How to retire early?

[Shuman4413]

Age 27 Male
Married
2 Children
Army pension and healthcare for life.
Salaried position
State PA
Pension $24,684 annually $2057 paid 1st of every month.
Salary $73,000 after tax $2306 paid every two weeks 26 times a year
Total income $97,684 before tax. After tax $84,640 ($7053.33 monthly after taxes)
Access to Roth 401k Yes
Matching=Yes will match 50% up to 10% each pay period what you contribute in company stock which can then be exchanged for index funds.
Roth IRA Vanguard= less than $1000 at this point
Debt $38,800 on 4 runner
No other debt just paid all off this year
No mortgage we rent
Savings $1000 (so low because we have been paying off like 25k in debt)

If I wanted to retire at age 40 in 13 years would this be possible and how would you plan to do it?
I will always have the pension of 2057 per month and healthcare and dental for me and the family. Also college is paid for with the gi bill I transferred to them before medically retiring. Our monthly bills we be between $3500.00 to 4500.00 per month and open to living anywhere in the country at that point. (we have lived a lot of places already) Please tell me what you would do in this situation and how to retire early (40 hopefully). Any more information needed please let me know. I am trying to provide as much information as I can. Thanks!

[ysette9]

You have too many unknowns to be able to say for sure. Will you pension be indexed for inflation? Will you get social security when you are old? How confident are you in your spending?

First, get rid of the 4 Runner. It is unnecessary and ridiculously expensive for your salary and net worth. Out household net worth is over $2M and we would never buy a car that expensive, certainly not ok with such poor gas mileage. There are plenty of great alternatives out there and this forum can make suggestions based on your true needs.

Assuming your pension is indexed for inflation and assuming no social security or other income in retirement, you need to make up the gap between  your retirement income ($2057 per month) and the high end of hour spending estimate ($4500) which is $2443 per month. That translates into $29k yearly or $733k that you need to have invested. You could achieve that presuming nominal stock market returns of 7% real by investing $2883 a month. The usual stuff applies: invest only in broad market, passive, low-fee index funds, buy and hold, have a reasonable asset allocation, make sure you are properly insured, etc etc.

Check out the investment order thread for step-by-step instructions on what to do with your money and why. https://forum.mrmoneymustache.com/investor-alley/investment-order/

[Shuman4413]

Yes it is indexed for inflation. And i am going to get rid of the 4runner. As far as social security goes who knows. If its there i should be entitled to it i pay into it now. I am very confident in my spending plan. And i plan on investing in vstmx or vfinx. Thanks

[ysette9]

Indexed for inflation is great! I hear what you say about SS but I am including a low estimate of it in our calculations. After all I have read I think it likely that it will survive in some form (old people tend to vote and vote in their own best interests) though it may not be as generous down the line.


Of course there is always the option of getting your spending down to $2057/ month and then you are FI today. :)

[Shuman4413]

I wish i could get it down to that number.(2057) With two kids and special needs (expensive formula (milk allergy) etc etc.) it would be hard. Plus i want some cushion underneath me in case of emergencies and if the military stopped paying the pension (unlikely). Could i just do 2883 in a taxable account in vstmx until age 40 and retire or would the taxes kill me?

[ysette9]

Why would you do in a taxable account? Check out the investment order thread. You should maximize all tax-advantages accounts first. There are ways to access retirement money before age 59.5. The Mad Fientist has written articles about that, among others. But worse case even if you pay a 10% early withdrawal penalty you are probably still better off because of the tax advantages going in.

[Shuman4413]

Alrighty so i have read the order of investment you recommend i stay right with that or deviate at all?

[Hirondelle]

A more detailed breakdown of your spending would greatly help us to further give you advice on how to get to FI quicker. You have a guaranteed pension which is great, so you'd only have to come up with the difference between the 2057 and your actual spending. You already report a difference of $1000 for your 'average' month which indicates that you either don't have a clear idea or just a lot of variations in your spending, but a $1000/month difference is a 300k difference in capital that you'll need to build up.

[ysette9]

Alrighty so i have read the order of investment you recommend i stay right with that or deviate at all?

I don’t see anything that you have told us so far to indicate that you should deviate.

[Shuman4413]

My spending varies that 1000 due to special formula $50 a can 2 to 3 times a week and doctor visits for my daughter which can be 10x a month with 30 dollar copays all depends. That's the variations everything else about or budget is low

rent 1400 water sewer trash included
electric 125
gas 50
health care 50 put aside
dental 100 put aside
car insurance 80
renters insurance 25
phones 50
4 runner 734
2614.00 hard bills
1k for groceries and food
another 0-1k for hospital special needs for children varies a lot month to month (she requires special medical attention regularly)
anywhere from 3614-4614
need to get rid of 4 runner i know (impulse buy)

[Hirondelle]

Seems like getting rid of the 4 Runner is indeed the easiest cut you can make :)

So the special formula is between $400-600/month? Ai, that's a painfull one! On the other hand, special formula will be a temporary cost so although your general grocery expenses might go up once she gets older, that certainly won't cost as much as the formula. Assuming your kids are young (as one is still on formula and you're only 27) your leftover food costs still look high after subtracting the formula. $500 (taking the middle of the formula costs) for 3 people is a lot of money. Go to APowers "Groceries under $200/month"-thread for some shopping inspiration!

As your savings now are rather low I think the easiest thing you could do now is to follow the investment order and start saving in tax-deferred accounts + get rid of the 4 runner to lower 'hard bills'. Once you get on track with the savings you can figure out in more detail what the FI lifestyle will cost and to what extent your budget changes once your children get older (e.g. college savings).

[Shuman4413]

Great advice i believe i will do just that thank you very much for responding everyone. :)

[erutio]

Ok, you've got a great start.

@ysette9 already laid it out for you:

... you need to make up the gap between  your retirement income ($2057 per month) and the high end of hour spending estimate ($4500) which is $2443 per month. That translates into $29k yearly or $733k that you need to have invested. You could achieve that presuming nominal stock market returns of 7% real by investing $2883 a month. The usual stuff applies: invest only in broad market, passive, low-fee index funds, buy and hold, have a reasonable asset allocation, make sure you are properly insured, etc etc.

You spend $4500/month, passively earn $2000/month, so will need $2500/month to cover all your needs.  That translates to a stash of ($2500/month*12 months) *25 = $750,000.

As an example of how much cutting your expenses can shorten your time to retirement, if you can get your spending to more consistently be the lower end at $3500 (I know your daughter has medical needs, so I would looking into cutting expenses elsewhere), the stash you need would only be ($1500*12)*25 = $450,000!!

To answer you question, you can easily reach either of these numbers within 13 years. 

Regarding the investment order:
WHAT           
0. Establish an emergency fund to your satisfaction  You will not need a robust emergency fund due to your pension. I would keep maybe a 3 to 8 thousand dollar float in your bank account for monthly expenses.           
1. Contribute to your 401k up to any company match      You have the enough salary to immediately max your 401k, two IRAs, and still meet all your monthly expense.  Thus, I would set your 401k to 26% immediately (18500/73000 = ~25.3% -> round up to 26%).  Put it all in index funds at your chosen asset allocation.
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.  Get rid of 4runner and get a used, safe, fuel efficient vehicle.           
3. Max HSA   Probably not applicable due to military pension healthcare?  Unsure here.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   Max out IRAs (Roth or trad) for both you and your wife, $11k total. All in index funds in your chosen AA.           


Just by doing these steps, you will reach a $750k stash in about 13 years, or a $450k stash in less than 8 years.  Seems almost too easy to be true, but it's all you need to do. 

[Shuman4413]

the way you put it makes it seem so EZ :)

[erutio]

To put it even simpler:

Make no changes (ie, spend $4500/month, invest the remainder $2500/month) = retire in 13 years.

Replace car, saving about $500 per month, invest the rest = retire in 11 years.

Make minor changes (spending $3500/month, invest the remainder $3500/month) = retire in 7.5 years.

Make concerted, but realistic changes (reduce spend average to $3000/month) = retire in about 5 years.

*Above calculated using FV function in Excel.

[Shuman4413]

wow very powerful what rate of return do you guys use for these calculations? Also I hate the idea of having to deal with the 401k conversion to get the money out etc etc etc I don't know just part of the game. You guys have opened up my eyes a lot..... Thank you

[erutio]

I used 7% for my calculations above.

... Also I hate the idea of having to deal with the 401k conversion to get the money out etc etc etc I don't know just part of the game...

Yes, it is unfamiliar territory for a lot of people, but there's no reason to hate it.  It just involves a couple clicks online, and an extra form with your taxes for record keeping. 

You "don't know that part of the game" now, but you have 5-13 years to learn up about it. =)

[Shuman4413]

very true thanks for being so reassuring about that 5 to 13 years when your 27 feels like five million years

[ysette9]

I think the investment order stickie is so helpful because you can just start down the list and work on one thing at a time. Take care of the big hitters like tracking and reducing spending, and maximizing the tax-advantages investing. With those figured out you can take your time learning and asking questions to get the more nuanced optimization steps.

[Shuman4413]

i agree very much

[ixtap]

My spending varies that 1000 due to special formula $50 a can 2 to 3 times a week and doctor visits for my daughter which can be 10x a month with 30 dollar copays all depends. That's the variations everything else about or budget is low

rent 1400 water sewer trash included
electric 125
gas 50
health care 50 put aside
dental 100 put aside
car insurance 80
renters insurance 25
phones 50
4 runner 734
2614.00 hard bills
1k for groceries and food
another 0-1k for hospital special needs for children varies a lot month to month (she requires special medical attention regularly)
anywhere from 3614-4614
need to get rid of 4 runner i know (impulse buy)

You seem to be missing quite a bit, perhaps you haven't been tracking very long?

Gifts?
Entertainment?
Vacations?
Car maintenance?
Gas? (assuming the gas listed is for the home, but maybe it is for the car?)
Clothes? ie, we haven't bought any kind of clothing for 6 months, but that is still more than $0 per month

[Shuman4413]

yeah honestly need more work on tracking gas kinda falls in with groceries for us don't know why just always fill up when at grocery store clothes same. Vacation we have never taken one (military) and maintenance all under warranty why do you think I paid 40k for a car so I can get a free oil change make since? just kidding

[Lady SA]

What do you use to track your spending? Mint? YNAB? A Notebook?

Is your list of spending above accurate, based on historical records? Or a guestimate for some categories? Because I agree, you are missing a lot of categories for that to be an accurate view of your actual spending. I suggest using a tracking service for a few months (I use Mint and like it) to really gauge your real spending.

[beekayworld]

Good job! This looks great!

Some gaps though: What about clothes, haircuts, internet, cable tv, charity (offerings at church for example)?

Regarding gifts, don't just think about your family's Christmas and birthday gifts, but about your friends' birthdays, housewarmings, bridal showers, baby showers, and wedding gifts.

The gifts category gets even bigger once the kids go to school and are invited to birthday parties every other weekend. 

As the kids get older, new categories will be added. They will probably want pets.
 They may have sports expenses or tutoring, braces (covered by your insurance?), band instruments, field trips, dance classes.  There's Boy Scouts and Indians Guides, etc. that don't cost much but everything added together adds up.