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Remember when I said we’re busier in retirement than when we were working? Well, this past weekend proved it. We were in Chicago demoing the non-profit app we built, and man oh man, literally every minute of the day was accounted for. From app demos to the launch party, to 7am author breakfasts, to fancy literary award dinners to late night parties, it was a wine-soaked, party-filled weekend that we’re still “recovering” from (champagne problems, right? LITERALLY.)
Needless to say, having neglected our inbox, we are just now digging ourselves out of the avalanche. But app launch or no app launch, Friday Reader Cases still need to be written, so without further ado, here’s an e-mail from one of our intrepid readers:
“Hello!
I’m an older millennial (age 36…I think we’re known as “cuspers”), married, two little kids. I’m an Army veteran and I currently work in medical sales. There are many things I like about my current job: the income, the flexibility, and the people. That being said, there are things that I don’t like about working for The Man, primarily the feeling of dread in a Sunday or at the end of a vacation knowing that I have to go back to work.
Why do I seek FI?:
I don’t want to be bound to a job with specific hours. I am not striving towards perpetual laziness but rather the freedom to use my time the way I see fit.
What will I do with my FI?:
This probably sounds crazy, but I want to design and fabricate hand-screened t-shirts for sale. I also want to “slow travel”, meaning I want to keep my home base but be able to travel overseas for 1-2 months at a time.
My financial stats:
1. Income from my job: Around $150,000/year before taxes; $85,000 base salary, the rest is variable comp (I’m in sales).
2. Additional income: Military pension, around $1275/month ($15,300/year…tax free!).
3. Monthly spending: $3500-$4000/month (includes mortgage).
4. Debt: Mortgage on residence, around $190,000 remaining, 3.785% interest rate. We pay off credit cards in full each month. Student loans paid off. No other debts.
5. House: Market value $340,000; $150,000 equity; monthly payment is $1675 (principle, taxes, insurance).
6. Fixed assets: House, 1 car which we own outright. I have a company car which I can use for personal use.
7. Retirement portfolio (401K & Roth IRA): $290,000. I now max out my 401K; (company matches 100% up to 3% and 50% for my contributions between 3%-5%. Guess where they do their 401K? Vanguard!)
8. Taxable portfolio: Currently around $100,000. On average months I anticipate adding $750/month to my taxable account. After quarterly bonuses I plan on adding $8,000-$12,000 in addition to normal monthly contribution.
9. Note: Wife stays home with the kids, no income.
So here’s my question…if I keep up this pace, how long ’til I reach FI?
Sincerely,
Captain Cacus“
Well, CC, at a first glance, your are definitely making major bank and your expenditures don’t look too bad either ($4000/month and you have kids?! So you didn’t have to sell a kidney to be able to afford them??! LIES, LIES I say!). So let’s see if we can make your T-shirt printing dreams come true!
As we always say on this blog, let’s MATH THIS SHIT UP!
| Summary | |
|---|---|
| Current Gross Income: | $150,000/year |
| Additional Net Income: | $1275/month *12 = $15, 300/year |
| Spending: | $4000*12 = $48,000/year |
| Debt: | -$190,000 @ 3.785% interest rate |
| Investable Assets: | $290,000 + $100,000 = $390,000. |
Now, since CC didn’t mention where he lives, we’re going to estimate his after tax income (which also varies from year to year, since a big part of it is commission). He can feel free to adjust the numbers accordingly by putting it into a tax calculator. And to all the whiners who complain that I’m missing information so we should be having a back and forth e-mail fests with the reader: either do the work yourself, or shut the Hell up. It takes a tremendous amount of effort to write consistently, answer comments/emails, while volunteering for a non-profit and supporting an app, and it takes ZERO effort to write whiny comments on other people’s blogs, so unless you’re going to DO the work of running your own blog, no one gives a crap what you think.
*Phew* Rant over. Okay, now back to the numbers.
Assuming that he makes around $100,000 after taxes, he would have a total after tax income of $115,300 with the military pension.
If he continues to live in the house and pay off the mortgage, he’ll be able to put away around $67,300 per year (note this does not include any unexpected maintenance costs, property tax increases, or interest rate hikes). And since he also maxes out his 401K and his company matches up 100% up to 3% and 50% from 3-5%. Since his base salary is $85,000, they would match $2550/year (100% for the first 3%)+ $850 (50% for the remaining 3-5%)= $3400/year.
With expenses at $48,000/year, by the 4% rule, he’ll need $48,000 *25 = $1.2 Million to retire.
BUT, since he has a military pension of $15,300/year, that will only need the portfolio to generate $48,000 – $15,300 = $32,700/year. Which means he’ll only need $817,500 to retire.
So, if he were to put away $67,300 + $18,000/year (max 401K) + $3400/ year (company match) = $88,700/year into a portfolio with a conservative return of 6%, he would get be able to retire in…
| Year | Starting Balance | Annual Contribution | Return | Total |
|---|---|---|---|---|
| 1 | 390,000.00 | 88,700 | 23,400.00 | 502,100.00 |
| 2 | 502,100.00 | 88,700 | 30,126.00 | 620,926.00 |
| 3 | 620,926.00 | 88,700 | 37,255.56 | 746,881.56 |
| 4 | 746,881.56 | 88,700 | 44,812.89 | 880,394.45 |
…just 4 years!
Realistically, as he pays off the mortgage, the monthly payment of $1675 should go down, reducing his overall spending costs. That said, when owning property it’s always a good idea to have some monthly costs set aside for unexpected costs like maintenance and property tax increases. So he needs to account for those costs.
Also, since a 6% return is a conservative average return over the long-term, during the 4 years there could be fluctuations in the market that could either push out his retirement timeline or shorten it. So he needs to be aware of that and plan accordingly.
And if he wants to set aside some money for his kid(s)’ college tuition, that will also push out his retirement date. But again, the cost of tuition varies from family to family. If his kids decide to go to a State school like RootofGood or get into a co-op program to pay their own way through school like Wanderer and I did, then they would save him a butt load of money. So CC will need to decide what makes sense for his kids.
So, I’d say CC is doing pretty well for himself. He’s also proof that you can live a good life without breaking the bank even if you have kids.
What do you think? What advice do you have for CC?
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4 years is aggressive! But it can be done. Dang, I love that they have a pension.
I’m going to guess 15 years until early retirement. Kids are brutally expensive the more you love them!
Sam
Hey I know a family who raises their kids just on the tax credits they get back from the government. You can love them without spending a lot of money.
Well done! I hope that I will be in exactly the same position as you at 36. It seems like you are well on your way to being able to decide how you want to live your life – and all accomplished with 2 kids! I am impressed.
CL
4 years is aggressive! But that’s awesome! Also impressed with your spending habits, that’s not too bad!
Hi FIRECracker,
Thanks to you and Wanderer for the interesting blog articles. They always make me smile and laugh at all your ridiculousness. Please keep it up!
Not trying to incite another rant :), but I’m wondering if Captain Cacus can retire a little earlier because his matching 401k contribution from his employer may be on his total compensation and not just on his base salary. Depending on the 401k and how the plan is set up (Captain Cacus would have to ask the dreaded HR Department – hiss, boo), he may get a match on the additional compensation. It depends on how the plan is set up. He already has a pretty quick path to FI, which is awesome, but wasn’t sure if this update would help
Yeah, maybe. I can’t imagine that would change the numbers that much though.
I would love to see an average breakdown of monthly expenses. $48K/yr is impressive. Especially considering our housing mortgage/rent payments are the same. And I only have 1 child + me. Best to reaching FI.
I like how this guy wants to open his own screen printing business after FIRE. I am guessing he is artistic and will be creating his own designs so this is kind of similar to what we are trying to do with our art business except we will not be focusing on t-shirts.
“the feeling of dread in a Sunday or at the end of a vacation knowing that I have to go back to work” I can totally relate to and as I do still work part time I still occasionally get that feeling but work is a lot easier to deal with at home in my pajamas with my spouse bringing me coffee. As i typically only work 4 hours a day I don’t normally take lunch, but if I do I can hang out and watch a bit of a netflix show while I eat with my spouse and hang out with my cat. Now I only really experience that dread feeling if I have a particularly unproductive weekend where I slept for most of it and wish I would have done more, or an over productive weekend and didn’t get much time to relax.
I wish you the best of luck in your journey to FI and your business ventures beyond retirement Captain Cacus.
Thank you for your service!
Damn it..I have one kid and I only spend 32k a year and it will take me 10 more yrs to reach FI because I dont have a pension and 390K stashed to start with unfortunately !
Hey 10’s not bad. Ours was 9 years.
This screen-printing gig sounds interesting… is there anything that would prevent the writer from trying that out on a small scale now? Say, an Etsy store with just one or two designs? I am assuming he travels a lot for work, but maybe he has some downtime on the road to play around with ideas?
Damn! Almost my entire situation is similar to Mr. CC. From the income, to the mortgage amount, and I have a child (my wife stays home.) Age wise, I’m about 7 years behind Mr. CC and I only have about $165k in investments.
I’m inspired to run the calculation for myself because I am getting a little sick and tired of the grind working for the man. Like the Millennial Revolution team, I’m an engineer and I have a yearning to work with small businesses that want to incorporate tech, specifically IOT Connectivity, into their business.
Yeah, absolutely crunch the numbers for your situation. We showed you how.
They are doing so well. Their FI is in sight that is fantastic.
I can attest that the older the kids get the more they cost. Cars, clothes, insurance, dresses, computers, sports, phones, etc. I used to save a lot, but not any more. I’d say save at least another 8 years to build a nice cushion.
Cars? Phones?!? I didn’t have any of that shit!
It’s just the situation I’m in. Once you open Pandora’s box it gets complicated
we had beepers and no cars.
Since CC is only 36, he won’t be able to draw on his 401K until 59 1/2. Early withdrawal will cost an additional 10% penalty. I assume that most people do not want to pay that penalty on top of whatever regular income tax from withdrawing a portion of that $48,000 from his 401K.
Highly recommend you read this article from RootofGood about the Roth IRA Conversion ladder: http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/
I was aware of the equal payment distribution, but I didn’t think of utilization Roth conversion in that manner. As a general rule, I would avoid paying any taxes unless I have to. I supposed CC would want such a mechanism if he wants to retire in 4 years.
By the way, great work, FC and Wanderer! I wish someone teach me about this when I was much younger. I tell both my boys to follow your model if they want to retire early and to pursue their dreams.
Johnny Elle, I’m pretty sure FC is using a 4% draw down to calculate what he will need to cover his expenses during retirement, assuming 48K/yr remains constant, plus the annual rate of inflation. Since he has a tax-free pension that covers 15.3K of annual expenses, the remaining balance of 32K would be covered by 800K in investments through drawing down 4% of that each year and increasing the draw down by the rate of inflation each year. Theoretically, assuming expenses remain constant throughout retirement, after adjusting for inflation, he should be able to cover expenses from interest and dividends on his 800K nut. Of course, stuff happens, things change and life is unpredictable. Retiring in 4 years would be a best case scenario and as others have pointed out, working a few more years to build a little bigger cushion would improve the odds on the margin of error.
Correct. Just because you CAN retire doesn’t mean you HAVE to.
Great job this family has done. Retire by forty is possible for them if they want it. Also thanks to Millennial Revolution for this entertaining blog!
Awww, thanks! *blushes*
Well, I’ve got two kids (and similar spending). Ultimately we decided to wait until we reached the $2million mark before we retired. Maybe we’re being overly conservative, but I like having a little buffer.
It’s true, kids don’t have to be expensive — but having a little extra never hurt.
Medical sales sounds kinda cool! So if he retires in 4 to 10 years he could also later do part time sales or freelance sales for the medical companies he is linked to … I knew a fellow like that in Beijing who did that …. later he just went out to the provincial hospitals he had contact with … maybe 4-6 rounds a year selling medical equipment … and spent the rest of the year playing badminton at the gym, swimming, reading and spending time with family etc etc etc … God Bless, Beijing, China 🙂
These are cool projections… one question for Fire/Wanderer:
What is your rationale that reaching around $800K is the magic “number” to retire? I recall you used that number (roughly) when you advised the lawyer when she could retire.
Is the 800K based on your own number? (And I assume this number works if you don’t live like a celebrity, like Johnny Depp?)
Magic Number = Living expenses x 25, as per the 4% rule.
https://www.millennial-revolution.com/invest/how-much-is-enough/
I have a question about the Magic Number.
Right now I’m deducting ‘guaranteed’ income such as Social Security and Pension income from my living expenses prior to multiplying by 25.
Do you think that is a reasonable way to look at it?
If you’re planning to retire at the regular retirement age, then yes for social security. For pension, depends on when it kicks in.
2 small kids and a spouse with no income = sure hope there is adequate life & disability insurance!
Also, what is the survivor benefit on that military pension? Using the 4% SWR and including the military pension is great as long as CC is alive!
I like your comment re: college education. The cost is ridiculous these days, and personally I see a huge shift towards online-learning and a reduction in the actual cost of education in the next few decades.
Great analysis, Firecracker!
Thank you all for taking on my case study and for everyone’s comments. Firecracker’s case study validated what we were thinking… very beneficial getting an expert’s opinion. My wife is much more confident in our plan now. I will keep you all updated on our progress!
Best wishes, Captain Cactus
It’s genuinely very difficult in this active life to listen news on Television, so I simply use web for that purpose, and obtain the most recent news.
Best wishes to all. Love the blog!
I only see 2 things I might question:
1. “with a conservative return of 6%”. So what happens, like, if the market goes down?
2. CC is 36 and let’s say retires in the projected 4 years, so at age 40ish. The 4% rule thingy is based upon 25 years, so that get you to 65. Then what?? Pension helps for sure, but geezle if you get downside in the market in the first few years, this could be a debacle.
Not trying to be a downer, but the markets ain’t gonna go up forever.
1. 6% return is a conservative estimate over the long term. As I mentioned, since his time to retirement is only 4 years, market fluctuations could lengthen or shorten his time to retirement. He will have to plan to work a bit longer while the market recovers if it goes down.
2. The 4% rule is based on simulations of the market over a 30 year period, with a 95% success rate. If you’re looking 40-60 year period for early retirees, 0.95*0.95 = 0.90. You’re right, a downturn at the beginning of your retirement period could really hammer your portfolio. That’s why we advocate keeping a 3-year cash cushion to hedge against this.
“Realistically, as he pays off the mortgage, the monthly payment of $1675 should go down, reducing his overall spending costs.”
Say what? I’ve never heard of a mortgage for which the monthly payment is reduced because it is paid off. Makes no sense whatsoever. Although there are adjustable rate mortgages, he stated his was fixed. I think you need to research how a mortgage works.