Author Topic: Case: Young and Fortunate - Retiring possible at 30?  (Read 3870 times)

YoungJohn

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Case: Young and Fortunate - Retiring possible at 30?
« on: August 03, 2015, 03:10:14 AM »
Dear Mustachians,

Since about a year ago I stumbled upon this website and have since been interested in early retirement.
Let me give you some background on my situation and where I currently stand. I am looking for advice.

Life situation
I am 21 yo, from a western European country and have been fortunate enough to inherit a significant amount of money. I've a small idea of what to do, what not to do, etc - but not enough I feel. My goal is to be able to retire at 30 with a reasonable lifestyle.

fyi - I have a girlfriend, but my girlfriend's and my income/expenses are separated - too young to share, she still studies.

My current financial situation:
Capital: 502k
(in investment account, yearly ROI 6% - I can not change investment banks for 3 more years - taking out money is limited.)
Emergency Fund: 14.000
Study Debt: 12.850 (0,12% interest till 2019)

Income before taxes: 68k/yr ($83k USD - at average conversion rate)
Take-home-pay: 2850/m (after taxes, healthcare, pension fund, unemployment benefit, etc)
Savings-before-expenses: 350/m

My expense budgets are as following:
Rent: 600,- (2br apartment in Belgium, sharing with GF)
Utilities: 50,-
Car: 487 (Kia Rio Lease 2015) **
Food/Groceries: 250
Phone / Internet: 100
Extra Insurance: 35
Clothing: 200
Personal Care: 35 (think of haircuts, gel, shaving stuff, etc)
Mountainbiking: 150 (this is my sport/hobby)
Miscellaneous: 250 (This is projected expenses, so misc. is a bit hard to determine)

Want to save for:
- Wedding (even though I do not want to think about it yet)
- House purchase (see below)
- Having 1 Kid

That gives a monthly buffer of 315 after savings and expenses.
Because my salary is in USD, this fluctuates a little - above income and buffer is calculated at average conversion rate to EURO. Currently the buffer is 450/m

I expect the capital to be worth 810k after taxes when I am 30, after putting 350,- in every month at a 6% ROI

Income from return-on-investment in my country is taxed at 30%. Quite high.
That means at 30-year-old, with a withdrawal rate of 4%, I would nett 2025 monthly, which is too little to maintain a family.

To live a normal middle-class life you will need about 3000/m (2000/m if you paid a house in cash)
An average house in the sub-urban areas currently goes for about 300.000, city areas about 425.000

My questions:

1. How can I improve my chances on a early retirement at 30? - I don't want to stop working at 30 tbh, but I do not want to have to worry about any of the bills when I live a normal lifestyle (middle class).
2. What are the best moves I can make right now financially to increase my chances?
3. Do you see it possible for me to retire at 30 with an income of 3000/month after taxes - purely from return-on-investment?

 

** Car: I am driving a 2015 Kia Rio, I drive about 15.000km/yr, because I use the car to invest in my personal network - I find building a strong network of talented, high-growth individuals very important. And this will definitely increase my chances of earning more later on. (attending events, conferences, meeting people, visiting family, etc) - Leasing is a significantly cheaper option due to Car Insurance VS buying a new car. Buying an old second hand car saves about 100. See a comparison below (15 year old mazda 323 vs new Kia Rio)





« Last Edit: August 03, 2015, 07:39:47 AM by YoungJohn »

thedayisbrave

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #1 on: August 03, 2015, 07:07:35 AM »
What is your money invested in? Is that 6% guaranteed, or just an estimate of market returns? If it's the latter, I would just be careful not to count on it... sure it could average out to be a 6% return over 30 years, but it's impossible to know that before the fact.

The price comparison you posted with the Kia Rio vs. the 15 year old Mazda... it shows that buying the 15 year old Mazda as the cheapest option.. so I'm not sure why you insist leasing the Rio is the best idea.  That's 100 euro that could go into savings each month.

You are in good shape for right now.  But since you're so young, there are definitely future unknowns, as you've documented.  So keep saving.  Some things I noticed:

-200 euro on clothes every month is very, very high.  What are you spending all this on?
-Phone/internet.. can you shop around for cheaper plans? For comparison, my cell phone + internet combined is about $40 (USD)..

I would also separate out the miscellaneous category and see what exactly that money is going to. 

I calculate your expenses to be 2507 euro (including savings before expenses), yet your income to be 2850.. what are you doing with the extra 350?

velocistar237

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #2 on: August 03, 2015, 07:10:49 AM »
You are fortunate to start off with a pretty good amount of capital. You'll need to increase your savings rate, though, to retire by 30. You might need to aim for later than that. Most of the gains you're calculating right now are from interest on your capital alone, and your 350/mo contributes less than 50K to the final ~800K amount. Taxes are making the calculation difficult, but I can take a shot at it later and tell you how much you'd need to increase your savings by. What is the basis on your 502K capital?

Are you sure that maintenance, gas, and insurance are included in the car lease? That would be unusual in the US.

I'd start by aiming at food, phone, and clothing.

YoungJohn

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #3 on: August 03, 2015, 07:35:22 AM »
What is your money invested in? Is that 6% guaranteed, or just an estimate of market returns? If it's the latter, I would just be careful not to count on it... sure it could average out to be a 6% return over 30 years, but it's impossible to know that before the fact.

Over the past 15 year it has been 6% average, but it's not guaranteed. In 3 years I get management over it myself, if I would want to.

The price comparison you posted with the Kia Rio vs. the 15 year old Mazda... it shows that buying the 15 year old Mazda as the cheapest option.. so I'm not sure why you insist leasing the Rio is the best idea.  That's 100 euro that could go into savings each month.

The reason being is that I don't drive often, but long distances. It seems to me smarter to take a reliable car vs a 15 yo old car for 250km++ distances

You are in good shape for right now.  But since you're so young, there are definitely future unknowns, as you've documented.  So keep saving.  Some things I noticed:

Definitely planning to keep saving. What kind of 'unknowns' should I be aware of? Or isn't it really an unknown if you could name it? ;)

-200 euro on clothes every month is very, very high.  What are you spending all this on?
-Phone/internet.. can you shop around for cheaper plans? For comparison, my cell phone + internet combined is about $40 (USD)..

Ehh.. yeah clothes might be a bit pessimistic. As said it's projected expenses, currently I don't spend that much. Though clothes are more expensive in Europe than US. 100/150 more likely.

Internet: Home internet is about 70,- and cellphone plan about 25. - However my employer compensates for it with extra $100/m salary (the employment situation is a bit strange as I work for a US company as contractor for the time being, until they have a Europe entity)

I would also separate out the miscellaneous category and see what exactly that money is going to. 

I calculate your expenses to be 2507 euro (including savings before expenses), yet your income to be 2850.. what are you doing with the extra 350?

Nothing at the moment - this is projected. This will go to savings if I have it left at the end of the month.

YoungJohn

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #4 on: August 03, 2015, 07:37:50 AM »
You are fortunate to start off with a pretty good amount of capital. You'll need to increase your savings rate, though, to retire by 30. You might need to aim for later than that. Most of the gains you're calculating right now are from interest on your capital alone, and your 350/mo contributes less than 50K to the final ~800K amount. Taxes are making the calculation difficult, but I can take a shot at it later and tell you how much you'd need to increase your savings by. What is the basis on your 502K capital?

Are you sure that maintenance, gas, and insurance are included in the car lease? That would be unusual in the US.

I'd start by aiming at food, phone, and clothing.

Yes, maintenance, gas, insurance, taxes, winter tyres, etc are all part of the leasing plan.

grantmeaname

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #5 on: August 03, 2015, 07:48:31 AM »
Quote
** Car: I am driving a 2015 Kia Rio, I drive about 15.000km/yr, because I use the car to invest in my personal network - I find building a strong network of talented, high-growth individuals very important. And this will definitely increase my chances of earning more later on. (attending events, conferences, meeting people, visiting family, etc)
I don't think attending conferences to the tune of 487 a month will pay off in the next nine years. It is enjoyable to know "talented, high-growth individuals", but I don't really see that you've made much of a business case for doing so. If you want to keep doing it you certainly can, but I can't see any way in the world that you're getting 487 of value out of it in increased future earnings. And if you really need a network of growthy people, couldn't you just take a train? You could do a lot of travel before you got to 487!

I'd start by aiming at food, phone, and clothing.
Those aren't bad ideas, but the red flag that jumps out at me (besides the numbers not adding up) is that OP spends almost 10% of his take-home every month on miscellaneous. That's almost as much as actual savings and it goes towards who knows what! I'd say a high priority should be figuring out what that 250 goes to and plugging all the holes.

Kronkl

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #6 on: August 03, 2015, 07:51:18 AM »
Leasing a car including gas? Most leasing constructions include maintenance, taxes and insurance but exclude gas. Don't you have a limit on km's per year you can drive? If not, can you share this plan with me? I'm interested as well ;-)

YoungJohn

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #7 on: August 03, 2015, 07:58:54 AM »
I don't think attending conferences to the tune of 487 a month will pay off in the next nine years. It is enjoyable to know "talented, high-growth individuals", but I don't really see that you've made much of a business case for doing so. If you want to keep doing it you certainly can, but I can't see any way in the world that you're getting 487 of value out of it in increased future earnings. And if you really need a network of growthy people, couldn't you just take a train? You could do a lot of travel before you got to 487!

Well.. I haven't gotten the car yet (again these are projected expenses). It's a bit of a 'want' as well. I know it's not very mustachian. It just gives me so much more freedom to attend events/meet people more regularly and save a lot of time on public transport, including freedom in my sport for weekend trips to the Ardennes, Germany, etc.

Those aren't bad ideas, but the red flag that jumps out at me (besides the numbers not adding up) is that OP spends almost 10% of his take-home every month on miscellaneous. That's almost as much as actual savings and it goes towards who knows what! I'd say a high priority should be figuring out what that 250 goes to and plugging all the holes.

I will work this out as much as I can once I am more sure about these expenses.

Think of: Dinner going out, lunch with someone for a meeting, grabbing a beer at the bar with a friend, buying an audio-set, purchasing a fridge, etc. I am relocating from SEA back to Europe, so don't have any belongings (couch, bed, etc etc)

YoungJohn

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #8 on: August 03, 2015, 08:00:46 AM »
Leasing a car including gas? Most leasing constructions include maintenance, taxes and insurance but exclude gas. Don't you have a limit on km's per year you can drive? If not, can you share this plan with me? I'm interested as well ;-)

with gas: 486/m
without gas: 385/m

You just get a tank card for at the petrol stations with which you pay, which is included in your monthly fee.

velocistar237

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #9 on: August 03, 2015, 08:26:19 AM »
I'm not sure how to consider basis. My thought is that long-term, most of your investment return will be from gains, so use a flat 30% as the tax amount. Or, just calculate the first-year balance needed based on a particular basis and assume that better-than-expected returns will cover the subsequent tax increase.

The first way, I get that you need to save 3173/mo, and the second, I get something more like  1200/mo best-case. Either way, that's a lot more than 350/mo. You'll need to tighten your expenses or relax your time frame or rely on future income increases. How do you feel about retiring at 33?

Let me know what you think of the attached spreadsheet. (Grant, can you take a look?)

EricL

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #10 on: August 03, 2015, 08:30:30 AM »
That student loan, at 12%, counts as an emergency.  I recommend you kill it ASAP.  Consider using some of that emergency fund. 

The 250 miscellaneous is silly.  Use it to pay the loan and if a miscellaneous cost comes up tap the emergency fund and reimburse it accordingly.

Learn to cut your hair yourself off of YouTube.

It seems like you're wedded to the Rio.  Considering Belgium's current 5.40 a gallon gas prices and your ~30 mile daily commute at ~42 mpg, 101 a month for gas looks like a pretty good deal.  But the way you describe it still kind of hints that there may be some rationalization there.

Ditto on the monthly clothing costs.  Ater a year spending 200 a month your apartment should look like a clothing cocoon. 

The investment account % is OK.  If you have an alternative you prefer after three years expires research it thoroughly. Remember you may get hit with taxes when you move the money.

Make sure you get your girlfriend on board.  This will save you a little money on the wedding if the conversation goes well.  And she can contribute money to both your happily ever afters.  Or it will save a lot if the conversation goes poorly. 

I don't think you have a shot - especially if you want a kid - at retiring at 30 unless you REALLY jack up your savings and/or investment returns, make more money.  But if you can do a little better than you're doing now 35 or 36 is very likely.  That's still really good. 

YoungJohn

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #11 on: August 03, 2015, 08:38:11 AM »
That student loan, at 12%, counts as an emergency.  I recommend you kill it ASAP.  Consider using some of that emergency fund. 

250 misc. I will come back on this.

Re Cutting my hair myself: with my amount of curls? Ehh.. but I spend only 7,5/m on this

Re Car: There is some rationalization... it's something I really want.. probably not necessarily need.

35/36 still sounds reasonable for sure - after all I am not expecting to stop with work entirely. I would like to shoot for 30 though, even it it means I have to make some more income.


YoungJohn

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #12 on: August 03, 2015, 08:48:29 AM »
I'm not sure how to consider basis. My thought is that long-term, most of your investment return will be from gains, so use a flat 30% as the tax amount. Or, just calculate the first-year balance needed based on a particular basis and assume that better-than-expected returns will cover the subsequent tax increase.

The first way, I get that you need to save 3173/mo, and the second, I get something more like  1200/mo best-case. Either way, that's a lot more than 350/mo. You'll need to tighten your expenses or relax your time frame or rely on future income increases. How do you feel about retiring at 33?

Let me know what you think of the attached spreadsheet. (Grant, can you take a look?)

Hey thanks for helping out so actively. A example calculation for the capital gain tax:


Tax based on total capital at 1st of January.

Total capital = 200.000
Debts = 12.000
Tax free = 21.139
Taxable capital = 200.000 - 12.000 - 21.139 = 166.861
4% advantage of capital = 6.674 (this is a standard ROI rate used by the government and is FIXED)
Tax of 30% on advantage = 6.674 * 0.3 = 2002 in taxes.

At 1.2million without debts it would be:

Total capital = 1.200.000
Debts = 0
Tax free = 21.139
Taxable capital = 1.200.000 - 21.139 = 1.178.861
4% advantage of capital = 47.154 (this is a standard ROI rate used by the government and is FIXED)
Tax of 30% on advantage = 47.154 * 0.3 = 14.146 in taxes.


Kronkl

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #13 on: August 04, 2015, 05:47:15 AM »
Leasing a car including gas? Most leasing constructions include maintenance, taxes and insurance but exclude gas. Don't you have a limit on km's per year you can drive? If not, can you share this plan with me? I'm interested as well ;-)

with gas: 486/m
without gas: 385/m

You just get a tank card for at the petrol stations with which you pay, which is included in your monthly fee.

Seems to me you are dutch. Me too. Never heard of leasing a car with included cost for gas. The 101 will be an advanced payment for the gas, but you definitely will have to pay for *all* the gas you fill up in your tank.

velocistar237

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Re: Case: Young and Fortunate - Retiring possible at 30?
« Reply #14 on: August 04, 2015, 09:05:36 AM »
example calculation for the capital gain tax:

So it's basically an annual 1.2% tax on capital. You can treat it as a reduction in growth rate on the way to FI and a reduction in SWR during FI. I've updated the spreadsheet with a table to show the tradeoff between retirement expenses and years. Obviously if you continue to work part-time, it's different, but it's just to show the idea.