Retirement questions - any early retirees out there?

Pasteton · Dec 12, 2012

I want to retire by 40 - 6 years from now.

No kids, and no desire to have any. Small condo with 3500$/month expenses including hoa, mortgage, taxes. I do have, or will have, an expensive car but will pay that down at 1000$/month over next 5 years.

My question is, any other early retirees out there, how did u make it happen, and any suggestions on how much I need to save in next 5 years to make this happen to where I can live comfortably ( basically my above recurring expenses plus daily living etc) indefinitely

Zombie Thorne_sl · Dec 12, 2012

So you are 34 now? I don't see how you could even come close to calculating 40+ years of living expenses. You are still young, a lot can and will happen in your 30s/40s.

There is no way I would want to spend my 40s on a fixed income. Unless you can realistically save 5M+

BrutulTM · Dec 13, 2012

You are out of your mind. Why do you want to do this?

Corndog · Dec 13, 2012

The people I know who are actually on pace to retiring at 40 treat it as a soft retiring. Basically at age 40 you can work any job you want. Basically you have a hobby that you love. You then go work there for min wage basically and can work 3-4 days a week and just live a fulfilling life.

You need to realize that once you retire, it's like it's summer time in school. By the end of those 3 months you are fucking bored. Retired people spend way MORE than they did while working. All of a sudden you've gotta fill 60 hours a week extra than you do now.

Soriak_sl · Dec 13, 2012

With $3,500 in housing expenditures, you're going to want about $9,000/month pre-tax? Assuming you expect to live for 50 years in retirement and get a real rate of return of 3%, you'd need about $2.8m.

Not that much, if you think about it.

edit: You need substantial savings already to make this happen by retirement though. Assuming very risky investments with an 8% real return and no savings, you'd have to put aside $31,400 per month for 6 years. It's more reasonable if you had $1.75m stashed away... you could get there with savings of $1,600/month.

Pasteton · Dec 13, 2012

Soriak_sl said:
With $3,500 in housing expenditures, you're going to want about $9,000/month pre-tax? Assuming you expect to live for 50 years in retirement and get a real rate of return of 3%, you'd need about $2.8m.

Not that much, if you think about it.

edit: You need substantial savings already to make this happen by retirement though. Assuming very risky investments with an 8% real return and no savings, you'd have to put aside $31,400 per month for 6 years. It's more reasonable if you had $1.75m stashed away... you could get there with savings of $1,600/month.

Thanks this was the kind of info I was looking for.
Sorry I am really stupid with finances. So close to 3m should be my goal then? Can you show me the math for getting there with 500k stashed away currently?

And yea this is a soft retirement. Off-topic, but my goal is to go back into some specific science related research topics that interested me but I ignored in lieu of greener financial pastures.

Izuldan_sl · Dec 13, 2012

I think one other huge thing you need to consider is inflation. None of us have any idea how good or bad inflation will be over the next few decades. The numbers Soriak give as an example only apply to 2010s.....what's it going to be like in 2040?

For example, in the 1970s gas was about 40 cents a gallon, today its about 4 dollars, which means a roughly 10-fold increase in cost. So having 3 million dollars in the bank *might* mean it will only have the purchasing power of $300,000 (in today's dollars) in 2050.

As far as your math goes, it's easy. You are at 500k, you are 2.5 million short of 3 million, you want to retire in 6 years......you need to put away roughly $400,000 a year for the next 6 years. I didn't include any real appreciation on your current 500k because imho the markets suck right now, your rate of return will not be that great, even if you are lucky and hit 8-10% growth per year for the next 6 years or so you are looking at an increase of only a few hundred thousand.

What you will need to do is have a sound financial plan so whatever you do retire on, hopefully your investments can match or exceed the rate of inflation.

I'm honestly not trying to discourage you, I think more important than making money is doing something in life you love to do, and hopefully they are both one in the same. If you're soft retirement can cover almost all your living expenses, then that would be perfect I think, because you can let your investments grow without having to touch any of the principal or interest.

BrutulTM · Dec 13, 2012

Pasteton_sl said:
And yea this is a soft retirement. Off-topic, but my goal is to go back into some specific science related research topics that interested me but I ignored in lieu of greener financial pastures.

And this would pay nothing?

Eomer · Dec 13, 2012

I'd like to do a soft retirement at 40, but I'm not sure if I'll get there. I've looked at the finances and my lifestyle, and figure that I'd need about 2-3 million at bare minimum to keep things going with passive income from my investments. Maybe less if I were to find employment to supplement that a bit, whether ski patrol or some sort of guiding or whatever. Big thing for me is that my bro is 6 years old than me, and wants to be out in the next 3-5 years, and neither of us has a ready replacement that can take over. I've invested a lot of money to buy my dad out of the company, and may have to do that again with my bro, and then when I want to retire all I'll be able to do is shut the company down or sell it for pennies on the dollar because construction companies are only worth what the people working for them are.

I have zero concern about being bored in retirement. I'll find shit to do.

Borzak · Dec 13, 2012

I will be 42 next month and I am "semi" retired. I sold majority interest in my business and now work as a consultant doing design work on a contract basis. I have pretty low expenses, live in a cheap part of the world and have a pretty large chunk of land that I inherited control over (51% and my sister has 49%) that I manage for timber and wildlife that provides the bulk of my income. I have the majority interest because it was set up that way to give me control since I have the background in forest and wildlife management (Double BS and MS in wildlife management). My normal monthly expenses are right around $1,000 per month. But that is because the house is paid for, the vehicles are paid for etc...that also means I have to save or spend what I already have saved in the future for any new vehicles, houses etc...

For instance I live in a 2,900 square foot house on 2.5 acres on a golf course and a small lake - but I paid less than $175k for it and today it would probably sell for $300k after some updating I did. My expenses are low because I do most of my stuff, I do it because I enjoy it. I do my yard work, do all the maintenance, built my new shop/garage etc...basically my expenses are down to food, insurance, and entertainment. Even my entertainment is fairly cheap. I'm building my second teardrop camper because I like to take fairly long travel vacations camping and backpacking thru the west and it makes a handy base camp. Even property tax is low here. I pay about $800/year on the house and right at $3/acre on the land.

I have no delusions that I may have to go back to work at some point full time and working part time doing contract work keeps me up to date. I do actively still look for some work but I turn down a lot. The stuff that is just annoying that I used to do to keep someone happy that gave me a lot of work, now I just pass on it.

It's not for everyone. My sister makes nearly the same as I do on the land income and I could see her making 10x as much on that and still being just as broke as she is now, and what she makes now is 10x what she made in the past if you catch my drift.

Nester · Dec 13, 2012

You should not even be considering "retirement" if you still have an active mortgage.

Joeboo · Dec 13, 2012

The ideal situation for a "soft" retirement in your 40s would be to still find a part-time job to at least provide your medical benefits. They do exist, but aren't probably overly common. My wife works for Bank of America, and they actually offer full benefits to any employee, regardless of if you are full or part time. Obviously you just have to work enough to cover the cost of the medical insurance coming out of your paycheck. She has a co-worker who is a 50-ish year old lady and her and her husband are pretty much retired, she just works as a teller a day or two a week to cover her medical insurance for the both of them.

Medical insurance rates are pretty crazy, and who knows what they will be like 10 or 20 years from now, or if social security will even be available for us Americans once we get into our late 60s. I'm 35 years old and I'm not counting on any social security income in my retirement planning, because even if it is still around, the retirement age will be like 80 or higher by the time I get there. The bad part about individual medical coverage, is that not only have rates traditionally raised 10-20% every year over the last decade or so, you also get hit with a rate increase based on your age each year on top of that when you have an individual plan. Whatever your medical insurance is costing you now, it could easily be 5-10x that within 20 years if things keep going like they are now.

Soriak_sl · Dec 13, 2012

Izuldan_sl said:
I think one other huge thing you need to consider is inflation. None of us have any idea how good or bad inflation will be over the next few decades. The numbers Soriak give as an example only apply to 2010s.....what's it going to be like in 2040?

Actually, my calculations take into account inflation - they're all with real contributions and real withdrawals (i.e. your withdrawal amount increases every year). The rate of inflation I take (4.13%) is the median rate of inflation over any 35 year period since 1916. Similarly you get the real rate of return for the S&P500 at 6.76% (nominally around 11%).

The easy way to do it is to use Fisher's equation to transform nominal interests into real interests. Then you've got everything in real terms. Let i be the nominal interest rate, r be the real interest rate, and pi be inflation. Then (1+i)(1+pi)=(1+r) - plug in 0.0413 for pi, your expected nominal rate of return, and solve for r.

Pasteton_sl said:
Sorry I am really stupid with finances. So close to 3m should be my goal then? Can you show me the math for getting there with 500k stashed away currently?

See attached excel file.

You first enter the values below PV - the monthly rate of return you expect (annual/12), the number of periods in retirement (years*12), and how much you want per month (pmt) - negative for a payout, but the sign doesn't really matter. This tells you how much money you need by retirement.

Then you do it similarly for the values below FV, except this is from today until you plan to retire. Enter for PV your current savings - e.g. 500k. Then, make sure the solver plugin in excel is enabled. Have it solve for the FV equal to what you got for the PV below by adjusting the pmt variable. That will tell you how much to stash away per month.

With $500k stashed away, you'd have to save $23,200 per month for the next 6 years.

edit: just to be clear... this is very sensitive to the assumptions you make about the rates of return. Usually, it pays off to be much more conservative. 100% stocks 6 years before retirement is a bad idea, and these returns are unlikely to manifest over the short term. However, if you don't make aggressive estimates, your likelihood of getting there approach zero. In any case, you have to make some assumption to get a figure. Feel free to adjust as desired.

splorge · Dec 13, 2012

Soriak's calculations are the standard to have your purchasing power last indefinitely adjusted for inflation. I would have to consult actuarial tables, but the chance for this equation to last until age 115 is above 90%, but this takes into account things like social securty. If retiring at age 40, your social security payment will be substantially less, raising the risk of the money running out. A way to retire on less money is to budget so that the your money will run out at age 115 or 120, this allows you to retire on less than the amounts suggesting by the above calculations. However, this once again adds risk to the tables of the money running low before you expire.

Pops · Dec 13, 2012

Are you crazy?

Pasteton · Dec 14, 2012

Soriak_sl said:
Actually, my calculations take into account inflation - they're all with real contributions and real withdrawals (i.e. your withdrawal amount increases every year). The rate of inflation I take (4.13%) is the median rate of inflation over any 35 year period since 1916. Similarly you get the real rate of return for the S&P500 at 6.76% (nominally around 11%).

The easy way to do it is to use Fisher's equation to transform nominal interests into real interests. Then you've got everything in real terms. Let i be the nominal interest rate, r be the real interest rate, and pi be inflation. Then (1+i)(1+pi)=(1+r) - plug in 0.0413 for pi, your expected nominal rate of return, and solve for r.

See attached excel file.

You first enter the values below PV - the monthly rate of return you expect (annual/12), the number of periods in retirement (years*12), and how much you want per month (pmt) - negative for a payout, but the sign doesn't really matter. This tells you how much money you need by retirement.

Then you do it similarly for the values below FV, except this is from today until you plan to retire. Enter for PV your current savings - e.g. 500k. Then, make sure the solver plugin in excel is enabled. Have it solve for the FV equal to what you got for the PV below by adjusting the pmt variable. That will tell you how much to stash away per month.

With $500k stashed away, you'd have to save $23,200 per month for the next 6 years.

edit: just to be clear... this is very sensitive to the assumptions you make about the rates of return. Usually, it pays off to be much more conservative. 100% stocks 6 years before retirement is a bad idea, and these returns are unlikely to manifest over the short term. However, if you don't make aggressive estimates, your likelihood of getting there approach zero. In any case, you have to make some assumption to get a figure. Feel free to adjust as desired.

Thanks very much this will be useful!

I forgot another confounding factor - my 401k. I am making max contributions allowable under IRS, and my company matches 1:1. I think this comes out to about 200k by the end of 6 years, not including any growth over that interval. Now I wouldnt be able to draw from that until i am 57 i believe, but is there a way to incorporate this potential 'boost' of money i'll get at 57, into determining how much to save?

Soriak_sl · Dec 14, 2012

Yeah, you could split it up by calculating your needs 57+ as a lower monthly withdrawal than from 40 to 57. You'd get your monthly "allowance" from the 401(k) by starting with 200k and calculating the monthly payouts such that you will have 0 on the account after 45 years. I can do the calculation quickly tonight if nobody wants to do it in the meantime.

By the way: my calculations assume you buy an annuity for 45 years the day you retire. So it will not last indefinitely as some other calculations do (which never made sense to me - you don't live indefinitely, so you want to draw down your principal). Basically, you die broke at 95. You don't have to buy an annuity, of course, but essentially self-insure with your own savings.

Burren · Dec 14, 2012

Soriak_sl said:
Yeah, you could split it up by calculating your needs 57+ as a lower monthly withdrawal than from 40 to 57. You'd get your monthly "allowance" from the 401(k) by starting with 200k and calculating the monthly payouts such that you will have 0 on the account after 45 years. I can do the calculation quickly tonight if nobody wants to do it in the meantime.

By the way: my calculations assume you buy an annuity for 45 years the day you retire. So it will not last indefinitely as some other calculations do (which never made sense to me - you don't live indefinitely, so you want to draw down your principal). Basically, you die broke at 95. You don't have to buy an annuity, of course, but essentially self-insure with your own savings.

There are many annuities with guaranteed income riders (the norm these days) but rates are horrible right now. In 5-6 years, who knows; they'll likely be up again though.

Borzak · Dec 14, 2012

Don't do it if you work in a sector where it's hard to get back into a good job. For me, my stuff hasn't changed much in the last 30 years except we do it on computers now isntead of paper. But some sectors you really have to stay tied in to keep up, if my job was like that I wouldn't even consider it because you never know what lies ahead.

Philip23_sl · Feb 13, 2013

You are doing wrong its very flop idea. You are trying to retire so early. After some time of retirement you will be feel boring life and feel yourself an extra person. These feelings create anxiety and depression. Try to keep busy yourself even after retirement.

Retirement questions - any early retirees out there?

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