 years ago or 20 years ago I might be FI already.

    1. “Trouble is I like my job. A lot. And they pay me to travel..”

      Good problem to have 🙂 It’s always good to have the FI part of FIRE, just in case things change with your job but so far you have an enviable situation. There’s no need to retire if you love your job.

      Just curious, what field are you in?

      1. I am a professor. Specifically, I am a professor of rhetoric and politics. I get paid to talk about the most important subject in the world. I am actually traveling to London to give a talk this summer (and paid for by my university) but I think we are going to miss the Chautauqua. Although I have always wanted to do one.

        1. Oh man, that does sound like an awesome job! Lucky you 🙂

          Too bad the timing didn’t work out for Chautauqua. Hopefully you’ll come to a future one?

  21. Yes, I’d like to be in their position — where the spouse agrees and has bought in! We’re roughly even on the financial side at the moment; they’ll hit FI before me because of their mutual commitment to this goal and what it enables.

    7 years is about one business cycle. Perhaps they’d consider saying “we’re out in 7 years after investing everything we can, and we’ll live on what we have by then”.

    That 4% is for US/Canada 30-year horizon, per the Trinity study and follow-ons. Unclear how flexible and optimistic they are — pessimists would want 3% safe-withdrawal-rate for a “forever” depletion portfolio; flexible optimists (like you) would observe that 4% would still last “forever” more often than not, especially with other earnings and Social Security equivalents and lower expenses in the mix.

    For myself, I aim to live off the income generated by dividend stocks and bonds. (I prefer a permanent portfolio to a depleting one.) My nest-egg sizes itself based on the yields I select; perhaps they’d consider the same.

    1. Nice! We are actually in agreement. That’s why we advocate building a portfolio in retirement to throw off 3-3.5% fixed income and dividends so that we don’t ever need to care about the capital value. This is what we like to call “the yield shield”.

      Another thing that’s helpful is location independence. By traveling to inexpensive places, you can easily live off of $20K, which means that even a 90/10 or 100% equities portfolio throwing off 2% would be enough that you never have to touch the capital value.

  22. Just wondering if selling their car, investing the cash, would be worth it. They are after all in walking distance to work.

    1. That’s a good point, Suzq400 and that’s what I would do in their situation. But even without selling the car, they’re doing really well and on their way to FI. Selling the car might shave off a month or two, but not a big deal in the long run.

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