I've been generating ideas for this post for quiet a while, namely from the depressing nonsense I've seen thrown around our very own interwebs.
Mind you, they aren't directly depressing to me, but rather, they're making me depressed on behalf of other people, because I think people throwing numbers around don't really know what they're getting into.
Let me explain what I mean.
Ridiculous Retirement Savings Targets
All over chat boards (reddit included), I see target "early" retirement / financial independent net worth figures of at least $1,000,000, many 2.5 million or higher. Obviously, throwing these targets around make you sound cool and everything seems achievable, but let's dive into the numbers to see the amount of effort that would require.
Let's say you make 80K a year (even that is generous, hell, the median American salary is somewhere between $57,000 - $59,000 according to the US census: https://www.census.gov/newsroom/press-releases/2017/income-povery.html).
If you are the average American, you invest/save 6% of your saveable income per year: https://networthify.com/calculator/earlyretirement.
At this rate, you would need 282 years to reach $1,000,000 (6% of $59,000 is $3,540, which goes into $1,000,000 about 282 times), and a vast 520 years to reach 2.5 million. Oh, you complain, don't forget my average 4% yearly return on investment. Ok, you're right, let me incorporate that into the calculation: it's only a balmy 64 years to get to $1,000,000 and a quick 86 years to get to 2.5 million... -_-
Yeah. Let's let that sink in for a while...
Still wanna get to $1,000,000 before "pulling the trigger"? (Another term that rubs me the wrong way - why has society defined life as the white and black 'working' and 'not working' buckets - it's never like that anyway).
I think too often, people throw these massive numbers around, and haven't run the numbers themselves.
Listen, I'll give you the benefit of the doubt. Let's raise your salary to CEO levels of 250K per year. With only a 6% savings rate (that means investing $15,000 a year), you still need 33 years to reach that heralded $1,000,000 target.
Even at my own personal cheapo-ass-self savings rate of about 60% per year (investing about $40,000 per year), I still need 18 years to reach $1,000,000, and a whopping 31 to reach 2.5 million. Yes, too often stories are told about the alluring career paths of 30-40% salary upgrades every 5 years. These are paths usually filled with lucky opportunities, that are made out of maybe 1 in every 10,000 workers. Perhaps everyone will think they will get a 10% raise each year. I'm sorry, I think that's a bunch of snake oil. In short:
Unless your savings rate is 90% or higher, net worth targets of $1,000,000 or higher are NOT possible to be included in early retirement plans.
I see many people proudly touting the fact they are maxing out their 401Ks ($18,500 max as of 2018) and their Roth IRAs (a meager $5,500 max) - a total of $24,000 per year. This follows a similar outlook as examples above: 25 years to $1,000,000 and a staggering 41 years for 2.5 million when compounded yearly at 4%. So, if you are one of these 'touters' and think you are on some miraculous road to financial independence and returns will somehow fall out of the ether, YOUR ARE WRONG! If you want a true fast pass to an early financial independence, you'd better think (you'd need to do this anyway since the 401k and Roth withdrawal is at 59.5 years of age - otherwise you're gonna take the tax hit.)
These are not lies, this is not my own smoke and mirrors show. This is pure math of constant yearly contribution with 4% year-over-year returns from this super basic calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm
If you wish to take the normal route, amassing wealth until you hit your big million dollar targets, well, enjoy, you will be 60-80 years old and will be sitting on a massive stack of cash that you won't even have time to use. Pretty dumb. It sounds harsh, but I've laid out the numbers as plan as I could.
Get Real With a More Realistic Target
Therefore, I follow in the footsteps of wise mentor Mr. Money Moustache, and propose a modest (although, as you will soon see, still surprisingly very powerful) new target net worth amount for when you can "quit your job" (again, more on that soon) and call yourself retired / financial independent:
I hear the internet laughing: "600K?!" You all chuckle, "Why, that's just only over half of a big ol' million!" Well excuse me, but with 600K you can:
- Spend 100K per year for 6 years (that's already a ridiculous amount - do you need 2 model S's per year?)
- Live in a nice Brooklyn or NYC high rise apartment for 20 years (this is at 2.5K a month - even in New York, you can get a pretty nice apartment with that price tag) Or, if you live like me (which is why it is my "financial independence" target)
- Live for 25 years on a 24K a year budget.
Let's stop and think about that. 25 years on a 24k budget. It will take me anyway another 11 years to get to $600,000 I'll be 37 then. That means, if I don't do a damn thing for 25 years, my savings will completely run out when I'm 62. But I haven't included a key variable: time. This 25 year figure doesn't include the face that over those 25 years, the money I don't take out of my index funds is still gaining value at 4%, year over year. Let's take a moment and include that fact, and this is where the hidden power of non-million sized numbers and market comes to light:
Year 1 of FIRE: start with $600000 and take out $24000 (assume on january 1st) $576000 @ 4% for 1 year (~$23040 in market gains this year, add to principle for next year) $575040 @ 4% for 1 year (~$23002 in market gains this year, add to principle for next year) $551002 @ 4% for 1 year (~$22040 in market gains this year, add to principle for next year) $526040 @ 4% for 1 year (~$21042 in market gains this year, add to principle for next year) $501042 @ 4% for 1 year (~$20042 in market gains this year, add to principle for next year) $476042 @ 4% for 1 year (~$19042 in market gains this year, add to principle for next year) $451042 @ 4% for 1 year (~$18042 in market gains this year, add to principle for next year) $426042 @ 4% for 1 year (~$17042 in market gains this year, add to principle for next year) $401042 @ 4% for 1 year (~$16042 in market gains this year, add to principle for next year) $376042 @ 4% for 1 year (~$15042 in market gains this year, add to principle for next year) $351042 @ 4% for 1 year (~$14042 in market gains this year, add to principle for next year) $326042 @ 4% for 1 year (~$13042 in market gains this year, add to principle for next year) $301042 @ 4% for 1 year (~$12042 in market gains this year, add to principle for next year) $276042 @ 4% for 1 year (~$11042 in market gains this year, add to principle for next year) $251042 @ 4% for 1 year (~$10042 in market gains this year, add to principle for next year) $226042 @ 4% for 1 year (~$9042 in market gains this year, add to principle for next year) $201042 @ 4% for 1 year (~$8042 in market gains this year, add to principle for next year) $176042 @ 4% for 1 year (~$7042 in market gains this year, add to principle for next year) $151042 @ 4% for 1 year (~$6042 in market gains this year, add to principle for next year) $126042 @ 4% for 1 year (~$5042 in market gains this year, add to principle for next year) $101042 @ 4% for 1 year (~$4042 in market gains this year, add to principle for next year) $76042 @ 4% for 1 year (~$3042 in market gains this year, add to principle for next year) $51042 @ 4% for 1 year (~$2042 in market gains this year, add to principle for next year) $26042 @ 4% for 1 year (~$1042 in market gains this year, add to principle for next year)
Just within the first 5 years of drawing from our index funds, we squeeze out ~$109166 worth of 'extra' of market gains, simply because we didn't draw those funds out during the large majority of time in that 24 year window... indeed, this value of extra per-year market gains really tapers off over the last 10ish years of withdrawal (especially with any years of market downturns), but see the pattern here?!?
Does anyone realize, when you "retire" you don't cash your whole damn index fund to cash!? You're gonna miss out on 25 years of market growth!!
Because you're only cashing out 25K per year. Living frugally is key here.
What it Should Truly Mean to Be Financially Independent
Let me be clear on my opinion of financial independence and early retirement: it is NOT to escape work for the rest of your life!!! It is to ensure an effectively massive cushion so that a human can focus on neat projects, whether extremely difficult, charitable, or creative, and not have to worry about the next pay check.
Because, let's be honest, if you can't find an job opportunity or a new way to ensure income in 25 years, you've got bigger problems than worrying about income in the first place.
A Weird Actuary's View of Getting to 700K
For the sake of tax purposes, losses from essentials like health insurance and rent and all that nonsense, lets bump up my 600K target to a total of 700K to be, in my terms, financially independent. Lets think of this 700K in terms of simple exchange for services. I need:
1 person to give me $700000 (ha!) 7 people to give me $100000 (still ha!) 70 people to give me $10000 (eh...) 700 people to give me $1000 (with a _very_ nice product/service I could see this partially happening) 7,000 people to give me $100 (alright, now we're getting there) 70,000 people to give me $10 (if you go viral, yes) 700,000 people to give me $1 (just for the sake of completeness)
Let's consider returning customers:
35 people to give me $10000 twice 350 people to give me $1000 twice 3500 people to give me $100 twice 35,000 people to give me $10 twice 350,000 people to give me $1 twice
Super awesome returning customers with a very nice brand/product/service:
14 people to give me $10000 five times 140 people to give me $1000 five times 1400 people to give me $100 five times 14000 people to give me $10 five times 140,000 people to give me $1 five times
Yes, these numbers are way to simple to just apply to such a massive amount of money as $700,000... but it does get you thinking...
My Call to Anyone Who is Listening
So that was my own personal version of what is known otherwise as 'lean' FIRE. Unless you truly know you are one of the group that can reach $1,000,000 (and you probably know who you are), don't try and shoot for these crazy targets - I don't think it leads to happiness, and it certainly won't lead to any innovation or great works.
So my final call to anyone out there who will listen is this: build your 600K foundation, then move to follow your true passions - even better when that passion can generate more income, and I think you'll find it does when you spend years building something.
Remember, with moderate living you have 20-25 years cushion to ride out on and BUILD SOMETHING! Start a charity, build massive works of art, stop global warming, save the world, I don't care! Whatever you do, don't sit in an office doing something you hate just because you are scared. Remember, you won't need ANY income for 2.5 decades. The only question remains is:
What will you build?