Sorry in advance for the long post, but early retirement is like porn to me (always thinking about it, but don't talk much about it in public).
jchiles wrote:Do you factor in salary increases at your job or just in general throughout your career into this? Obviously thats hard to know now but would making significantly more 10 years or so down the road mess up your planning?
Yes, salary increases factor in, but loan payments should remain manageable for two main reasons: (1) tax deferred contribution limits should rise; and (2) payments decrease with family size.
To the first point, the 401k max in 1996 was about $9,000 per year. Twenty years later it's $18,000 per year. That contribution limit will continue to increase with inflation, as will the contribution limits for other tax-deferred accounts like traditional IRAs and HSAs.
To the second point, you get to deduct 150% of the poverty level of your family size when calculating your REPAYE payment. Right now, as a single filer, I deduct $17,820 from my AGI. When I get married it will be $24,030. When I (god-willing) have a kid it will be $30,040. When I have a second kid, it will be $36,040. And like the contribution limits, these numbers will continue to rise with inflation.
So let's say ten years from now, I'm making $100,000 per year and my wife is making $40,000 per year. I bet the 401k max will be about $21,000 by then (which, if we both max, brings us down to an AGI of $98,000). Traditional IRA contribution limits will be about $7,500 (both max, down to $83,000)*. HSA limit is up to $9,000 (down $74,000). I'm sure there's other AGI deductions (e.g., child care credit) we can use (AGI down to $70,000). Note: I know I only might get a partial deduction here, but who knows what the income cap will be by then.
Now I have a family of four, and that deduction will be up to $40,000 by then. So $70,000 minus $40,000 equals $30,000. Ten percent of that is $3,000, divided by 12 and you have a payment of $250/month. And assuming we max everything, we saved $66,000 in tax deferred accounts that year.
A. Nony Mouse wrote:Can you say more about how you plan to retire by 45 on your income and having kids? That's not intended to sound snotty, I'm pretty ignorant about this stuff except at the most general level.
The first and most important thing is that I live in a very low COL area (NE Ohio...GO CAVS BABY). I just played with a couple COL calculators and my GF and I's income of $115,000 gives us the same standard of living as a couple making about $300-325,000 in New York City.
Some hardcore early retirement people call this "geographic arbitrage" (i.e., moving to a low COL area to retire early), but I was born here, and that in itself is going to be very valuable as we have kids.
Not only is my cost of living low, but I also am pretty frugal. And by frugal I mean I cut costs everywhere I can but spend extravagantly on things I like (Ramit Sethi's "I Will Teach You To Be Rich" is great). I don't have a car payment, have Sling TV, I call and reduce my car insurance every year, my groceries are like $40/week, etc. But I also spend probably $2,000 a year on OSU tickets, $3,000 per year on other vacations/visiting friends, etc.
All in all I average about $1,200 per month in total expenses (outside of things like OSU tickets). Once my GF pays off her student loans and car (should be by next year), her cost of living will be about $1,300 per month.
Now here's why I spent all that text talking about low expenses: the lower your expenses, the less you need to retire. Financial advisors get all hot and bothered and say you can't retire with less than $3,000,000, but that's absurd. To retire, you need 25 times your yearly expenses (in 96% of 50 years periods, 25x your expenses lasts forever). I'm conservative, so my goal is to have 30x my expenses (which I think should cover taxes, which are laughably minimal if you retire early and have a family).
Of course, the lower your expenses, the lower your retirement number.
Say your family spends $125,000 per year. $125,000 times 25 is $3.125M. So, at a minimum (unless you're 75), you need $3.125M to retire.
Once my GF pays off her car and student loans, we will spend about $38,000 per year. Add in kids at about $1,000 per month (they're going to public school and paying for the majority of their own college), so $50,000 per year in expenses. But, when we retire, we intend to have our mortgage (about $115,000 left) paid off, so subtract $625/month, which leaves us at $42,500 per year in expenses. Multiple that by 25 and we need $1.062M to retire. Multiply it by 30 and we need $1.275M to retire.
Assuming 7% returns, and with our current account balances, that means we need to save about $33,000 per year to get to $1.275M. And really, that's not that hard when we've intentionally made our cost of living so low. Hell, this year we are paying for a bunch of shit for our new house and paying out the ass for a wedding next year, and we are still on pace to save about $36,000 this year.
Yes, you could sit there and poke holes in a few of my numbers, but that retirement number ($1.275M) assumes ZERO retirement income. That's not going to happen. I'm going to continue refereeing and perhaps become a soccer coach, and I'm also thinking about becoming a professor or tutor at the local college. My GF will work part time as a speech therapist. And then we will have social security (in some form).
I honestly think I might be able to retire by 40 (would require about $52,000 in savings per year), but I'm foreseeing some bumps in the road and don't want to get my hopes up too much, so 45 seems like a more modest goal.