Retire By 40 With A Few Life Hacks
I trust that the majority of young adult Americans who read this post have grown up with or currently live the typical suburban or exurban lifestyle that I did. By this I mean fairly large houses (at least 2,000 square feet), parents who drive 15+ miles to work, and ultimate dependence on the car or SUV/minivan. This lifestyle is incredibly inefficient, so much so that author James Howard Kunstler calls it, “the greatest misallocation of resources in the history of the world.”
If Kunstler is right about the American way of life being so inefficient, then if someone can turn the tables and make their life really, really efficient and frugal, then they can quickly accumulate a lot of money assuming one or two middle class incomes. In fact, a couple who starts this kind of lifestyle restructuring early could potentially retire by 30, 35, or 40. Someone starting later could potentially still retire early, like by 45 or 50.
Let’s take as an example a typical professional middle class couple with no kids who live in a 2,500 square foot house and drive two late-model SUVs. Their combined income is a very healthy (upper) middle class $100,000. In the table below, I illustrate on the left a typical scenario where this couple only saves about $2,000 each year. On the right hand side, I illustrate how this couple could save almost $50,000 per year, and have over a half-million dollars of invested assets after 10 years with a few minor tweaks.
|Budget Item||Suburban Budget Disaster||Tweaked Lifestyle|
|Annual Cost||Assumption||Annual Cost||Assumption|
|Housing Value||$350,000||Assumes 2,500 square foot 3 bedroom home in major metropolitan area.||N/A||Sell house and move into apartment.|
|mortgage/rent||$22,800||Assumes 10% down at 4% mortgage. Includes PMI and real estate taxes. $1,900 per month.||$13,200||Assumes rent of $1,100 per month for garden-style apartment in suburban area.|
|maintenance||$3,500||Assumes 1% of home value annually.||N/A||Apartments are worry-free.|
|Gas & Electric||$3,600||Assumes $300 per month for gas and electric.||$360||Assumes $30 per month for electric. This is based on an apartment I lived in.|
|Internet & Cable||$2,400||Assumes $200 for internet and cable.||$600||Assumes $40 per month for basic internet and $10 per month for netflix.|
|Cell Phones||$1,440||Assumes $120 for two iPhone plans per month.||$720||Assumes 2 MVNO plans like Airvoice wireless, H20, ting, etc. ($30/month each)|
|Car payment 1||$3,600||$300 per month for SUV payment.||N/A||No car payment, because couple takes proceeds from SUV and house sales to buy $10,000 used/good condition fuel-efficient hatchback to share. Assumes that couple finds apartment near one member’s workplace such that one person can walk/bike or get dropped off by the commuter. Assumes only liability insurance on the hatchback, and 15,000 driven per year.|
|Car payment 2||$3,600||$300 per month for SUV payment.||N/A|
|Car insurance 1||$960||$80 per month for SUV insurance.||$720|
|Car insurance 2||$960||$80 per month for SUV insurance.||N/A|
|Gas 1||$3,000||Assumes 15,000 miles each, 15 mpg, and $3.00 per gallon for gasoline.||$1,286|
|Food||$7,800||Assumes $150 per week.||$7,800||Same as suburban disaster situation. There is still lots to cut here without losing quality of life, but the point of this exercise is to not cut into any important stuff like good food, going out, vacations, and clothing.|
|Entertainment/Dining||$5,200||Assumes $100 per week.||$5,200|
|Vacations||$4,000||$4,000 per year.||$4,000|
|Clothing/Consumer Goods||$2,000||Assumes $1,000 each per year.||$2,000|
|Pre-Tax Income||$100,000||Assumes combined income of $100,000.||$100,000|
|$0||Couple cannot afford to fund IRAs and 401(k)s because they are financially strapped.||$46,000||Assumes that couple maxes both 401k funds and IRAs pre-tax.|
|After Tax Income||$70,000||Assumes 30% tax rate including social security, federal, state, and local taxes.||$37,800||Assumes 30% tax rate including social security, federal, state, and local taxes.|
|Annual Savings||$2,140||After annual expenses of $67,860.||$1,914||After annual expenses of $35,866|
|1||$2,226||Assumes that couple maintains this budget for next 10 years and that their savings grows at 4% annually (invested in mutual funds). Their net worth equals the value in line 10 as well as any equity in their home.||$49,831||Assumes that couple maintains this budget for next 10 years and that their savings grows at 4% annually (invested in mutual funds). Their net worth equals the value in line 10 of over half a million dollars.|
(apologies for the wonky spreadsheet – let me know in the comments below if you have any questions)
So what changed?
The couple sold their $350,000 3 bedroom house which they only owned 10% equity in (a typical northeast-US down payment), and they moved into a nice 1-bedroom apartment for $1,100 per month within walking distance of one of the member’s work. Since they only need one car to get to work, they sold both of their financed SUVs and used the proceeds to buy a used hatchback like the Honda Fit. They saved a ton of money on their utilities, and they canceled their cable TV in exchange for a $10/month Netflix subscription. They canceled their major carrier cell phone plans at $60/month each and signed up for an equivalent MVNO carrier (using the same cell towers) like Airvoice Wireless at $30/month each (unlimited talk and text and 500mb data). The couple took all of the funds they saved each month from these lower expenses and invested the money in their pre-tax 401(k)s and IRAs – mostly in low-cost mutual funds (assumed rate of return of 4%). Most importantly, the couple didn’t touch their grocery, entertainment/dining, vacation, or clothing budgets. This is what I mean about maintaining the same quality of life.
But they have a lower standard of living!?!?
I fully realize that someone may comment below that this couple has a significantly lower standard of living. They don’t own a home, they have 2 fewer bedrooms, they have 1 fewer car, and they have a smaller car. Economically, yes, they have a lower “standard of living” by official economic definition. However, who cares about this technical economist mumbo-jumbo? What I care about, and what most people really care about, is called “quality of life.”
The couple can still have friends over for parties and have overnight guests, they can still get to work easily, and they can go on vacations in their car. Their car is reliable, can transport large loads, and has a stereo to jam out to on that vacation road trip. They still have iPhones with data plans, and they now have on-demand access to thousands of movies and amazing TV shows like Breaking Bad and House of Cards! Further, they haven’t cut back on spending for groceries, going out, vacations, or consumer purchases. Last, but certainly not least, after 10 years they have more than $500,000 in invested assets. If the couple is young and starts this track at 25, they would have $577,000 in their investment accounts at 35.
Opening A World of Possibilities
These numbers assume that their income doesn’t increase at all over those 10 years, so imagine what a few promotions or job changes could do. Imagine how much easier job changes could be if they aren’t tied down with a house. After they pass the $500,000 point, what kind of possibilities does this open up? They could take a year off and travel the world, with the security that they will only spend a small amount of that $577,000 (they would need to save some outside of tax-deferred accounts). They might even be able to finance that year long trip with the investment income from the $577,000. With this dough in the bank, they can start to think about having a child with a very thick security blanket if that’s their fancy. Oh yeah, and they could retire by 40 in just a few more years. A very ambitious individual or couple following this plan could even retire by 30 if they choose a frugal lifestyle.
I wish that I could go to college campuses on graduation day and proselytize about this topic. Perhaps I can and should do this, and maybe this is what I will do when my own nest-egg grows big enough. Seeing the economic potential of a young individual or couple like this get burned up in mortgage payments, car payments, and gasoline and heating bills makes me depressed. I just hope a few young people read this blog post and think about the possibilities that exist if they just think a little bit outside of the box!
Let us know in the comments below if you know someone who did just this. Also, let me know if you have any critiques of my example.