Jump to content
sschullo

How to Retire in Your 30s With $1 Million in the Bank

Recommended Posts

Excerpt: "Fed up with their high-pressure jobs, some millennials are quitting and embracing the FIRE movement. (It stands for financial independence, retire early)."

Hey Young Teachers! 

Perhaps having a million in your 30s is a bit ambitious and unrealistic, but in your 40s, absolutely. It will take a lot of work and discipline but you have one bit of money that all of the young people featured in the following NY Times article don't have--a pension.  It will be difficult because you will have to live frugally and save every penny. You will have to start saving immediately after signing your first teacher's contract and learn how to invest with low-cost index funds (stay away from ALL annuities from the big insurance carriers). But you will live a stress-free life because you will learn to live without the useless material crap that people buy, big homes, big trucks, SUVs and new cars every three years with chronic car payments. 

But you will have fun too while you are teaching and saving to retire in your 40s. You are not the only one trying this out. Read every word of the following NY times article and meet the FI, financial independence movement that is spreading like wildfire with millennials.

CALIFORNIA TEACHERS: One Group is returning to Joshua Tree CA in October 2019. They have meetups during the rest of the year in Los Angeles and San Diego. Look on meetup, the website that has thousands of groups. 

https://www.nytimes.com/2018/09/01/style/fire-financial-independence-retire-early.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=&module=stream_unit&version=latest&contentPlacement=1&pgtype=sectionfront

 

Share this post


Link to post
Share on other sites
1 hour ago, sschullo said:

It will take a lot of work and discipline but you have one bit of money that all of the young people featured in the following NY Times article don't have--a pension.  

Along with the added benefit of a pension I would also include job security.  When you read through some of these profiles, a lot of these workers stressed over being fired or replaced.  Once tenured, teachers have a great chance of staying in one place for as long as it takes to reach their goals.

1 hour ago, sschullo said:

But you will live a stress-free life because you will learn to live without the useless material crap that people buy, big homes, big trucks, SUVs and new cars every three years with chronic car payments. 

Not sure I agree with this.  If these people are living off investments, what happens when the market takes a hit?  When they retire at 40 and start living off their investments, are they still growth oriented or, have they become more conservative the way a 60 - 65 year old would be?  If they’re supporting their lifestyle and, in some cases their family, with what they’ve stashed away in investments, psychologically they’d be anything but stress free in the event of an economic downturn.  The article makes mention of the good fortune this group of young investors have experienced in this past decade.  Does the FIRE community discuss strategies for surviving a recession after retiring early?

Share this post


Link to post
Share on other sites

 

Thanks for sharing this article, Steve, and for posing good questions, jebjebitz.

This article was only the tip of the iceberg. It's an introduction to "you don't have to work until traditional retirement age". It's a different mindset. It counters what you learned and it counters what your school district sets you up to do: work until you've worked 30 or 40 years, often in one school district or take a reduced pension. (I cannot change school districts without accepting a starting salary after teaching for 15+ years. I am beholden to this one particular school district in this one geographic location. I have two choices: take it or leave it.)

Pensions, as you know, are not essential for retirement or peace of mind. If you track your expenses, which many people do not do, and lower your expenses while increasing your savings, you set yourself up for living off of your own investments. Add to this, taking responsibility for learning to do things yourself, such as learning to use index funds for your investment accounts thereby lowering your expenses, you'd save tens of thousands of dollars.

As for managing in down markets, great question. A few buckets of aggressive, moderate and cash investments that are intentionally established, along with your expected expenses, because you tracked them, and you've got a plan. The plan can include taking on a side hustle or building a fat nest egg. Regardless, they've researched and documented strategies for handling the very scenario you present.

Welcome to the FIRE lifestyle.

Share this post


Link to post
Share on other sites

I don't think this thread sets peoples' expectations in line with what is mathematically possible/probable and I believe that is always a harmful state of mind for folks to be in (even if it feels good initially). Let's look at a quick example:

Here in Orlando a starting teacher makes something close to $40,000 and let's really quickly estimate some "essential" expenses:

  • Taxes will be close to $2,000 (no state or local tax).
    • Assumes they invest 10k in a traditional account to get a bit of a tax break.
    • Assumes the standard deduction.
    • Assumes the $250 teacher expense deduction.
    • Completely ignores the expense of social security and medicare/medicaid because I'm lazy.
  • Mandatory 3% pension costs about $1,000.
  • You can't find housing for less than $13,500.
  • Transportation, food, clothes, cell phone service, and internet cost roughly $6,500.
  • Throw in another $6,000 for healthcare and all of the things I may be forgetting.
  • Notice I've budgeted $0 for entertainment, vacations, pets, children, etc.

That leaves you with just $11,000, but let's be extra generous and assume the following:

  • The person manages to somehow invest $15,000 per year (36% more than we think they'll even have).
  • The person starts investing at 23 years old.
  • The person benefits from a 4% real return.

Their inflation-adjusted portfolio won't be worth $1,000,000 until they're 55 years old. They'd have to invest $25,000 per year to hit the $1,000,000 by the time they're 46.

Possible criticisms of my model:

  • I didn't model a slowly inflation-adjusted increase in investing each year.
    • It was too much work so I just gave them 36% more than I thought they'd have right off the bat.
  • I didn't model the financial benefit you'd get from splitting housing expenses and such with a spouse/roommate.
    • I also didn't saddle the person with kids...something quite a few teachers have.
  • I didn't model home equity or the reduction in housing costs if you live there for 30 years.
    • I also didn't model the full cost of taxes and I gave them a generous inflation-adjusted yearly return.

Share this post


Link to post
Share on other sites
17 hours ago, MoeMoney said:

As for managing in down markets, great question. A few buckets of aggressive, moderate and cash investments that are intentionally established, along with your expected expenses, because you tracked them, and you've got a plan. The plan can include taking on a side hustle or building a fat nest egg. Regardless, they've researched and documented strategies for handling the very scenario you present.

Welcome to the FIRE lifestyle.

Thank you Moe, this answers my question.  Seems like these folks have thought of everything.  Very impressive.

 

Share this post


Link to post
Share on other sites
4 hours ago, jebjebitz said:

Thank you Moe, this answers my question.  Seems like these folks have thought of everything.  Very impressive.

 

I use the stock/bond split to manage risk. The rule of thumb is to use your age to decide how much to allocate to fixed accounts, bonds and cash. Because I am 71, I allocate 70% in bonds, and the rest 30% in stocks. I am retired I cannot afford the time required to ride through a 2008 type crash. My 30/70 portfolio was already tested during that time when I only lost 11.8%. My portfolio is very conservative, but I returned 9.0% last year. Young investors should have the opposite even 100% in stock index funds and pray for a stock market crash so those stocks are priced lower. 

 

Share this post


Link to post
Share on other sites
40 minutes ago, sschullo said:

I use the stock/bond split to manage risk. The rule of thumb is to use your age to decide how much to allocate to fixed accounts, bonds and cash. Because I am 71, I allocate 70% in bonds, and the rest 30% in stocks. I am retired I cannot afford the time required to ride through a 2008 type crash. My 30/70 portfolio was already tested during that time when I only lost 11.8%. My portfolio is very conservative, but I returned 9.0% last year. Young investors should have the opposite even 100% in stock index funds and pray for a stock market crash so those stocks are priced lower. 

 

Ok.  But if the FIRE people follow the age formula,(assume it’s a 30 year old allocated at 70 stock 30 bond) and the market crashes, they could lose a substantial chunk of money.  They don’t have an income to put towards purchasing more stocks at bargain prices.  So what do they do?  

 

 

Share this post


Link to post
Share on other sites

If the retired 30 yr old has a 70/30 portfolio and the stock market drops 50% in a recession, their asset allocation will change to 35/65. Then he/she will sell some bonds and buy some stocks at bargain prices. I think that's the theory anyway---easier said than done? 

Share this post


Link to post
Share on other sites
8 hours ago, krow36 said:

If the retired 30 yr old has a 70/30 portfolio and the stock market drops 50% in a recession, their asset allocation will change to 35/65. Then he/she will sell some bonds and buy some stocks at bargain prices. I think that's the theory anyway---easier said than done? 

So the rebalance process is their way of buying stocks at a lower price?

So, in a scenario like the 2008 crash, would investors consistently rebalance every day the market goes down?  Or do they wait a few days and try to rebalance when they think it’s at its lowest?  I know this is describing market timing to a certain degree but, I honestly don’t know how people react in these situations.

Share this post


Link to post
Share on other sites

Jebjebitz, there are folks who convince themselves of all kinds of mental gimmicks.

Some believe in a magical rebalance bonus in the sense that they believe if they keep a percentage in bonds or cash and then rebalance into stocks during a crash that they’ll do better than an all stock portfolio. This isn’t mathematically correct because the bonus from “buying low” in a bad year is outweighed by the “drag” of owning bonds/cash during the many good years.

Some believe in a “bucket” approach because they hate the idea of “selling low” to get money during a crash. Again, this isn’t mathematically correct because you’re stil selling just as much as you otherwise would have, but now you’ve got big chunks of your portfolio sitting in a bond/cash bucket creating a drag. You should think of your portfolio as the summation of all accounts, creating arbitrary subdivisions will increase drag, costs, complexity, and so forth.

Some believe in a high dividend approach again because they hate the idea of selling stocks. They say to themselves if I own enough stocks that the dividends pay my bills then I’m golden forever. This isn’t how it works mathematically. When a stock gives you a dividend it also drops in value, which is functionally equivalent to selling some stock that doesn’t give you dividends (the latter may actually put you in a better tax scenario). Plus a stock can eliminate/reduce dividends at any time.

All of these things that people do are just logical errors that make people feel good. The only key is to pick an asset allocation you can live with without doing something foolish and save up a massive amount of money such that the inflation-adjusted growth is greater than your expenses. Maybe your portfolio should be 33x your expenses, maybe it should be 50x, nobody can know. Then be ready to work again if you get a recession, or back-to-back recessions in the case of the 2000s, that drags your portfolio below a value that makes you feel comfortable.

...it is a stressful scenario because you never know if you have enough unless you accumulate so much that you almost certainly worked many more years than necessary.

Share this post


Link to post
Share on other sites
14 hours ago, jebjebitz said:

Ok.  But if the FIRE people follow the age formula,(assume it’s a 30 year old allocated at 70 stock 30 bond) and the market crashes, they could lose a substantial chunk of money.  They don’t have an income to put towards purchasing more stocks at bargain prices.  So what do they do?  

 

 

This is where mental toughness works, you keep contribution NEW money to those beaten down stocks that everybody is afraid of, that is in, broadly based equity index fund. With regard to losing a "substantial" amount of money, I am talking about young people the 20s usually don't have a lot invested as they are just starting out. 

Most of us here are do it yourselfers. I have my approach and it works for me, not necessarily for you. Also, I learned everything I know from my readings and bogleheads, nothing I say is original. The idea that young people would benefit from a massive crash is from Paul Merriman, a widely respected author, blogger, podcast producer and retired manager. I don't agree with his timing technique. So I took what is comfortable for me from all these professionals and DIYers combined and came up with what I know. Even then I have made massive mistakes and lost a bundle of money but I wrote a book about that and share everything that a layperson who tries out some of the ideas found for DIYers. I have always wanted to be a diyer because of the built-in conflicts of interest and the absolutely perverse incentives of the majority of financial advisers, especially in the 403b world. 

 

Share this post


Link to post
Share on other sites

...I think jebjebitz is talking about the FIRE folks who've reached retirement and therefore will have a lot invested, but won't have new money.

Share this post


Link to post
Share on other sites
6 minutes ago, EdLaFave said:

...I think jebjebitz is talking about the FIRE folks who've reached retirement and therefore will have a lot invested, but won't have new money.

The 100% stocks doesn't apply to anybody retired. I am not sure the final chapter has been written for people with a million and retire in the 30s because when they have 50 or 60 years ahead. I think they will redefine work when they stop their high pressure day job. They know how to live frugally, and live in low standard of living areas with low taxes and all of that. I met the FI community and they are very sharp. They got the frugal living down pat, and that is where it starts. 

Share this post


Link to post
Share on other sites
7 hours ago, jebjebitz said:

So the rebalance process is their way of buying stocks at a lower price?

So, in a scenario like the 2008 crash, would investors consistently rebalance every day the market goes down?  Or do they wait a few days and try to rebalance when they think it’s at its lowest?  I know this is describing market timing to a certain degree but, I honestly don’t know how people react in these situations.

There are a number of ways to organize rebalancing. One is to use bands, say of + or -5%, and rebalance back to your desired AA when it is off by 5% (or some set percentage). It often takes weeks if not months to change by 5%, even in a downturn.

The 30 or 40 year olds that have achieved FIRE may use something like a “bucket” type of organization that Ed mentioned. They have funds for maybe 3 or 4 years of living expenses set aside in stable accounts like CD ladders or short-term bond funds, so that they don’t have to sell stock funds for living expenses in a downturn. They can ride out the downturn without “selling low”.

Since those who have achieved FIRE are likely to have investments of 1 to 2 million, but not always, the value of sticking strictly to a given asset allocation may not be as important as it is in the accumulation phase of investing. The FIRE folks are disciplined, are experienced in living below their means, don’t panic and sell in a downturn, and in some cases have a side gig or part-time job they can work in if needed. FIRE gives people choices.

Ed Mills, the Millionaire Educator, is a good example of a teacher pursuing FIRE. He’s been interviewed twice on the Teach and Retire Rich podcasts, and has a blog with details of how he’s done it.  http://www.millionaireeducator.com 

This Boglehead thread has lots of financial tips for teachers by teachers and others, and is especially useful for those just starting their career:  https://www.bogleheads.org/forum/viewtopic.php?t=220126  Whether a teacher wants to Retire Early or not, the Financial Independence part of FIRE is a goal worth pursuing.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×