FIRE. Not the kind that burns things, but Financial Independence, Retire Early.
So, I’ve done the math, and at the time of writing this, I could actually retire before I’m 28 years old.
Now before you start to think I’m just some tech or finance guy making a million bucks a year and that’s how I can retire that young, I’m actually not… I make 64k a year and I’m 20 years old.
I don’t come from a rich family… in fact, I grew up extremely poor. My parents never gave me any money, hell, I lived in a homeless shelter for 2 years growing up. So you might be asking, how do you plan on being able to retire so early. Are you going to pitch me some get rich quick scheme or something? Or let me guess, you’re gonna sell me your course for $500 on how to make money online, right?
No. The answer is actually quite simple. I just need to save 70% of my income, and invest the rest. I spend about $1,500 a month, but sometimes less, and I save the rest of my money. I’m a software engineer, making a little over $64,000 a year. That’s not even great for a software engineer, but I’m only 20 years old and never went to college, so not only do I not have any student loans to pay off, but I’ve had an extra 4 years head start to make money. By the time my peers are 22, graduate, and start looking for a job, I should have roughly $80,000 saved, assuming I don’t get any raises that allow me to increase my savings rate, and also assuming I don’t get a new car or something, or lose all my money gambling in the stock market.
Compare that to the average 22-year-old college graduate who will be $32,731 in debt, paying a 5.8% interest rate on that debt.
I’m not necessarily recommending that you don’t go to college, by the way. The main reason I’ll be able to do this is because I save 70% of my income. Now this won’t allow me to ball out on new expensive toys and vacations all the time, so the truth is I will probably work longer than 28, but I think it’s important to have the ability to retire, if I wanted to. That’s the FI part of FIRE.
I’m kind of like most people, I don’t really enjoy work, I mean, it could be worse, but ask yourself: If you weren’t getting paid to go to work, would you still do it? If the answer is yes, then congratulations, you’re either lying to yourself or extremely lucky. According to some random study I found online – 85% of American’s are “unsatisfied” with their jobs.
If you’re part of the 15%, maybe this isn’t for you, but maybe it is. You can enjoy your job, but still want the freedom to not have to rely on it to pay your bills.
So let’s just assume that you would rather be doing something else, or have the freedom to do something else, or even just only go to work for 10 hours a week instead of 40. Whatever the reason, I think everyone would love to have more money; at worst, it gives you more options in life. So, you want to retire early too? You might be asking, what do you plan on doing, how can I get there, how is it even possible, and why does no one talk about this if it’s so good? I’m going to answer those questions for you.
First of all, what do you plan on doing once you’re retired. What will you do with all that free time?
That is honestly the stupidest question to me. Whatever I want to do, duh.
But for real, go camping, climb a mountain, write a book, create a software as a service company. Play video games all day, watch 100 movies, go to the gym, spend quality time with my friends, start reading again, watch YouTube videos for an entire day, make my own video game. Like, even if some of these things would get old, the main thing is that they are all things I would enjoy doing way more than going into work and programming someone else’s project all day. Even if I wanted to continue working, guess what… I could do that… the worst case scenario here is that I have a lot of extra money to spend on whatever I want… doesn’t sound so bad.
Some of these things are actually productive things, like creating a software as a service company or making a video game. Some of the things are not productive one bit, like playing video games or watching movies all day. The reality is that I would do a mix of all these things, but it doesn’t matter, as long as it’s better than being confined to a set schedule and having someone else tell me where I have to be from 9:00am until 6:00pm 5 days a week.
Ok, so as you can tell, I don’t really like my job all that much, but here’s the thing:
- I actually have a super chill boss
- Work is super lax, I get to work from home sometimes if I want (update: I guess so does everyone now because of Covid-19)
- My commute is awesome since I moved, it’s about a 7-minute drive to work
- I made more than the average American household income at 18 years old
- I sit in an air-conditioned office all day
Objectively, I have a better job than most people, yet I still don’t like it.
It’s that realization that makes me think that I won’t really ever enjoy working, at least not for someone else. If I have an objectively great job right now, and I still don’t like it, I doubt I would ever like a job. But let’s be real, most people don’t enjoy their jobs, that’s why you get paid to do them. Maybe I would enjoy it more if I had more freedom or if I got to work on what I wanted to, when I wanted to. Or, maybe I would enjoy it more if I had some share up the upside. Currently, I just get paid salary, I have no ownership percentage or anything. Those are all things I can investigate in the future.
How can you get there, & How is it even possible?
Well, I can’t give super specific advice because I don’t know your situation, but it’s extremely easy.
You just need to save and invest as much as you can. The higher percentage of your money you save, the earlier you can retire.
If you save every other paycheck, aka 50% savings rate, you can retire in 16 and a half years. If you save just 10% more, saving a total of 60%, you can retire in 12 and a half years. That’s 4 years of working that you can spend doing whatever you want by just saving an extra tenth of your paycheck. This works in 2-fold, because you’re not only saving more, but you’re spending less. So this assumes you will continue to spend that 40% of your income amount once you retire.
That’s the basic way to think about it. I’m using the average returns of the S&P500 here to calculate returns on your money. I could talk all about the numbers, but this page would get far too long, so I will link some other posts and videos that explain everything you need to know about that, and would do a much better job than I would, but the tldr is:
Invest in VFIAX or some other fund that tracks the S&P500 or similar, and you should be able to withdraw 4% and then adjust for inflation every year and not run out for at least 30 years. Depending on how long you need it to last for will determine a safe withdraw rate (SWR). An SWR of 3.5% should last you forever, with an incredibly small chance of running out of money. Even smaller chance if you are able to be flexible with your money and spend less when the market is down and go back to normal spending when it’s back up.
So to calculate how much you need to save in order to retire, multiply the amount of money you want to spend per year by 100 divided by your SRW, and once you reach that amount in savings you can retire.
Let’s say you plan to spend $2,000 a month after you retire, or $24,000 a year; For a 4% SWR, you would need to save $24,000 (Yearly Spending) / 0.04(SWR) = $600,000. 24,000 / 0.04 = 600,000
That’s how much you would need to retire. Change 0.04 to 0.035, and now you need $685,714. Change $24,000 a year to $50,000 (keeping 4%), and now you need $1,250,000. Keep in mind that this is different from having that much as income, since it will be taxed much differently. Depending on how you have saved it (401k, Roth IRA), or even just the fact that long term capital gains are taxed lower than income, you will likely be paying much less in taxes than if you were making $50,000 a year. Now depending on a lot of factors, maybe that $1.25m figure sounds like a lot of money to you, but that’s where compound interest comes in to help out.
Let’s say you save 50% of your income, or $2,000 a month if you make $48,000. You would need to save for 14 years to reach $600,000 at a 7% average yearly return. So if you start at 18, you could retire when you’re 32. 14 years is a long time, but retiring at 32 is still a very early retirement; In America the average man retires at the age of 65, while for women, the average retirement age is 62.
All it requires is living below your means and saving 50% of your income. If you make a lot of money, this is even easier. If I wanted to, I could probably live off of under $800 a month. I would need to get a roommate, which is something I wouldn’t be too excited about, but they say the best time to get a roommate is when you’re young. It’s best to try to strike a balance between spending money on things you actually enjoy and saving money where you don’t mind not having something. Some people like to spend more on food but don’t need the latest car. Some people enjoy vacations twice a year, but don’t mind packing food at home. Figure out what works for you and save where you can. Making yourself miserable to retire a year early is probably not good for your mental health.
There are also many other savings options as well, like buying a multi unit home and renting out the other units while living in one yourself, not buying expensive cars, not going out to eat and drink all the time. Honestly, the biggest problem in my opinion is the car culture in America.
A reliable car is cheap, and you shouldn’t be replacing your car with a brand new one every few years. That is such a huge waste of money. Since I got my car I have spent maybe two thousand dollars on service, replacing fluids, re-aligning the wheels, replacing the rotors and brake pads, and I’ve driven it roughly 30,000 miles. I bought it for $6.5K, and I expect it to last me another 5 years at least. It’s fuel efficient, and it’s a great car. Is it fancy? No, but it was a great financial choice, and it will save me tens of thousands of dollars compared to the types of cars that my peers drive. My sister recently purchased an $18,500 like-new Hyundai Elantra, and the kicker is, she makes something like $30,000 a year. My $6,500 car will probably serve me just as well as her car, which cost her 3 times as much! If I was to spend that much on a car in proportion to my income, I’d need to spend $40,000 on a car! And her car isn’t really all that expensive when you compare it to what some people at my office are spending. Often times, people confuse “status” with “how expensive your car is”.
Here in America, we tend to play this game called “Keeping up with the Joneses”, where we must have the newest car, spend insane amounts on the latest clothes, jewelry, etc., and for what? For social status? To impress people? It’s all so… vain… when you think about it, and it’s a giant waste of money. It might make you feel “cool” for a bit, until someone else gets a nicer necklace, or a more expensive car, and now it’s back to work all over again.
“We buy things we don’t need, with money we don’t have, to impress people we don’t like.”
― Dave Ramsey
You can continue running in the rat race with the rest of them, but at the end of the day, you’re on a hamster wheel; you’re not actually going anywhere, just giving yourself the illusion you’re moving.
Enough of that, back to the point.
From big things like what car you drive, down to the little things like packing your own lunch instead of eating out every day, every choice you make to save money will buy your time back. We only have so much time in life, so you have to ask yourself, is bringing lunch to work to save $2,000 a year worth it to retire 3 years earlier?
I’m not saying you can’t have fun, but I am saying that if people knew how much it would actually cost them, not just in hours worked, but in terms of time it extends their retirement, I think most people would be a little more careful with their spending.
There was a study done on new car owners that asked them 1 year after they bought their car if they would go back in time and NOT buy the car, and 2 out of 3 people said they would go back and not buy the new car! That means 66% of people regret buying a new car after just 1 year. http://press.autotrader.com/2014-11-25-AutoTrader-Survey-Reveals-More-than-Two-Thirds-of-Car-Shoppers-Surveyed-Have-Experienced-Buyers-Remorse
The odds are, that after a few weeks when the initial “wow” factor wears off, you will be in the same position that you were in before, which was not caring about what you’re driving. (unless you’re really into cars as a hobby).
The truth is, after a week, no one will notice your car anymore, and no one will care.
Now you’re 20 grand down and, yeah, you have a new car, but if you’re the average American, you just pushed your retirement down another 3 years.
I’m going on a bit of a tangent with this, so I just want to end off by saying that the principles are pretty simple.
Spend less money, save more money.
That’s it.
In theory, this is simple, in practice, it takes some will-power.
Again, the main things that will have the biggest impact are your home and your car.
Other things that are super easy to change are packing your food from home, switching your insurance provider, and stop spending so much money on useless designer clothes, or a new gaming computer when the one you had worked just fine (looking at you, past self).
I can’t offer specifics, but what I can say is simple: make a budget.
Make a budget, and you will see clear as day where it is that your money is going.
I can not stress this enough, but make a budget if you want to save money. That’s all there is to it, make a budget. Track your spending and realize you’re spending $400 a week eating out, or $140 a month on coffee. Without tracking your spending and making a budget, you’ll never fully be able to realize where your money is going. This is the most important thing you will do in your adult life. Most people work 40+ years to make money, yet only half of Americans actually have a budget to track how they’re spending it. That means only 50% of Americans are tracking what they’re doing with the proceeds from those 40+ years of their lives. That half is the half that will actually be able to retire.
It’s estimated that a quarter of Americans will never be able to retire. https://www.cbsnews.com/news/nearly-one-quarter-of-americans-say-theyll-never-retire-according-to-new-poll/
That’s extremely sad to me. Even if I loved my job, there is so much more to life than working, and these people will live their entire life and die never experiencing any of that.
I guess in summary I just want to say, don’t go overboard, but think about if it’s really worth another 10 years working just to get a slightly bigger house, a new car for a few years, or being lazy and going out to eat instead of packing a lunch.
While I can live off of $1,500 a month, as I mentioned in the start of this post, I will probably try to target something like twice that for my retirement, so I can still go on vacations and have lots of freedom. So something like $3,000 a month, or $36,000 a year, with a 3.5% SWR, means I need about $1,000,000 to retire. With my current savings rate, it will take me about 18 years to get there. Which is far too many years. That’s why I need to increase my income. At $64,000 a year, I am making about what the median household makes in America. That’s not bad, but I could be doing better. I plan on starting my own company to increase my income from $64,000 to… well… as much as possible. I have a bunch of plans, and I am confident in being able to retire somewhere around the age of 30. Hopefully I can find work that better suites my personality, since I clearly don’t like working for other people.