Retire at 50, 40 or Earlier? How?

Author: PaZoo
About 10 minutes read.

DISCLAIMER: Author makes NO representations or warranties with respect to the accuracy or completeness of thee information provided. Please also note that the author is not a tax or financial professional and DOES NOT guarantee to produce same result or success by following this article. Further due diligence or consultation with a qualified tax professional and financial advisor are recommended.

TL;DR - Be frugal, do your book-keeping and track your expenses, allocate a portion of your take-home income for retirement and keep it up for 15+ years, and most important part, start early, allocate larger portion in early stage, carefully pick a rate of return in your tolerated risk level, and commit to it, seriously. You will be amazed by compound and time.

I have heard about this term retirement from time to time from friends, colleagues, family members, and others, however, what I really learned for myself the most boils down to one question:

Am I in the condition and position to do what I love/like?

Today, it is common for people to have one or multiple retirement plans (see IRS exhausted list for Types of Retirement Plans) and the most common ones I have heard are 401(k)/403(b), and IRAs. In addition to qualified/non-qualified retirement plans, some people will also have assets (e.g. cash/savings, real properties, investments), and other income stream (e.g. Social Security benefits after attaining the age of 62/65 ), or an ongoing business that generates income as business owners or stockholders. So if I ask myself, can I retire, I am in fact looking for financial independence with a balance life style. I heard about this concept of Financial Independence, Retire Early (FIRE) from the 1992 best-selling book “Your Money or Your Life” by Vicki Robin and Joe Dominguez, and also from Mr. Money Mustache blogs when he retired at the age of 30 with a frugality life style, and it occurred to me to do a calculation of my retirement plan and review my current book-keeping and income stream, and life style.
Note: The numbers only apply to myself and lifestyle in 2019, and it varies case by case. Your milage may vary.

Net Spendable = your Gross Income - ALL expenses (liability) and Tax-owed

In Case 1, I ended up ~$3,344.11 net spendable income after tax and expenses. I paid off my car so there is no auto-loan. But you get the idea, list out all the expenses, and make sure you do calculate the taxes to derive the net spendable income.

Case 1

In Case 2, I ended up with renting my place instead of owning it. I ended up with ~$15,5000 more net-spendable income comparing to Case 1 that I could utilize.

Case 2

I have controlled my personal expenses around $3,000 and budgeted it for social events, dining out, etc. When it comes to travel, I allocate the budget 1-2 years ahead of time which I could accumulate to ~$2,400 by putting $100-$200 per month aside.

Now, the problem I have here is that if I quit my job, my income is $0 but my expenses still exist. They won’t go away unless I move back to live with my parents to save rent and food, share utility bills, etc., but I still need to drive my car and 3rd party liability insurance is required (California Compulsory Financial Responsibility Law). Eliminating expenses is one way, however, there is no additional (passive/active) income stream. On the other hand, I won’t be able to contribute to my Social Security credits (QC) later when I reach 65.

Ask yourself, can I eliminate all expenses and liability without becoming a cave person? @.@

I can’t (╥﹏╥) 😆😂 I need Internet to write and post this blog, and a phone to be reachable, and if you are reading this online, I guess the same? ... 😅

If I am able to follow FIRE mentality or the 30/70 rules by putting in 70% of my net-spendable income and invest in my future on a tax-advantage/tax-deferred account, I can apply a simple Future Value of Periodic Payment using compound interest calculation including inflation (you can also apply other indexes e.g. Consumer Price Index, cost of living, etc.) and salary raise annually to take a look how my investment “could be” in 25 years.
NOTE: Whether the retirement account has accumulated enough depends on where you live (cost of living), and how you would use it (your life style). I also took a 0.5% (already includes a 2% inflation rate) annual salary adjustment into account so the periodic payment increases annually so the outcome is higher if you apply a standard Future Value Periodic Payment calculator online.

The gross income ~ $65,500 applied comes from California household income between 1990-2018 and the spreadsheet simulates different scenarios. The net spendable income here deducts expenses (utilities, phone bills, gas, auto insurance, etc.), taxes (FICA, Federal, CA State), rent (no mortgage, just renting) and some personal expense (clothes, food, etc.). The spreadsheet applies 2 types of Return on Investment (ROI) per year, 4.5% and 7%, with different investment allocation from the net-spendable income. Couples net-spendable income are doubled with additional expenses and assume ~$10,000 per year are reserved for emergency fund.

Note: The rate 4.5% and 7% are hypothetical here and for educational purpose only. Whether a guarantee rate of investment applies depends on what you choose for your investment. It could also be a variable rate. Here, we use fix rate for simplification.

Comparison of investment funding and ROI rate

For those that are not familiar with numbers, I will simply put it in the following words to interpret this table.

• Rate of Return does play a big role in compounding. The green link shows the difference between rate 4.5% and 7% on your investment with the same investment amount. It is almost ~50% different over time.
• Allocate larger portion in early age into my retirement account yields higher ROI. The pink link shows ~32% more in ROI with similar investment amount. (A qualified retirement plan with elective deferral can also boost your capital with pre-tax $).
• Time is your enemy here. Start early. If you try to catch up in later age, you end up paying more but yield the same results as if you could have invested in an earlier age. The orange link shows the same return at the end but you end up putting in ~18% additional capital.

When I started this, the most challenging thing I encounter is - where did my money go?
Make sure you do book-keeping as a good habit, it really shows me how I spend my money and the do’s and don’ts (to be frugal). It has also been a mental shift as well and I am happy with the modest lifestyle. Another thing I realize is that consumer products I thought they could preserve values actually cannot. You can pick something like that and try to sell them online and see how much you can recapture from your original purchased price. Yikes.

I hope you enjoyed this article and shed some lights on how I do budgeting, book-keeping, and planning for my future retirement. The concept here does not only apply to retirement but also savings for certain personal plans/projects/financial goals. The key concepts I am stretching boil down to Future Value (time value), Periodic Investment/Payment (commitment), and Compound Interest (time). For those that notice I invested my income in tax-deferral or tax-advantage accounts, I can share what are those in another post to understand how tax impacts these numbers which are huge! But I will leave that to a different post since that is more on tax planning. Since you have made it so far, I will also share you something I noticed. When you get older (as we all do), health insurance and health care expense are something you do need to consider. Don't forget, when you retire, there is still a long way to go (e.g. 65-87 is 22 years, 50-87 is 37 years, etc. you get my point 😉) and these expenses only get more expensive.

Disclaimer

This article is provided based on individual knowledge only and SHALL NOT be construed as investment, tax, or legal advice nor individualized recommendation or advice as well. Author makes NO representations or warranties with respect to the accuracy or completeness of the information provided. Information is based on current laws, which are subject to change at any time. All numbers and data applied in charts are hypothetical, and data that are obtained from historical records or past performance do NOT guarantee future results or success, nor producing similar results. You shall perform further due diligence and consult with a qualified tax professional, and financial advisor for guidance regarding your specific financial situation and need.

References

Compounding - https://www.investopedia.com/terms/c/compounding.asp Future Value - https://www.investopedia.com/terms/f/futurevalue.asp Retirement - https://en.wikipedia.org/wiki/Retirement Types of Retirement Plans - https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans S&P 500 Historical Data - https://www.macrotrends.net/2324/sp-500-historical-chart-data Real Median Household Income in California - https://fred.stlouisfed.org/series/MEHOINUSCAA672N