CASE STUDY: Young Couple Needs Your Advice

[bigskyrookie]

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 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 $26,000.00 in a savings account (What should we do with this?). Starting July 1st we are expecting to have a combined income of $60,000.00 a year (pre-tax). Conservatively our anticipated expenses are:

Rent: $1,100 a month (We live in a very high rent area)
Utilities: $180 a month
Insurance: $220 a month
Gas: $200 a month
Groceries/Dining: $640 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
Retirement Plan automatic contribution: $625 a month
Car repair/ maintenance fund: $800 for the year
Medical Fund: $2,000 for the year
Travel: $5,000 for the year

Spending Allowance Total: About $46,7400

New Savings for the year: $4,300+




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

[ender]

Rent: $1,100 a month (We live in a very high rent area)
Utilities: $180 a month

$60k income for a couple seems low in a high cost of living area. This is more an observation than suggestion. But generally higher cost of living areas correspond to higher incomes than $60k for a couple.

Insurance: $220 a month

What is this? You list car insurance separately.

Gas: $200 a month
Groceries/Dining: $680 a month
Cell Phone Plans: $50.00 a month
Entertainment: $50.00 a month
Miscellaneous: $90.00 a month

These are all pretty reasonable (assuming you need to drive as much as you do, I guess?) other than food. I suspect with minimal effort you could cut the food budget several hundred, does this include significant eating out expenses? Many couples here are in the $200/couple range, even if you are double that you still are saving nearly $300.

Food costs are also one which is not easy to simply cut immediately but rather a slow change works. Perhaps shoot for lowering it $50/month for six months.

Car Insurance (2 cars): $90.00 a month

Obligatory MMM forum question, do you need two cars? They look to be costing you about $400 a month ignoring replacement costs (which I don't see budgeted anywhere).

Retirement Plan automatic contribution: $300 a month
Car repair/ maintenance fund: $800 for the year ($67/month)
Medical Fund: $2,000 for the year ($167/month)
Travel: $5,000 for the year  ($417/month)

I broke this down into monthly costs and added it together. Your total monthly expenses are just over $4000/month. This is pretty high on a salary of $60k as you are planning to spend $48,528/year. The math here won't work well at all, as you've got $12k total for savings/taxes (I didn't add the $300/month into the monthly $4k budget sum).

Even if the 60k is post tax you are only going to be able to save about $12k/year. or something like 20% your income.


If you are not planning on increasing your income significantly this lifestyle simply will not let you buy a house soon nor retire early at 45.

[MDM]

enderland's analysis looks spot on from here.

One other example: on an income of $60k, you are planning "Retirement Plan automatic contribution: $300 a month"?  That's only 1/2 of 1%. 

You can save now and retire (early) later, or you can spend now and work and spend and work and spend and....

[warfreak2]

One other example: on an income of $60k, you are planning "Retirement Plan automatic contribution: $300 a month"?  That's only 1/2 of 1%. 

It's 6%. But still nowhere near the levels needed for ER.

[bigskyrookie]

Thanks warfeak2 - you are correct.

[MDM]

One other example: on an income of $60k, you are planning "Retirement Plan automatic contribution: $300 a month"?  That's only 1/2 of 1%. 

It's 6%. But still nowhere near the levels needed for ER.

Yeah, what's a factor of 12 among friends?

[warfreak2]

Yeah, what's a factor of 12 among friends?

Ah, an astrophysicist.

:-D

[NewStachian]

Edit: Oops, I read age 45 as 35. My mistake. Let me update my numbers (I think ~45-50% is for 20 years, no? If it's not, please just fill in)

Rough numbers: If you make $60k and want to retire in 20 years, you're looking at having to invest roughly 50% of your salary each year. If your income doesn't change, you're looking at $30k of your money each year. Which means living off $30k a year, or $2,500 a month and FIRE'ing at that amount as well.

Or, if your expenses don't change(~40k a year), you'd have to adjust your income to a combined level of about $80k+ a year for the next 20 years.

You're definitely within striking distance with a few tweaks to either your budget or your incomes (my original post for FIRE at 35 was a bit less optimistic, sorry lol)

All that being said, here's what I recommend:

1) Put just enough into your 401(k) to get the match
2) Max both of your ROTH IRA's. Your income is low enough to not really be a factor, so a ROTH will be a better play for you at your income level.
3) Continue with your 401(k),
3) Do as much of the cost savings/revenue increases (second job?) that you can. A lot of high-income areas have high-paying side jobs like dog walker, uber/lyft driver, etc.

All that said, kudos to you for tackling this at 25. You're leaps and bounds above most people by taking a quantitative approach to this problem so early.

[Freedom2016]

Rough numbers: If you make $60k and want to retire in 10 years, you're looking at having to invest roughly 70% of your salary each year. If your income doesn't change, you're looking at $42k of your money each year. Which means living off $18k a year, or $1,500 a month and FIRE'ing at that amount as well.

Or, if your expenses don't change(~40k a year), you'd have to adjust your income to a combined level of about $130k+ a year for the next 10 years.

Both are extreme options. I think you need to ask yourself how important FIRE at 35 is to you. Is it worth one of the two options listed above, or maybe a hybrid of the 2? Is it worth changing fields or jobs? These are questions we can't answer for you.

All that being said, here's what I recommend: (which won't FIRE you by 35, but will still be helpful):

1) Put just enough into your 401(k) to get the match
2) Max both of your ROTH IRA's. Your income is low enough to not really be a factor, so a ROTH will be a better play for you at your income level.
3) Do as much of the cost savings/revenue increases (second job?) that you can. A lot of high-income areas have high-paying side jobs like dog walker, uber/lyft driver, etc.

The OP says they are 25 now and would like to retire at 45, so they have 20 years to work with...

[bigskyrookie]

Thanks for the scenarios. Yes the goal is retire by 45 not 35, but some of the same advice applies.

[Thegoblinchief]

Food is a red flag. $200 for a couple should be your end goal, $300 tops including all "misc". Allergies require creative cooking, but not sure how that increases the food bill? Maybe with more specifics I could help.

$5000 travel per year is a lot. I plan on spending that much when I'm FI, but not as much before. If it is trips to visit family overseas, that's somewhat understandable, but you could benefit from the threads on travel hacking and credit card churning. Not my cup of tea, as having a family of 5 necessitates shorter, driving vacations.

What is the medical fund for? Do you have chronic health issues that require known, regular expenses?

[ender]

Enderland- You are correct, our food expenses are very high and this is largely due to several significant food allergies in the family. But I do think we can try to trim this a little!

Just to be clear, a little trimming is not going to let you achieve the goals you set out in your first post. Either significant increase in income or reduction in expenses.