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Another week, another user case! And guess what? This time it has NOTHING to do with housing. *blink blink* Really?
Okay, here it is:
“To start off, we are both 20 years old and on active duty in the US Navy, we have no children nor do we plan to for the next 6 years or so. I found your website doing my usual rounds of early retirement blogs (we have been moving towards that goal ever since we got married about 9 months ago) and right off the bat I was shocked by how similar your situation seems to be to ours. We have a goal of being millionaires by 30 and to retire early in order to travel the world and live on our own schedule.
Our incomes (and projected income growth) also match up almost exactly with yours. Currently we make about $93,000 together (US) before taxes and about $86,000 after. We also get over $230,000 in bonuses next year for the field we are in (nuclear engineering) so by 21 we should be well on our way to $200,000 in the bank and retirement accounts (half the bonus up front and the other half paid over 6 years). Currently we have about $15,000 in after tax accounts and another $20,000 in retirement accounts. We also ‘travel hack’ with credit cards to satisfy some of our travel bug 🙂 my question to you is would you be interested in doing a case study on us for your readers, for example detailing any steps we should take to ensure we can retire by ~35”
–NuclearEngineers
The Breakdown:
• Income: $86,000 after tax/year + $230,000 bonus paid out over 6 years.
• Net worth: $15,000 + $20,000 = $35,000
• Goal: 1 million by 30.
Wow, NuclearEngineers are only 20 years old and they are already making 6 figures/year?! Nice! When we were their age (Oh God, now I feel old), we were still bright-eyed and bushy-tailed, with no idea how hard engineering was about to spank our naive little asses. Ah so young. So dumb.
Ahem…okay, enough reminiscing. Let’s get back to the numbers.
Given that their goal is to reach a million by 30 and travel the world, let’s see if that’s possible.
To grow their current net worth from $35,000 to $1,000,000 with an average return of 6% in the markets, they would need to invest:
| age | savings | net worth (jan 1) | gains (@6%) | net worth (dec 31) |
|---|---|---|---|---|
| 20 | 35,000 | 35,000 | 2100 | 37,100 |
| 21 | 66,850 | 103,950 | 6237 | 110,187 |
| 22 | 66,850 | 177,037 | 10,622.22 | 187,659 |
| 23 | 66,850 | 254,509 | 15,270.55 | 269,780 |
| 24 | 66,850 | 336,630 | 20,197.78 | 356,828 |
| 25 | 66,850 | 423,678 | 25,420.65 | 449,098 |
| 26 | 66,850 | 515,948 | 30,956.89 | 546,905 |
| 27 | 66,850 | 613,755 | 36,825.31 | 650,580 |
| 28 | 66,850 | 717,430 | 43,045.82 | 760,476 |
| 29 | 66,850 | 827,326 | 49,639.57 | 876,966 |
| 30 | 66,850 | 943,816 | 56,628.95 | 1,000,445 |
So by contributing just $66,850/year (or $33,425/year each), they will reach 1 million by the time they are 30 years old.
And since they are making an average of $124,333 after tax (assuming you can use TSPs to shelter your $230,000 bonus), this gives them $57,483/year to spend. Pretty awesome, considering how the AVERAGE retiree Canadian household income is $42,000! $57,483 is enough to live it up! Especially since they plan to keep being DINKs for the next 6 years.
So by putting away $57,483/year, their 1 Million net worth is within reach in the next 11 years.
Now, one caveat to this is that I said the $1 Million net worth is within reach, but to become FI, we need to apply the 4% rule.
And if they want to retire on $1Million, they would need to live on $40,000/year. But on the plus side, if they can live on $40,000/year, they would be able to put aside even more—$84,333/year, resulting in a savings rate of 68%! What does that mean in terms of years to early retirement?
| age | savings | net worth (jan 1) | gains (@6%) | net worth (dec 31) |
|---|---|---|---|---|
| 20 | 35,000 | 35,000 | 2100 | 37,100 |
| 21 | 84,333 | 121,433 | 72,85.98 | 128,719 |
| 22 | 84,333 | 213,052 | 12,783.12 | 225,835 |
| 23 | 84,333 | 310,168 | 18,610.09 | 328,778 |
| 24 | 84,333 | 413,111 | 24,786.67 | 437,898 |
| 25 | 84,333 | 522,231 | 31,333.85 | 553,565 |
| 26 | 84,333 | 637,898 | 38,273.86 | 676,172 |
| 27 | 84,333 | 760,505 | 45,630.27 | 806,135 |
| 28 | 84,333 | 890,468 | 53,428.07 | 943,896 |
| 29 | 84,333 | 1,028,229 | 61,693.73 | 1,089,923 |
That would allow them to become financially independent with a $1 million net worth and retire at the age of 29 (beating us by 2 years!) to travel the world!
So to recap,
1) In order to reach the $1 million net worth goal by age 30, they would need to invest $66,850/year.
2) In order to become FI, retire, and travel the world on $1 million at the age of 29, they would need to invest $84,333/year.
Hear that, NuclearEngineers? If you can live on $40,000/year, you can retire by the time you’re 29, and kick our asses by 2 whole years! Take that, computer engineering. Clearly, nuclear engineering is where it’s at.
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So easy, anybody can do it 🙂
One other important key. Don’t break up!
It might be a better idea for each person to try to amass $1 million instead.
Sam
Very good point. They’re still young, it’s always better to prepare for the worst, even if I hope it won’t happen. When I was 20, I was also in a relationship that lasted for many more years. She’s not my wife. It didn’t end well, but if she left with half million (or the whole), it would’ve been worse…
Totally agree with Sam here. A breakup can totally destroy the dream of early retirement for a couple.
Many people might be able to live off $1million as a couple (using the 4% rule), but as a single person living off half that is far harder. Four percent of $500,000 is only $20k per year.
Depends on your cost of living too I suppose. If you live in an expensive area like Sam or myself, $1million won’t get you very far. In southeast asia, it might be enough for a nice life.
Totally agree. At 20 there’s still a long road ahead in a relationship. The aim should be 1 buck each 🙂
Meh. If they breakup after amassing $1 million, that’s still $500K each. Still much better off than the average 29 year old.
And I don’t think most people get into a relationship thinking “what if we breakup?” Way too pessimistic way of looking at life. I think they have a good chance of staying together, especially since they are in same field–much easier to have things in common, find jobs in the same city etc. I have high hopes for this power couple. 🙂
Excellent post. I love these case studies. They show just how simple and easy it is to become FI. The strange part is how on the same salary people can become FI or be broke.
I agree and disagree with Financial Samurai here. In theory yes both should have everything their own 1M portfolio, but if you are in a loving committed relationship it’s a bit hard to save up double the money you actually need. The second million is easier cause the first million will work for you. But it would be hard to delay FI just because you could split up.
This is something I think of frequently as I work towards that 1M. The reasonis i think of everything in more of a worse case scenario, but emotionally I just can’t do it and I belive we will last.
Your stats remind me of Ben Barkow’s Retirement Cashflow Calculator, courtesy of the Globe and Mail:
http://www.theglobeandmail.com/globe-investor/investment-ideas/article5164626.ece/BINARY/cashflow-calculator.xls
I can’t vouch that it is safe; you click your links, you take your chances; but I have downloaded it (in 2012) and found it very useful.
Fun! Thanks for sharing.
Isn’t 93000 combined income? They say together make 93000….
” $93,000 together (US) before taxes and about $86,000 after…”
$94,000 together is before taxes. I used the $86,000 after taxes + their bonuses.
I’m confused how they can be nuclear engineers in the Navy at age 21. I assume they are officers and if they are they would still be in the academy/nrotc. Enlisted sailors wouldn’t receive a bonus so large being that junior and I am highly skeptical of officers receiving over 100k in bonuses each over 6 years without graduate school.
I dunno. Not familiar with the pay scales of the US Navy. Maybe they fast-tracked through school and have already graduated?
Hey I apologize for replying so late but I never even thought to look at the comments! I am the MR in the above couple and yes we are both enlisted and yes we get those bonuses for re enlisting (putting our total time in the navy at 8 years getting out at 27) the reason the bonus amounts don’t quite add up is I also will be getting back payed sub pay (about 2k) and we get a large chunk of change to move to our next duty station in California (about 5k above what it actually costs us). Also I’m happy to report that our incomes will be skyrocketing in June/July to over 120k combined after tax (not including bonuses) due to ranking up and getting many of the special pays associated with our jobs. So we are really looking at more like 2 million at 30! (Working at a civilian power plant from 27-30 at 300k a year). As far as taxes only a small fraction of our pay is taxed because how the military pays us. And lastly I say nuclear engineers because that’s a relatable term, my official term is Nuclear Electronics Technician and I will be operating the nuclear reactor on a submarine at my next duty station, she is a Nuclear machinists mate and works in the steam plant. If you have any more questions feel free to reply to this and we can talk.
I know almost nothing about US personal tax, so apologies if this is an ignorant question. Are they saying they’re paying $7K tax on $93K in income (as a couple) – ie an effective tax rate of 7.5%?
As a point of comparison – in Ontario, if a couple earned $93K combined – $46.5K each – they’d have to pay almost $15K in income tax, then another $6K or so in payroll taxes, so the government would take around $21K or 23%.
The military pays less in tax but not to that extreme. This story is missing something and does not add up at all. I researched nuclear engineer bonuses and reenlistment bonuses and found none that would remotely suggest receiving over 100k over a few years
They are enlisted, not officers. They get the bonuses for reenlisting and the amounts they get are based on how may years they are extending, their current pay, and a multiple that is used to get them to continuing doing a very demanding job. If they reenlist in a combat zone like the Persian Gulf, all of their bonus is tax free and can go directly into TSP and not count towards their cap.
Actually, I don’t see how they could get the bonus amounts they’ve provided if they’re enlisted. Max is $100,000 each for reenlistment and $12,000 for completing nuclear training. That is a little shy of the $230,000 combined they stated.
So that would be $224,000 combined. That’s not far off from $230,000.
Don’t get separated long term in ur military assignments. You’ll be surprised what happens when one of u is longing physical contact, emotional aspects, someone to just shoot the shit and do things with. It starts off as nothing to worry about, then 6 months in it’s regular activities with ‘someone’ else but nothing to be jealous of, then one of u becomes distant and its over in under a year as they profess their love to that ‘someone’ they met half a year earlier. Don’t worry they will find an excuse why a habit of urs is suddenly intolerable, or they can’t stand parts of ur personality they just didn’t say anything earlier and there is absolutely nothing u can do on ur part to change it.
Experience trumps wishful positive thinking.
5-10 yrs ago it was unthinkable and a person would get harassed for saying that society’s norms would be divorce, just find another person they’re easily replaceable, be independent. But its the norm today for good or for bad.
It’s good to know the reasons why ur together and will be. And not just a continuation of high school sweethearts cause ur whole high school was dating at that time.
Sure doing it at age 40 y’all have to live frugal for another 5-10 yrs while you save more at a job that you love or hate. (You’re looking to retire from this nuclear navy job you love, remember)
I like it! These sort of exercises really do show what’s possible if you stick to the plan and start early.
One of the problems I run into when running these calculations myself is that we know the returns are going to vary quite a lot from that 6 or 7% average, and the sequence of returns are significant. I like calculations that try to account for this (e.g. FIREcalc) just so that people can see that there are a lot of scenarios where you’ll have more than $1M, and some where you have less.
Plus there are the normal caveats that sometimes future costs don’t exactly line up with current costs, blah blah blah.
The most important thing is to get started in cutting costs, budgeting, and investing early. The rest you can pick up along the way.
Great case study!
God, I wish I had my life this together at 20.
Cool story!
Moral to the story as FS mentioned above: your spouse can easily double your earning and savings potential. It can also destroy it. What is impressive is the career path and insight that they have at this age. When I was their age, I was beginning to dig my net worth from a negative five figures to negative six figures! I had no clue how to deal with finances and was sinking my excess loan monies to restaurant tabs with my friends.
I think that they could easily live off even less than $40k a year at that age. This would accelerate their savings rate even more.
First time on this blog, very cool!
I am a bit confused by the fact that the savings of the previous year are added to the net worth on the jan 1. I guess it’s just a simplification and the money should be invested monthly.
I am wondering if that would change the date they reach 1 million by a lot?
Thanks!
Welcome to the blog, Lionel! Yes, you are right that I’m simplifying by assuming they don’t invest monthly, but it wouldn’t change the result by too much. If they invested throughout the year, they might be able to get to their goal a few months earlier, but in the grand scheme of things, not a huge difference.