We met Ted and Claire Carr from the FIREwalkers website at FinCon#19. They were one of the first people we met at the “bloggers” meetup, and it was so wonderful to connect with such a lovely, fun couple. After chatting for a few moments, Ted told…
“How much money do I need to retire?” is a question most 20- and 30-year-olds rarely ask themselves. Sadly, many 40- and 50-year-old Americans these days still could not think of retirement, for they are too preoccupied with debt repayment.
Since you are reading this article, congratulations. You are one of the few who are enlightened enough to realize that you might retire broke and care enough to do something about it before it is too late.
Use the tips below to have decent retirement savings when you hang up your gloves, despite being heavily indebted now.
1. Prioritizing Rainy Day and Emergency Funds
In personal finance, there are three nest eggs you have to think about – the rainy day, emergency, and retirement funds. Setting aside adequate amounts for the first two matters because they keep you from relying on debt whenever you encounter any unexpected expense.
Being unprepared for rainy days and financial storms makes it so much harder to save sufficient money to retire on.
2. Use a Retirement Calculator
Building up a retirement fund is a journey. Without a clear destination, you will get lost.
Do the math to figure out the amount of money you need to have when you want to retire. Time is a major factor, for it gives you a sense of perspective. The folks at MedAlertHelp agree that savings goals vary by age, so chart your own course based on how close or far you are from your target retirement age.
3. Take Advantage of Automated Savings Plans
When beefing up any form of savings, micromanagement usually does not work. Convenience is the key, which is why you should adopt automation as much as possible.
The use of savings apps allows you to increase your retirement fund without any intervention on your part. The barrier to entry is so low that you can get started with just $5.
The real beauty of it is that it will guarantee consistent contribution, and you will not feel its impact on your pocket. Tiny deposits add up over time, so you can have a sizable money stash when you reach full retirement age without experiencing cash flow problems along the way.
Use the same strategy with your 401(k) plan to lessen the psychological pain of saving.
4. Stop Digging a Deeper Financial Hole
Let us address the elephant in the room – debt. It is not necessarily evil; in fact, it is a tool to improve your way of life. But it could backfire on you if you lack the discipline to manage it properly.
The older you get, the more you should focus on reducing your liabilities. They eat up your budget, weaken your capability to save, and force you to work beyond the usual retirement age in the USA, which is 62.
5. Pay Off Bad Debts First
As you probably know, debts are not equal. Some are more financially damaging. Therefore, the bad ones should be paid off before the others.
What constitutes bad debt? Any debt with high and/or variable interest or that is nondeductible is bad.
High-interest debt does not need any explanation for why it is disadvantageous. Variable-interest debt is unpredictable since market forces dictate its rate, so your installments could balloon whether you are ready or not. Nondeductible debt does not reduce your tax liability, so there is little incentive not to pay it off as early as possible.
The fewer bad debts you have, the more capable you are for driving up your average retirement savings contributions.
List down all of your debts to categorize them accordingly. Debt avalanche and debt snowball are two of the most popular debt repayment methods. Understand how each one works to pick the more suitable strategy for you.
6. Avoid Losing a 401(k) Match
Do you want to know how to retire early? Doubling your contributions while paying just half of them is a winning formula.
If your employer is willing to match your contributions to your 401(k) plan one way or another, find out the minimum amount you can contribute to benefit from this privilege. It would be foolish not to use free dollars.
However, there are valid reasons for pulling back or paying below the match. Increasing your cash reserves or repaying your debts could justify skipping 401(k) contribution, even if it means losing your retirement match. Either decision should not be taken lightly, though.
7. Do not Touch Your High-Return Assets
When trying to pay down as much debt as you can more quickly, it is natural to consider every resource at your disposal. But do not cash out any investment too fast. If an asset provides a return higher than the interest of a debt you intend to liquidate, it would be wiser to keep it invested. In the end, it can help you stay within the ideal range of retirement savings by age.
8. Moderate Your Lifestyle
Reckless spending is one financial vice you should kick. You might have gotten away with it during your most productive years, but when it comes to retirement, a lack of spending discipline will drain whatever savings you have fast.
Before you ask yourself when to retire, you should probably think about what you should give up to achieve your goal. If you have mounting credit card debts, you likely do not live within your means. There is nothing wrong with downgrading your lifestyle when you should not have upgraded it in the first place.
Review your bills and honestly admit which services you can live without. You could indulge yourself every once in a while, but you should rationalize your expenses.
Also, think twice before outsourcing anything, especially cooking. You would be surprised to see how much cash you could keep if you prepare your own meals instead of buying takeouts and eating out regularly.
9. Move Somewhere More Affordable
If you live in a community with a high cost of living, consider moving to any of the cheapest places to retire in the States, like Austin, Texas, or Lancaster, Pennsylvania. You might not be able to find the same salary for a similar job, but you could keep more of your income when most of your expenses go down.
Downsizing your house can make a world of difference too. Unlike land, a house is a liability because it does nothing but take money out of your pocket—unless you can rent out your space.
A smaller property costs less to buy, power, and maintain, so imagine how much money you could save just by moving out of an oversized residence.
10. Stay in the Labor Market a Bit Longer
If you hope to retire early but are still heavily indebted, accept that it is not going to happen under normal circumstances. Instead, use your time wisely to increase your income while you still can.
Thanks to the booming gig economy, starting a side hustle is easier than ever. Determine what you are good at and turn your untapped talents into dollars. Earmark your new stream of income for debt repayment, retirement, or any other purpose that can bring you closer to financial freedom.
Ultimately, “how much money do I need to retire?” is a question with no straight answer. Carrying significant debt as your retirement nears is not an enviable position, but it is what it is. While your sunset years might not seem to be as comfortable as you imagined, there is always a way to make things better as long as you play your cards right from here on out.
This post, and incredible infographic, was brought to you by Dr Nikola Djordjevic, MD (Co-Founder of Medalerthelp.org)
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About The Author
Chris is the founder of Money Savvy Mindset, a blog about personal finance and financial independence. He is also a pharmacist and business owner who has paid off over $100,000 of student loan debt in 5 years. He helps others learn about side hustles, passive income, saving more money, and paying down debt. Click here to learn more.
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The post 10 Tips for Building a Retirement Fund for the Indebted appeared first on Money Savvy Mindset.
Adam is 23 years old and wants to achieve financial independence as quickly as possible. However, he’s nervous about investing in the stock market and real estate. How can he overcome his fears?
Paris, age 35, has a similar question. She earns $150,000 per year, is debt-free, and doesn’t own a home. How can she reach financial independence in less than 10 years?
Paul wants to househack his first home, but none of the properties he’s seen meet the one percent rule. He doesn’t want to rent forever. Does he need to compromise on his commute time, or wait until he finds an undervalued gem?
Anonymous Househacker rents an apartment with three bedrooms, two of which he rents out on an inconsistent, short-term basis. They want to know: does the money they earn count as rental income if they aren’t making a profit on it?
Ben is a real estate investor who’s curious about growing his portfolio from four units to 20 units. What’s the best approach to take?
I answer these five listener questions in today’s episode. Enjoy!
Adam asks (at 02:30 minutes):
I’m 23 years old and earn $41,000 per year as a music teacher. I side hustle on the weekends as a bartender. I’m on track to pay off my student loans this year, my emergency fund has 2 months of savings (a little over $4,000), and I contribute $300 per month to my Roth IRA.
What can I do to accelerate towards financial independence? I’m nervous to invest in the stock market because it’s new to me; I don’t want to invest in something I have no knowledge of. I feel like I’m too young to invest in real estate, and I don’t have enough knowledge of that, either. Do you have any advice that can help me feel confident with investing?
Paris asks (at 20:38 minutes):
I’m 35 years old, debt-free, and do not own a home. I earn $150,000 per year at my new job, and I’m excited to save more money on this higher salary.
I know I’ll reach financial independence in 10 years if I continue on this path, but I don’t want to wait that long. If you were in my shoes, what would you do to achieve financial independence in less time?
Paul asks (at 35:53 minutes):
I want to buy a two-bedroom condo in Northern Virginia. I plan to live in one bedroom and rent out the other. However, none of the homes in my price range that have a reasonable commute come close to meeting the one percent rule. Should I keep searching for an undervalued gem? Or should I compromise on my commute?
Additionally, since Amazon’s HQ2 announcement, housing prices have already increased. I’m afraid that I’ll get priced out of this area if I wait for an undervalued gem to come on the market. On the flipside, there’s increased potential for capital gains because of HQ2. Should I give any weight to this?
Anonymous Househacker asks (at 53:19 minutes):
I rent a three-bedroom apartment for $690 per month, and pay around $100 in utilities per month. After my two roommates moved out, I decided to try househacking. I charge $500 per month for roommates that stay with me on a monthly basis.
On average, I have one roommate a month. There are months I have two roommates, and months where I have none. Since I’m not making a profit, do I need to pay taxes on this income? Would this even be considered rental income?
Ben has a financial independence story and a question (at 01:01:18 minutes):
I’m a former property manager who moved from California to Cincinnati to start a new chapter. After moving, I bought a 4-plex for $48,000, put $100,000 into it, and rehabbed it myself. I did a cash-out refi for $266,000, and now I’m financially independent and semi-retired.
I want to repeat this process for more cash flow. How can I grow my four units to 20 units?
- Adam’s Question:
- The Simple Path to Wealth, by J L Collins
- Paris’ Question:
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I’m wearing my Betabrand pants on a flight – they’re that comfortable!
Retirement isn’t always an easy transition. After the initial honeymoon period, many retirees become bored, lonely, and even depressed. That’s understandable especially if you’ve worked your whole adult life and built your identity around a job. Work gives you structure, goals, social outlet, a sense of belonging, and income. On the other hand, retirement is totally unstructured. You have to define your own goals and figure out what to do with your time. This can be jarring if you aren’t prepared. Early retirement is similar, but a bit different, too. Early retirement is harder financially because the time in retirement is much longer. On the other hand, it’s easier in other ways. Early retirement means you haven’t worked as long so you’re not as settled into a structure. Also, early retirees usually yearn for more freedom and autonomy. Most FIRE folks chafe under the yolk of structured work. We prefer to define our own goals and work at our own pace.
One question I often get is – how do you know FIRE is the right move for you? The thing is, I didn’t know. I knew I hated working in a corporation. I figured I’d retire from my engineering career for a while and see how it goes. Luckily, life improved immensely and I’m still retired after 8 years. On the other hand, some people retired early and it didn’t work out so well. They found that early retirement isn’t quite the right fit for them. So, how do you know if early retirement is right? I came up with 3 indicators that can show you. If you hit all these, early retirement probably will work out very well for you. If not, then you might need to rethink early retirement.
Net worth should increase
My first indicator is a financial one. Early retirement is a difficult financial proposition because the time in retirement can be very long. I retired when I was 38. I could have 50+ years of retirement ahead. Also, I only worked full-time for 16 years. That’s not a lot of time to save up for 50+ years of retirement. In contrast, traditional retirement is more balanced. People usually work for about 40 years and retire for less than 30 years. That’s much easier than early retirement.
Since the retirement timeline is so long, how do you know you’ll have enough money to last the whole retirement? The FIRE movement has a good starting point with the 4% rule, but 25x expense isn’t quite enough. The 4% rule is meant for a 30-year retirement period and conditions have changed since that study was completed. It probably won’t work for 50 years of retirement.
I started with the 4% rule, but I modified it.
- Your net worth should keep increasing until you’re 55.
This resets the withdrawal period to about 30 years. The 4% rule should work much better then.
My withdrawal strategy
We can take a look at my early retirement withdrawal strategy for reference.
This is how I planned for early retirement. We saved and invested a large portion of our income before I retired at 38. Our net worth increased sharply when we both worked full-time. After I retired, we saved less and our net worth increased at a slower pace. We’ll start drawing down sometime between 55 and 65.
This is different than traditional retirement. Normally, there are just 2 phases – accumulation and withdrawal. Early retirees should insert this extra phase into the curve. I call it the holdfast phase. Your net worth needs to keep increasing until you’re near the traditional retirement age. This makes the timeline more reasonable. The withdrawal phase will be 30-40 years, similar to traditional retirement.
How do you increase net worth after retirement?
There are many ways to increase your net worth after retirement. Here are some of them.
- Lower the withdrawal rate. If you set your withdrawal rate to 2%, your net worth probably will keep increasing. Most years, your investment returns will be better than 2%.
- Work part-time. Most people assume you shouldn’t work at all after early retirement. That’s false. Work is great if you can do it on your own terms. If you can find work that you enjoy, that’s way better than doing nothing. Coincidently, it’s much easier to find work that you like when money isn’t a big consideration.
- Stagger retirement. My wife still works and this enables us to save. She likes working and she’s not ready to retire yet. This works out very well for us. If you can swing this kind of staggered retirement, then go for it. Next year, she’ll take a year off to see if early retirement is a good fit for her.
- High investment returns. If you’re a great investor, you can cover your cost of living and have some left to reinvest. Unfortunately, I’m a mediocre investor so I focus on living modestly instead.
If you can keep your net worth increasing until you’re 55, then early retirement will be fine financially. Of course, some years won’t be as good. Your net worth might dip a bit when the stock market has a down year, but it should trend up over time.
You should be healthier
This one is a bit of a crapshoot, but you should be healthier after early retirement.
You’ll have more time to take care of yourself when you don’t have to work full-time. You can eat healthy meals, exercise more, and take care of any health issue early. I had many physical and mental issues near the end of my engineering career. My back and shoulders hurt constantly, I had panic attacks, depression, and more. Forcing my body to work in a job I loathed screwed up my health. After I retired from my engineering career, I took better care of myself and my health improved tremendously.
Of course, you can’t defy time. Most of us will have more health issues as we age. One recent retiree (reader) developed lupus and this is going to derail her retirement. If I developed a serious chronic health issue, I might have to think about going back to work, too. Healthcare is a huge problem in the United States.
You should be happier
Lastly, you should be happier after early retirement.
This one is subjective, but you should be able to judge your happiness. Most people are very happy in the initial honeymoon period of retirement. The question is whether your happiness continues to be high. Surprisingly, many people are happier working than being retired. I think this largely depends on your personality. Some people just enjoy the structure and objectives that work provides.
Many traditional retirees have a difficult transition, but they don’t have a choice. They can’t go back to work anymore due to age and various other reasons. Early retirees still have a choice. We could go back to work if early retirement doesn’t work out. That’s why I didn’t hesitate much in 2012. If I had a hard time with early retirement, I’d have gone back to work after a year or so. In a way, this is a good thing to know early. If you find that retirement isn’t a good fit, then you can keep working for as long as you can.
Luckily, early retirement has been great. I’m much happier since I retired from my engineering career. The SAHD/blogger lifestyle is a great fit for me. I have complete autonomy and I could work at my own pace. I love it. The SAHD part of it was tough early on, but it improved a ton after RB40Jr started school. Now, the SAHD part takes very little time and effort during the school year. It’s a bit harder when he’s out of school in the summer, but even then it’s not bad. I cut way back on blogging and take it easy in the summer, too.
3 indicators of a successful early retirement
Early retirement is a big transition. If you can keep getting wealthier, healthier, and happier, then early retirement will be very successful. Unfortunately, I don’t think anyone really knows how it will go. You’ll just have to try it and see if early retirement is a good fit. That’s why we plan for Mrs. RB40 to take a year off in 2021. She can test drive the early retirement lifestyle and see if she likes it. If she doesn’t like it, she can always go back to work. One year really isn’t that long.
Alright, what do you think? I’d love to hear from some early retirees. Are you hitting these 3 indicators?
Image credit Victor Freitas
FIRE for One curates this week’s links, with picks from A Family on FIRE, Strong Money Australia, Burning Desire for FIRE and Life Long Shuffle. International features from Rich & Regular, Women Who Money, Bitches Get Riches and Our Next Life.
Before we dive in to this week’s post, I wanted to mention that I was a guest on one of my favorite podcasts last week: Jamila Souffrant’s Journey to Launch.
I’ve been listening to Jamila’s podcast for while and it was such a cool, surreal experience to get to chat with her. (Though like everyone else, I hate the sound of my voice, so I had to listen to the episode in five minute chunks before hitting pause and berating myself for sounding the way I do, and for letting inane thoughts fall out of my piehole.)
Jamila and I talk about financial independence (what else?), specifically digging in to whether financial independence is possible for everyone and anyone, education, debt, and a lot more.
Here is the link to the episode. And if you’re not listening to Jamila’s show yet, go ahead and add it to your podcast rotation. You won’t be sorry.
I like taking stock. I’m a planner, and Mrs. Done by Forty is, too. We like going over our plans together, and seeing how we’re tracking towards the goal.
As we’re approaching our financial independence number (or perhaps we’ve technically passed it if we use the 4% rule) I keep stumbling on things that cost money, but aren’t ever part of our annual budgets or our savings figures.
Like the yet-to-be-named MC Baby. We’d like to set up a savings account for this yet-to-exist little human. But how do we account for that with the 4% rule? It’s not in this year of spending or savings, or any year, for that matter. It’s just a one-off expense, and a big one: we set aside $40k for Baby AF’s college fund (expected to grow to over six figures by the time eighteen years of compounding works its magic). So our plan is to set aside another forty thousand for MC baby, too.
And there’s that 13′ Scamp fiberglass camper we keep talking about: the thing we’d like to take out on long weekends and summer vacations with the kiddos, heading to state parks and camp grounds, maybe even boondocking on BLM land a bit. But even used, they’re not particularly cheap: we’re looking at anywhere between $10k used and nearing $20k if we wanted to buy new.
And while we’re fine making one car work for now, our still-to-be-formed plan for perhaps both of us working in financial independence might mean that two cars makes more sense. If I substitute teach, there are likely schools I can’t bike to easily (and for part of the school year, that ride home in the afternoon would be pretty miserable). I’d also like to take Baby AF and MC Baby to daycare, or to pick them up, too: splitting up the extra labor & commuting that is currently falling only on Mrs. Done by Forty.
(For those who care about this sort of thing, we’re eyeing a downright luxurious vehicle: a used Lexus RX350, with a tow prep package to pull that Scamp around. We’re debating all wheel drive, as we aren’t sure how likely it is that we actually head out on dirt roads to BLM land. Still, even in the years we’re looking at, between 2012 and 2015 with low miles, we’re probably looking at $15k or $20k for this second vehicle.)
Anyway, that’s a whole lot of extra spending that isn’t technically in our “FI” number, which is based on past spending.
When we consider the future spending that isn’t technically in any of our past years either, things like a new roof, new appliances, and hitting our out-of-pocket maximum for medical expenses once in a while, it gets easy to see that pining down a specific financial independence number is tricky. All I know is that it’s probably higher than we originally were planning for.
We’ve all had our caffeine by now, yes? Let’s do a little math.
Our spending is projected to be around $35,000 now that we don’t have a mortgage payment (it was around $50k before, with the mortgage)
If we round up to $40,000 for safety, and use the 3.5% safe withdrawal rate instead of 4%, that means our FI number would be….$1,142,847.
Phew. Deep breaths.
But that just covers our average annual spending. What if we want to add in all the one-off expenses that we’re aware of:
$14,000: Remaining amount for Baby AF College Fund
$40,000: Remaining amount for MC Baby College Fund
$20,000: Second vehicle (want to account for additional insurance, maintenance, etc.)
$15,000: Scamp (TBD whether we actually want this thing)
$15,000: Miscellaneous extra cash for medical, appliances, etc.
That’s $104,000 in ‘extra’ money we’d have to pile up, in addition to our FI number. Mother fucking yikes. Even at our fairly ridiculous savings rate, that’s going to take some extra time to save up.
When I look at the goal we’d initially set up, to hit financial independence by forty, I often feel a lot of pressure to finish on time. In one way, we will have, I guess. When I set up the goal, it was under the assumption we’d use the 4% rule, not 3.5%. And under that original assumption, yeah, we’ve hit the goal. And that’s cool.
But we also moved the goal posts…a lot with that stupid half a percent. It means we’ll need an extra $143,000 invested for the safety that half a percent allows for. (Cue the PF bro critiques telling us that 3.5% is somehow both too risky and too conservative.)
Add in an extra $104,000 for the things we’d like to save up for while we still have our high household income, and, you know, I don’t think we’ll necessarily have that all wrapped up by the last day I’m forty. I might need to stay at the stressful job a bit longer to ensure we have the college funds topped off and the second vehicle we want. So there I’ll be, working past forty.
And cue the feelings of failure. Public failure.
I know I shouldn’t really care that much about hitting arbitrary goals, especially when they originated on the back of a napkin by some thirty two year old who didn’t know a whole lot about the subject.
Still, if given the choice, I’d rather succeed than fail. Who likes failing?
There are some neat alternative paths to get to these goals, though, if we get creative.
If Mrs. Done by Forty gets hired on permanently, and I end up wanting to earn a bit of side income in some second act career, I suppose we could just embrace that we did hit financial independence, that we really are FI and met our goals, and then we can say we’re using our income to save up for the little luxuries we’d like to enjoy in this second act of ours. Fancy college funds. Fancy cars. And a decidedly not-fancy fiberglass camper that we squeeze four humans and one adorable farting golden retriever into for camping trips.
I like that idea. We can claim a little victory, feeling like we did what we set out to do, and then deciding we’re working at things just because. Just because we want to.
Internet retirement police will probably not like it, for sure. There will be finger wagging and pointing to jobs (jobs!) as proof that we did not really retire. They’ll say we’re failures and frauds and be out to deliver their righteous internet justice.
But let’s see if they can catch us in our fancy car. It has two hundred and seventy horses, and I bet it goes pretty fast, even with a little scamp in tow.
Thanks for reading, as always.