Phew, so after the crazy few last few weeks, we finally got some time to sit down and read our e-mails. And now that it’s Friday, you know what that means!
Reader case time!
Today’s reader isn’t your stereotypical FIRE candidate. He’s only 27 years old, doesn’t have an engineering degree or a 6-figure salary, and is bascially your typical Millennial. Will he be able to retire early? Or will he prove the Boomers right that as Millennials, we’re all doomed?
Let’s find out…
“Hoping to get some input on my current financial situation. I’m 27 with a college degree. Working full-time, but hoping someday to retire early. I see myself changing careers within the next 5 years. I live with my girlfriend. She is in school and works part-time, so she doesn’t make much. Thus, I haven’t included any of her information here. She is in student-loan debt and has two more years until graduation. She only has about $7,000 in student loan debt. When she finishes school, we would like to travel, perhaps teach abroad.
Currently I am learning how to trade on Robinhood and am learning a lot. I have also thought of learning coding through one of those “bootcamp” sites to perhaps start a new career. Here is my current financial situation:
Gross Annual Income: ~$56,774.40
Net Annual Income: ~ $31,787.04
Monthly Spending: ~ $1,120.00
– Rent: $600
– All Utilities + Internet: ~$125
– Groceries: ~$125
– Climbing Gym: $50
– Home and Auto Insurance: ~$90
– Entertainment (out to eat, drinks, movies, etc.): ~$130
Debts: None (As of this month, student loan-free)
– Personal Car: ~$2,800
– Other Assets (computer, furniture, electronics, bike, etc.): ~$1,000
– Cash: ~$15,000 (at a credit union, a growing emergency fund, thinking of transferring some out to an investment account [Vanguard? Or put additional into deferred compensation plan, see below])
– Stocks: ~ $2,500 in Robinhood
– Retirement Accounts:
o State Employee Retirement Plan (similar to 401k):
– Total: ~6,000 – deductions are 6.7% pre-tax (around $155 per paycheck).
– State also puts in 6.7%, but only get to keep if you stay in State service for 5 years (currently have 2.5).
o State Deferred Compensation Plan (457b):
– Total: $6,331.69 – $500/month pre-tax (deductions can be made pre- or post-tax. You choose how much to deduct). Current investment portfolio is mixed:
• Large Cap (US): 55%
• Mid Cap (US): 20%
• Small Cap (US):15%
• International: 10%
– HSA: ~$436 (deductions are pre-tax, around $114 per paycheck [max contribution per year]). Can keep all money even after leaving State service.
Cryptocurrency (several types): Currently worth ~$1,000”
Okay, so right off the bat what jumps out at me is his taxes. Even though he’s making an average salary, he’s paying $24,987.36 in taxes? That’s a 44% tax rate! Even if he lived in a high-tax state like New York, there’s no way he would be shelling out that much with a salary like that.
This means he’s likely forgetting to include his contributions to his retirement plan, 457, and HSA as part of his net income.
Taking those into account, that’s an additional $12,456/year of income, which makes his tax rate a much more reasonable 22%.
I’ve also noticed that even though he doesn’t have a high salary (which is probably why he’s looking to switch careers), his monthly spending is one of the lowest I’ve ever seen! Plus, he’s only 27 years old and debt free so there’s tons of time for him to supercharge his salary and investments!
Will he be able to retire early? Is he doing well for his age even with a lower salary?
As we always say on this blog, let’s MATH SHIT UP!
|Net Income:||$31,787.04 + $12,456 (tax-sheltered contributions) = $44,243.04|
|Expenses:||$600 (rent) + $125 (utilities + internet) + $125 (groceries) + $50 (gym) + $90 (home + auto insurance) + $130 (entertainment) = $1,120/month, or $13,440/year|
|Investible Assets:||$15,000 (cash) + $2,500 (stocks) + $6,000 (retirement accounts) + $6,331.69 (457b) + $436 (HSA) + $1,000 (crypto) = $31,267.69|
This means his savings rate is $30,803.04 / $44,243.04 = 70%! Wow, that’s AMAZING given his net income. That’s as much as our savings rate during our best years!
With this spend level, using the 4% rule, he would only need $13,440 x 25 = $336,000 to become financially independent.
This means, at a conservative return of 6% per year over the long term, he will be financially independent in…
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
Just under 8 years!
Now, in this scenario, we haven’t included the state match of 6.7% on his pre-tax salary. That’s because he’s planning to switch careers within the next 5 years, so we don’t know whether he’ll move to another state.
If he does decide to stay for another 2.5 years (he’s already accumulated 2.5 out of the required 5 year stay), he’ll get an additional 6.7% x $56,774.40 = $3803.88 per year. $3803.88 * 5 = $19,019.4 total.
So if we add in the employer matching in 2.5 years, we get:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
He’ll get to FI in slightly less than 7 years!
Since 27YOI has already spent 2.5 out of 5 years in state, it makes sense to ride out the next 2.5 years to get the retirement plan match from the State and add more than 20K to his net worth.
So overall, he’s doing amazingly well, and on track to increase his salary by learning to code and getting his investments in order.
Let’s take a look at his investments:
He’s very aggressive with a 100% allocation in equities—split between 90% US and 10% international.
Given that he’s in the accumulation phase and only 27, it does make sense to be more aggressive, but if you’ve never lived through a market crash, you need to really be sure you can handle the drop when (yes, I said when, not if) the correction comes.
In addition to this, he’s also invested in cryptocurrencies. Now, you all know how we feel about Crypto, but given that he’s only invested $1000/$31,267.69 or 3.2% of his net worth, that’s within a safe range. As we’ve said before, if you want to invest in alternative assets, keep it within 5% of your portfolio to keep it from blowing up your finances.
So given his numbers, his age, and his willingness to learn new skills, he’s in a great spot and will be on track to become FI when he’s just 35 years old.
What I love about this reader case is that it proves that, even if you live in an expensive country like the US, don’t earn a 6-figure salary, you can still be on track to FI within 8 years, by making optimal choices with your spending. And if you’re young, learn to invest and get into the market as early as possible so your money can compound for as long as possible.
What do you think? What advice would you give to 27YOI?
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