Author Topic: Case study: Help 25 year old couple reach retirement at 45  (Read 7326 times)

bigskyrookie

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Case study: Help 25 year old couple reach retirement at 45
« on: March 15, 2014, 03:35:44 PM »
My wife and I need your help creating a blueprint for early retirement on a meager income. A blueprint that allows for travel, good living, and a future down payment on a house, future kids (lets say two kids starting in 4-6 years) all while retiring at age 45. I am just about to graduate with a Masters Degree and my wife and I are both 25 - we are ready to start our long road to being mild mustachians. At this point we are debt free and have $25,000.00 in a savings account (What should we do with this?). Starting July 1st we are expecting to have a combined income of $58,000.00 a year before taxes and lets assume this dose not change much into the future. Conservatively our anticipated expenses are:

Rent: $1,000 a month
Utilities: $200 a month
Insurance: $300 a month
Gas: $230 a month
Food/toiletries: $550 a month
Cell Phone Plans: $50.00 a month
Entertainment: $50.00 a month
Miscellaneous: $90.00 a month
Car Insurance (2 cars): $90.00 a month
401k automatic contribution: $300 a month
Car repair/ maintenance fund: $800 for the year
Medical Fund: $2,000 for the year
Travel: $7,000 for the year ( we really like to travel)

Total: About $44,120


Please share your ideas on how to save, invest, and use this money to complete our goals! Thank You!
« Last Edit: March 16, 2014, 03:15:19 PM by bigskyrookie »

Zikoris

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #1 on: March 15, 2014, 04:11:11 PM »
Really interesting case study - my boyfriend and I make a similar income (about 65K), similar age (27 and 25), and also spend 7K a year on travel! That said, I'd trim a lot:

Rent: we pay $732 in a major city. I wouldn't be comfortable paying more than $800, utilities included. I would hope that if you were paying $1100 utilities would be included.

Insurance is really high since it doesn't include car insurance and you're not homeowners - I have renters insurance and it costs about $15/month. Did you buy some sort of expensive life insurance policy from a friend or relative? Ditch it.

I can't comment on cars since we don't have any, but the numbers seem a bit high - do you need two cars? Do you need to drive a lot?

Food - $600/month for two people is pretty nuts. We spend well under half that. I would trim it.

I have no issue with a big travel budget, but definitely make sure you're getting a big bang for your buck. Our 2013 travel budget ($7600) included a summer trip to the south of France, Italy, and Monaco, and a winter vacation to Guatemala. The year before that we went to Paris and northern France in the summer and a Caribbean cruise. This year we're working our way by train though Hungary, Austria, Switzerland, and France in the summer, and taking off for Cuba or Hawaii or the Dominican Republic in the winter. So make sure if you're shelling out a lot of money that you're at least getting some really spectacular vacations.

saveriam

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #2 on: March 15, 2014, 04:28:32 PM »
Something to consider is when you have kids expenses will be higher.  I also enjoying traveling but for us it's either family vacation or no vacation. 

Ambergris

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #3 on: March 15, 2014, 04:51:36 PM »
My wife and I need your help creating a blueprint for early retirement on a meager income. A blueprint that allows for travel, good living, and a future down payment on a house, future kids (lets say two) all while retiring at age 45. I am just about to graduate with a Masters Degree and my wife and I are both 25 - we are ready to start our long road to being mild mustachians. At this point we are debt free and have $25,000.00 in a savings account. Starting July 1st we are expecting to have a combined income of $58,000.00 a year before taxes ( lets assume this dose not change much). Our conservative anticipated expenses are:

Rent: $1,100 a month
Utilities: $250 a month
Insurance: $350 a month
Gas: $230 a month
Food/toiletries: $600 a month
Cell Phone Plans: $50.00 a month
Entertainment: $50.00 a month
Miscellaneous: $90.00 a month
Car Insurance (2 cars): $90.00 a month
401k automatic contribution: $300 a month
Car repair/ maintenance fund: $800 for the year
Medical Fund: $2,000 for the year
Travel: $7,000 for the year ( we really like to travel)

Total: About $47,120


Please share your ideas on how to save, invest, and use this money to complete our goals! Thank You!

OK, so you want to be FI in 20 years.  I ran the calculator at http://lab.madfientist.com/calculators/time_to_fi with the following numbers:
Current net worth: 25000
Monthly expenses: (47120-3600)/12=3626
Monthly savings: 300
W/D rate: 4% (a bit high: this should be closer to 3%)
Investment returns: 6% (achievably conservative; I wouldn't bank on more than this for planning purposes)
...and got as a result that you would be FI in more than 43 years.  So something has to give.

So what has to give?  Well, the savings rate has to come up, for a start.  Taking monthly savings to $1426 and expenses to $2500 gets you to FI in just over 20 years (i.e. by the time you are 45).  So we need to get savings up and costs down by $1100.

Now, is there any space in your budget besides the spending above?

A really, really rough estimate for taxes gives about $4850 for federal.  Let's say you pay half of that for state (this is the approx figure for me, and I'm in a low tax state but with a slightly higher income and single).  This means you have $7275 in taxes to pay on top of your $47120: a total of 54395.  Then you have FICA, for you that would be $4437.  This gives a total of 58832, so all the extra space is probably taxes.  Have you run the numbers on your actual paycheck figures?

This means that the only other way to get yourself to FI is to cut expenses.

First, we have a housing/car costs issue.  Your apartment is expensive: are you in a big city/NorthEast/Cali?  Where are you living vis a vis your work?  Could you find alternative transportation, or bike/walk? You are being killed on gas, and even halving your usage would significantly increase your chances of FI.

What's "insurance": is that medical?

Utilities are a bit high, especially for living in an apartment and not including phone.  How does that break down? Could you take $100 off this by setting the temp lower, unplugging standby applicances, etc?

Food is also high. You should be able to chop a hunk off the food bill by planning more carefully, using loss leaders, switching to generic brands and stopping eating out. There are several helpful threads on doing this if you do a search.

Travel: where are you going, and what are you doing there?  At 25 you are still in a position to rough it a bit, and so if you want to FI and travel, you should probably learn to do this.  No fancy hotels until you're 40. ;)

Also, watch the "misc" category.  This isn't too bad, but it's a danger zone.

« Last Edit: March 15, 2014, 05:25:18 PM by Ambergris »

Zikoris

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #4 on: March 15, 2014, 05:25:31 PM »
Why do you have life insurance if you have no dependents?

Ambergris

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #5 on: March 15, 2014, 05:28:56 PM »
Thank you for taking the time to look a bit deeper into this. Your insight is very helpful!

I'll answer some of your questions:

- As far as the "gap" - There is another $4,000 dollars or so to invest and I am wondering if it is best to add that to my 401k or start investing in another way?

- We are living within 10 miles of both our work places.

- insurance is medical, life, and renter's

-Yes utilities are high and will be trimmed down a bit;)


Thank you!

BSR, you're very welcome: I actually realized that I hadn't run the tax figures for you.  Am I right?  Because my guestimates are saying the $4000 isn't there. 

MDM

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #6 on: March 15, 2014, 07:19:16 PM »
I share Ambergris' question: what $4000?

Below is an attempt to recreate your post in spreadsheet format.  From that, it appears your spending is almost exactly equal to your after-tax income...?

In - Out = Accumulation.  If you want more accumulation, either In must go up or Out must go down.

CategoryMonthly amt.CommentsAnnual
Salary/Wages$4,833 $58,000
FICA base salary/wages$4,833 $58,000
401(k)$300 $3,600
Income subject to IRS tax$4,533 $54,400
Paycheck deposit$4,533 $54,400
Federal Adj. Gross Inc.$4,533 $54,400
Federal tax$353 2014 rates, stand. ded., 2 exemptions  $4,238
State tax$181 Guesstimate$2,176
Medicare/SS tax$370 $4,437
Total taxes$904 $10,851
Income before other expenses  $3,629 $43,549
Monthly Expenses:
Rent$1,100 $13,200
Car Insurance$90 $1,080
Entertainment$50 $600
Fuel/Public Transport$230 $2,760
Gas and Electric$250 $3,000
Groceries$600 $7,200
Household; Maintenance$67 $800
Medical$167 $2,000
Medical Ins.$350 $4,200
Miscellaneous$90 $1,080
Phone$50 $600
Travel/Vacation$583 $7,000
Total Expense$3,627 $43,520
Available to invest$2 $29
« Last Edit: March 15, 2014, 09:32:44 PM by MDM »

golfer44

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #7 on: March 15, 2014, 09:08:58 PM »
You can't have it all, skipper.

Gimesalot

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Re: Case study: Help a couple in their 20s reach retirement by age 45!
« Reply #8 on: March 16, 2014, 03:14:33 PM »
Here are my suggestions in blue, savings in red:

Rent: $1,100 a month  Get this down somehow.  Maybe a room mate?  Renting out a room or couch on Air B&B?  $100

Utilities: $250 a month get lower rates on internet by threatening to leave.  Cancel cable.  Save energy by lower thermostat in winter, raising it in the summer, installing a timer on hot water heater, changing shower head, etc. $50

Insurance: $350 a month I would not have life insurance at your age unless it was free, or parents owed money on your  education $10

Gas: $230 a month You both live close to work, sell one car. Ride your bikes or car pool to make up for the lost car  $115

Food/toiletries: $600 a month Learn to make a lot of the special foods from scratch $100

Cell Phone Plans: $50.00 a month
Entertainment: $50.00 a month

Miscellaneous: $90.00 a month Figure out where you are spending this money.  Then budget or cut.

Car Insurance (2 cars): $90.00 a month Sell one car.  $45

401k automatic contribution: $300 a month

Car repair/ maintenance fund: $800 for the year  Sell one car.  Learn to change your own oil every 5k miles. $40

Medical Fund: $2,000 for the year Tough to limit but may be possible by taking advantage of free or reduced cost screenings

Travel: $7,000 for the year ( we really like to travel) Really?  I love to travel but our $5k a year is enough for several weekend trips in the US and one international trip a year.  Focus on low cost destinations until you make more money.  My husband and I stay at fancy hotels or apartments and eat at restaurants on our vacations and still stay to about $200/day including airfare and hotel.   $170

That's $630 a month.  Over $7500 a year.  You wanted to only save about half of that, so I suppose you can pick and choose what you would like to do.  Just remember that saving 10% a year is what most people suggest as a savings rate for those that want to work well into their 60's.
« Last Edit: March 16, 2014, 03:20:35 PM by Gimesalot »

capital

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #9 on: March 16, 2014, 03:24:36 PM »
-Unfortunately, rent in our area is very high and home prices are even higher. Not much we can trim from our rent budget:/
Thank you for your thoughts and happy traveling!
Dunno where you live, but the cost of living seems very high to me, and that's from the perspective of NYC. Your rent is only a bit less than the price of a basic NYC 1-bedroom, but considering the added cost of utilities, car ownership, combined with relatively low salaries for your level of education, it doesn't seem like you're getting much bang-for-buck location-wise, which is a big threat for plans of early retirement. Is there anything that's holding you back from moving somewhere with higher salaries or lower housing prices?

Dr. Doom

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Re: Help a couple in their 20s reach retirement by age 45!
« Reply #10 on: March 16, 2014, 04:00:23 PM »
Since you've stated it's basically impossible to get your monthly housing costs down and you're not moving, your cost cutting is going to have to come from selling a car, trimming your vacation budget, cancelling your life insurance, and trimming around the edges of your other expenses.  I know you really like to travel, but it also sounds like you'd really like to not work forever, too.  7K/yr is a lot to spend on vacations IMO.  My wife and I take 3 weeks a year and don't go over 2K for the duration, don't feel deprived at all, always have fun.

However, we do want the 25,000 to be somewhat liqued for a future down payment on a house. Thanks for everyone's help!

You may not want to buy a house.  It's not automatically a great decision for everyone, and for some folks it works out very badly.  Suggested reading: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Also based on some of your comments it seems like maybe you could use some baseline investing help.  Try jlcollinsnh's stock series.  Read it twice for good measure. http://jlcollinsnh.com/stock-series/

I guess I like jlcollinsnh....


mlipps

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #11 on: March 16, 2014, 04:23:29 PM »
As far as what to do w/the $25k, I'd put $22k in Roths for each of you for 2013 & 2014. Since this is your emergency savings as well as possibly the money for a future down payment, I would invest it very conservatively, if at all, but at least thig way you will have the space in your Roth preserved. You can open a Roth at a credit union & put the money into CD's or high interest savings, or you could put it into something conservative like a Vanguard Life Strategy income fund.

iris lily

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #12 on: March 16, 2014, 04:24:15 PM »
Why do you have renters' and life insurance? Always self-insure and you will save thousands over a lifetime.

Self insurance for life? That means that either you or your spouse can take care of yourself in the event that one of you dies. I think you are both in that place, you do not need commercial life insurance.

Self insure for your "stuff" (means no renter's insurance): Since you've got a lovely stash of $25,000 you can replace anything that gets stolen or destroyed. But in general, you won't want to have crap that costs a lot of money because it costs a lot of money. If your apartment is destroyed by fire today, tomorrow you can furnish it with cast offs from your friends, family, and co-workers. Clothing would be thrift store. You'd likely have to replace a computer or two and buy a new mattress. That's about it at retail price.

About the kids thing--really re-think that. You can get to FI much faster without them.

 

Cpa Cat

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #13 on: March 16, 2014, 04:55:15 PM »
Can you switch to a high deductible health insurance plan? Then set up an HSA, put the health savings there and take the tax deduction. This should reduce both the health cost and tax bill.

chasesfish

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #14 on: March 16, 2014, 05:20:30 PM »
Why is your combined income only $58,000?  What profession?  Your young enough to improve that. 

chasesfish

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #15 on: March 16, 2014, 06:04:18 PM »
There are good, high paying jobs if you're willing to look, learn, and not afraid to get dirty.  HVAC techs in a Georgia can make $70k-$90k.

Economic cycles may come and go, but I'm pretty sure it'll be hot in the summer in GA.

Zikoris

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #16 on: March 16, 2014, 06:11:15 PM »
I don't think it's really critical to strive for high income if you're willing to tighten up other areas - my boyfriend and I make about 65K combined, but save over 60% of our take home pretty easily by keeping our spending under control.

capital

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #17 on: March 17, 2014, 12:20:28 AM »
I don't think it's really critical to strive for high income if you're willing to tighten up other areas - my boyfriend and I make about 65K combined, but save over 60% of our take home pretty easily by keeping our spending under control.
Agreed. But 10 mile car commutes in opposite directions plus high rent mean that something needs to give in terms of salary or housing or commute for there to be room for more savings. Either higher salaries to justify car commutes and expensive housing, or very cheap housing to justify needing to drive that much, or finding different jobs with better commutes ($30k, with no room for increase, isn't a very high salary in most fields, so it oughtn't be that hard to find different jobs with a cheaper commute). Expensive housing, plus everyone needing a car, plus low salaries is a bad combo.

Hugerat

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #18 on: March 17, 2014, 05:39:57 PM »
Agree with many of the points the others have made. You are paying a lot of rent for a seemingly very car dependent area. Dump one of the vehicles, move, or do something else about this bad situation. The unspecified insurance should also be cancelled immediately. 25 year-olds with no kids do not need life insurance.

The only thing I'd add that hasn't been discussed too much was that your travel budget is extremely high even if you are taking annual trips to Europe. Was Nicaragua for 5 weeks last year your only trip? 5 weeks in Nicaragua should cost less than half this sum (your budget is 6 times higher than the country's per capita GDP).

bigskyrookie

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Re: Case study: Help 25 year old couple reach retirement at 45
« Reply #19 on: March 17, 2014, 05:53:12 PM »
Yes we are in a car dependent area, which is a big challenge but it is where we want to be at least for a while. Its car dependent because it is rural. Yes, the trip to Nicaragua was one of several trips.