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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
- $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.
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!”
|Debt:||-$12,500 + 3.5% interest|
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):
|2018||$265,000.00||$107,000.00||$22,320.00||$394,320.00||Car loan free! Savings goes up $12k|
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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