- How Has Covid-19 Affected Your FIRE Journey? Part 2 - May 29, 2020
- All the Ways Travel Screws You Up - May 25, 2020
- How Has Covid-19 Affected Your FIRE Journey? Part 1 - May 11, 2020
Hey peeps. It’s Friday again and that means another reader case!
This one immediately caught my eye because it slaughters two sacred cows.
Cow #1: Kids are expensive
Cow #2: You can’t become FI if you don’t have a high-paying STEM job.
This reader case is proof that you can raise four kids on just one postal worker’s salary and still be ahead (e-mail has been edited for brevity):
“Hello Firecracker & Wanderer!
First and foremost, THANK YOU BOTH! xoxoxo I am soooo thrilled to have found the 2 of y’all. I immediately I loved y’all style from jump. Thanks for taking the time to explain the madness to ordinary to slow people like myself whose brain runs circles trying to keep up and self-educate for further growth.
I became a Postal worker at 20 yrs old and had 4 kids along the way so my husband is a stay-at-home parent who works side gigs at random to have money saved—which does stack but is not usually counted for.
So the 3 main questions I have are:
1) Why do you estimate for 25 yrs of retirement when estimating how much money we are aiming for in the portfolio? I’m aiming for a 118 yr life span ☺ and I aim to be retired at 50-yrs-old (hubby 51) or the latest 55-yrs-old (hubby 56).
I am now 36 (hubby 37) so I need to know the money will last!
2) How do you get “portfolio growth” to get your estimates? I am assuming I need to get an investment acct somewhere—planning on following the investment course just haven’t gotten around to it because I’m still lost on basics or just a lil’ overloaded.
3) How many years will it take us to become FI? Is it achievable before 50?
Please help me with our Case Study! We would love to one day meet up and say hello at the Chautauqua events and enjoy the experience there as well as being FI sooner rather later. Feel me! Okay, on to the madness:
$74,270 gross w/ overtime
$46,595.63 net salary after tax
~$2,200/mo = $26,400/yr
~$4,000 medical bills
$62,000 still owe on house
$5,000 (2) cars
~ 2004 Honda Civic and 2003 Ford Taurus
$4,557/yr TSP -$60,100(ytd)
$2,432/yr Roth -$5,500(ytd)
* I aim to max out TSP but not sure how to get there and not be broke AF!
Thanks for all the help and enlightenment!
Aiming for Fi”
Well, AF, I have to say, kudos to raising 4 kids on just $26,000/year. Holy shit! That’s less than what most people spend on just one person. The only time we’ve ever met other families with expenses this low is the World Schoolers, who travel the world with their kids to reduce their living expenses. But you’re doing this while living the US? Wow. I’m going to have to get some parenting and budgeting tips from you .
Okay so first to answer your questions:
1) Why am I multiplying the expenses by 25? Am I projecting only a retirement period of 25 years?
2) How do you build a portfolio to get the 6%/year average return in my portfolio growth projection?
3) Is it possible for you to become financial independent before the age of 50?
This is a common misunderstanding of the 4% rule. The 4% rule was derived from the Trinity study, which simulated retirement throughout the entire history of the market. They pretended a retiree started with a bucket of cash at every year through history, and simulated what would happen if they withdrew a certain percentage and left the rest invested. 4% of the withdrawal rate left the portfolio intact with a 95% success rate. (We wrote a whole post about it here).
So by taking your expenses and multiplying by 25, I’m not projecting a 25-year life span. I’m reverse engineering how much your portfolio size needs to be in order to allow you to safely withdraw 4% each year to cover your expenses.
In your case, since your spending is $26,400/year, if that is 4% of your portfolio, you’d need a portfolio size of 25 * $26,400/year = $660,000 to cover that amount each (because 4% of x = $26,400/year, so solving for x = $26,400 /0.04, and dividing by 0.04 is the same as multiplying by 25).
Historically the S&P 500 has returned between 7-11% annually (depending on your portfolio allocation) over the long term. However, as you can see by our blog, we are extremely risk adverse (I’m not a plan B person, I’m a plan C, D, E, F—back up plan for the backup plan kind of person. Blame the Asian-ness), so I like to use a very conservative 6% return over the long term and a 60/40 (60 equities, 40 bonds) portfolio to get that return, with a yield of 3% to protect against market downturns. To find out how to build a portfolio like the one we have, follow our investment workshop here.
To find out how long it’ll take until you become financially independent, let’s take a look at your numbers:
With your hubby staying home to take care of the kids, saving money on childcare costs, you’re doing just fine on a postal worker’s salary, as we can see in this summary:
|Debt||$4000 (medical) + $62,000 (mortgage) = $66,000|
|Assets||$3000 (cash) + $60,100 (TSP) + $5500 (Roth IRA) = $68,500|
At expenditures of only $26,400/year, your saving rate is 43%! Once we subtract your medical debt from your assets, we get a starting point of $64,500 and savings of $20,195/year. This means that with a conservative 6% annual return in the markets over the long term, you should become financially independent in:
16 years! This means you’ll be 52 and your hubby 53, so that’s within your goal of retirement before the age of 55!
(Note: inflation is hedged by the 2% raise your job provides each year.)
And this isn’t taking into account any raises or additional income your husband earns from his side incomes. So it could be even earlier if you take those into account. On the other hand, if your expenses increase (college tuition for kids, maintenance for the house, etc), you’ll need to account for that as well. So make sure you redo the above calculations each year to account for any increases in spending and salary.
I also recommend having a 3 year cash cushion of living expenses, so in addition to the yield of the portfolio, you’re getting extra protection in the event of market downturns (which will inevitably happen).
So in your case, if your FI number is $660,000, a 3% yield (click here for the Yield Shield series on how to push up the yield on your portfolio) would generate $19,800/year. Since you currently live on $26,400/yr, that’s a shortfall of $6600/yr. So you’d set aside $6600 *3 = $19,800 as a 3-year-cash cushion. So, based on your savings rate, this would only add an extra year to your retirement date.
But before you build up savings and investments, you need to PAY OFF YOUR DEBT! You mentioned $4000 in medical debt, but you didn’t say what the interest rate of that is. If it’s anything above 5%, don’t bother setting aside savings earning 0.05% interest or even investing with an average 6% return if it’s just going to get eaten away from the interest from the debt. Having savings at the same time as debt with high interest rates makes no sense.
One other thing I noticed: Why are you splitting your contributions between your TSP and Roth IRA? If you still have contribution room in the TSP, redirect it all towards that and save more in taxes. You can get it all out tax-free in retirement by implementing a 5-year Roth IRA Conversion Ladder.
But other than that, you’re thriving on a single person’s salary, raising 4 kids on less than what most singles spend. And if you continue along this route, you’re just 16-17 year away from financial independence, and within your projected retirement age of 50-55. Well done!
That’s it! What do you think? Chime in the comments.
Update: A call out to previous Reader Case Study alumni! MR Readers have been asking about you and would like to have a “Where Are They Now” post. If you’ve been featured in a previous a reader case study, e-mail me at: FIRECracker.revolution.com and update me on your situation and I’ll pick some to share with our readers. Let’s help them follow along in your journey! (MontrealDilemma and MAS, I’ve already heard updates from you, thanks for that!)
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