Hypothetical Case Study: Nothing at 40...retire comfortably at 50?

[EconDiva]

This is the hypothetical scenario:

Single 40 year old, no children
Retirement savings: $10K ($5K in a 401K and $5K in a ROTH)
Revolving debt: $0
No other assets (rents home)
Emergency fund: $5K
Annual gross income: $50K

Monthly income: $3125

Monthly expenses:
Rent: $1000 (rents a 1 br/1ba condo close to town)
Cable/net: $100
Travel: $300
Transportation: $200 (gas/car insurance)
Electricity: $100
Food/Household goods: $400 (this includes eating out)
Cell phone: $100
Gas/Water/Sewer/Trash: $100
Clothing/entertainment/fun/wants: $200
401K: $200 (5%; company matches another 5%)
ROTH: $425
Total: $3125

Let's say this is the person's goals:
-Retire at 50 with enough income to continue to live the above lifestyle
-Buy a reliable used car by the time they retire with enough savings to replace every 5-8 years or so

Let's also say:
-Person will have a pension of $500/month in retirement
-They are willing to work part time in retirement
-Rents in their city are moderately high; they could find an alternative place for as low as around $850 but not much less

The questions are:
-Could this person retire at 50 with enough income to continue to live the above lifestyle (or very similar)?  If not, at what age could they do so?
-What adjustments would they need to make financially in order to do this (what things would you suggest they cut, and by how much)?
-Should this person consider buying a home before or by the time they retire (let's say they are on the fence about doing so and don't have a preference to owning versus renting...and plan to stay single forever)?
-In your personal opinion, is this person 'irresponsible' for wanting to stop working their $50K/year full time job to retire at 50?  Let's say their main motivation is simply to leave the "rat race" and have a less demanding/more leisurely lifestyle.

[FireDAD]

You mention wanting to keep living the same lifestyle which is a 5% savings rate.
Where is the $3,125 a month going to come from in 10 years? You will need just over $1MM to have the passive income to support that level of spend. You have $5,000. I have a similar income and my fire date is 12 years of work from $0 so it can be done on that income, but there needs to be some serious attention to the expense side of this to have a chance.

[horsepoor]

There would only be maybe $120K in retirement accounts after 10 years - not even $5K/year SWR.

Doubtful that the $500/month pension can be drawn at 50, but if it can, that only gets this person up to $11K income. 

Expenses are $2500/month or $30K/year, so with no adjustment in spending, this person either needs about a $750K stash (more than gross earnings over the 10-year horizon) or a way to make more than $29K in part time work.  I also don't see a line item for health care, which would be an added expense in ER if it's covered by employer currently.

There are some easy expense cuts there - housing (roommate, cheaper COL area after FIRE), cell phone, food bill, travel, utilities.  Those would all need to get scraped to the bone to get the savings rate, way, way up.

[arebelspy]

I wrote up a long answer, but first I need this answered:

Annual gross income: $50K
Monthly income: $3125

Where is the other 1000/mo going?  (50k annual =4167/mo., yet take home is somehow 1000 less than that.)  Some should be going to taxes, yes, but that seems extremely high.

And it can't be going to retirement savings, as those were counted in the spending as part of the $3125.  If it is retirement savings that's being taken out before the $3125 received, than there's spending missing from the $3125, as it's being taken out twice (from the 50k gross to net 3125 and from the 3125).

Find out where that missing money is and then I can more accurately answer your questions.  :)

10 year FIRE is totally possible, especially when you have the $500/mo pension coming.  But probably not on that low 20% savings rate (625/3125).

Figure out the above missing money though and we can tweak things to see 1) What age you can FIRE with that savings rate, and 2) What you'd need to tweak to FIRE at 50.

[FarmFam]

I think this is an interesting and fun experiment!  Thank you OP for this post. 

This seems to be a situation that a lot of people will find themselves in and I am interested in seeing the responses.

I would like to see a hypothetical one for someone who maybe just graduated college, has student loans and is starting their lives.  Or one with a young family and aging parents with student loans.  These seem to be common scenarios that maybe we can all learn from.  But then again, we do have some real case studies similar to these as well to learn from.

I just find this question interesting.

In response to EconDiva's question, maybe the OP can use this site to create a more realistic take-home pay: http://www.paycheckcity.com/calculator/salary/

[EconDiva]

I wrote up a long answer, but first I need this answered:

Annual gross income: $50K
Monthly income: $3125

Where is the other 1000/mo going?  (50k annual =4167/mo., yet take home is somehow 1000 less than that.)  Some should be going to taxes, yes, but that seems extremely high.

And it can't be going to retirement savings, as those were counted in the spending as part of the $3125.  If it is retirement savings that's being taken out before the $3125 received, than there's spending missing from the $3125, as it's being taken out twice (from the 50k gross to net 3125 and from the 3125).

Find out where that missing money is and then I can more accurately answer your questions.  :)

10 year FIRE is totally possible, especially when you have the $500/mo pension coming.  But probably not on that low 20% savings rate (625/3125).

Figure out the above missing money though and we can tweak things to see 1) What age you can FIRE with that savings rate, and 2) What you'd need to tweak to FIRE at 50.

The $3125 is net (after taxes and insurance).  I didn't think that was too high...when I was making $52K I was paying $900-something monthly in taxes and insurance.

[EconDiva]

I think this is an interesting and fun experiment!  Thank you OP for this post. 

This seems to be a situation that a lot of people will find themselves in and I am interested in seeing the responses.

I would like to see a hypothetical one for someone who maybe just graduated college, has student loans and is starting their lives.  Or one with a young family and aging parents with student loans.  These seem to be common scenarios that maybe we can all learn from.  But then again, we do have some real case studies similar to these as well to learn from.

I just find this question interesting.

In response to EconDiva's question, maybe the OP can use this site to create a more realistic take-home pay: http://www.paycheckcity.com/calculator/salary/

Yes, I believe a lot of people are finding themselves in this type of position.  Which is why I posted this.  I'm very curious to know what the frugal people here would suggest, or if most people would just say "this scenario is a lost cause"...

If this were a close friend that approached you with this situation, what would you say/suggest? 

[Murse]

I wrote up a long answer, but first I need this answered:

Annual gross income: $50K
Monthly income: $3125

Where is the other 1000/mo going?  (50k annual =4167/mo., yet take home is somehow 1000 less than that.)  Some should be going to taxes, yes, but that seems extremely high.

And it can't be going to retirement savings, as those were counted in the spending as part of the $3125.  If it is retirement savings that's being taken out before the $3125 received, than there's spending missing from the $3125, as it's being taken out twice (from the 50k gross to net 3125 and from the 3125).

Find out where that missing money is and then I can more accurately answer your questions.  :)

10 year FIRE is totally possible, especially when you have the $500/mo pension coming.  But probably not on that low 20% savings rate (625/3125).

Figure out the above missing money though and we can tweak things to see 1) What age you can FIRE with that savings rate, and 2) What you'd need to tweak to FIRE at 50.

The $3125 is net (after taxes and insurance).  I didn't think that was too high...when I was making $52K I was paying $900-something monthly in taxes and insurance.

What kind of insurance are you purchasing and what are the premiums?

[arebelspy]

I wrote up a long answer, but first I need this answered:

Annual gross income: $50K
Monthly income: $3125

Where is the other 1000/mo going?  (50k annual =4167/mo., yet take home is somehow 1000 less than that.)  Some should be going to taxes, yes, but that seems extremely high.

And it can't be going to retirement savings, as those were counted in the spending as part of the $3125.  If it is retirement savings that's being taken out before the $3125 received, than there's spending missing from the $3125, as it's being taken out twice (from the 50k gross to net 3125 and from the 3125).

Find out where that missing money is and then I can more accurately answer your questions.  :)

10 year FIRE is totally possible, especially when you have the $500/mo pension coming.  But probably not on that low 20% savings rate (625/3125).

Figure out the above missing money though and we can tweak things to see 1) What age you can FIRE with that savings rate, and 2) What you'd need to tweak to FIRE at 50.

The $3125 is net (after taxes and insurance).  I didn't think that was too high...when I was making $52K I was paying $900-something monthly in taxes and insurance.

That doesn't answer my question.  What insurance?  Health insurance?  Car insurance? (Probably not, as it's mentioned in the main budget, but can be taken out pretax at times.)

Can you break down the $1000+/mo that's missing and where it's going?

It's important not only for current savings but also to see what is necessary for the future and in FIRE.

Also we need to see what we can to do get that tax rate closer to 0% - saving 500-1000/mo on taxes can and will make a huge FIRE difference.

[EconDiva]

I wrote up a long answer, but first I need this answered:

Annual gross income: $50K
Monthly income: $3125

Where is the other 1000/mo going?  (50k annual =4167/mo., yet take home is somehow 1000 less than that.)  Some should be going to taxes, yes, but that seems extremely high.

And it can't be going to retirement savings, as those were counted in the spending as part of the $3125.  If it is retirement savings that's being taken out before the $3125 received, than there's spending missing from the $3125, as it's being taken out twice (from the 50k gross to net 3125 and from the 3125).

Find out where that missing money is and then I can more accurately answer your questions.  :)

10 year FIRE is totally possible, especially when you have the $500/mo pension coming.  But probably not on that low 20% savings rate (625/3125).

Figure out the above missing money though and we can tweak things to see 1) What age you can FIRE with that savings rate, and 2) What you'd need to tweak to FIRE at 50.

The $3125 is net (after taxes and insurance).  I didn't think that was too high...when I was making $52K I was paying $900-something monthly in taxes and insurance.

That doesn't answer my question.  What insurance?  Health insurance?  Car insurance? (Probably not, as it's mentioned in the main budget, but can be taken out pretax at times.)

Can you break down the $1000+/mo that's missing and where it's going?

It's important not only for current savings but also to see what is necessary for the future and in FIRE.

Also we need to see what we can to do get that tax rate closer to 0% - saving 500-1000/mo on taxes can and will make a huge FIRE difference.

Ok then let's assume the following:

Federal: $590
FICA: $80
State: $190
Medical: $120
Dental: $15
Vision: $10
Life: $20
Accidental: $15
Total-$1040

[mxt0133]

The would not be able to retire if the do not make a lifestyle changes.  The would need to lower their expenses to have a savings rate of 65% to retire in 10 years.  The good new is that they can count on the pension and social security at the age of 66 1/2 and medicare insurance at 65, so they would need less than that. 

Monthly expenses:
Rent: $1000  can go down to $600 a month by renting a room or getting a roommate
Cable/net: $100 - cut out cable and get DSL gets it down to $35
Travel: $300 cut down to $100 or less
Transportation: $200 (gas/car insurance)
Electricity: $100 - split with roommate $50
Food/Household goods: $400 (this includes eating out) - can be cut down to $300 easily
Cell phone: $100 - cut down to $10 with Airvoice
Gas/Water/Sewer/Trash: $100 - again split with roommate $50
Clothing/entertainment/fun/wants: $200 - cut down to $100

Sub total: $1445

So with income of $3125 = $1445 + 1680  => 1680/3125 = .5376

This brings up your savings rate to %53 which is not very far from %65, a part time job combined with more creative ways to cut down the budget and you at %65 savings rate.

It is more than possible in this scenario with the pension and social security that they can count on when they reach retirement age.

[NoraLenderbee]

Life: $20
Accidental: $15

A single, childless person doesn't normally need life insurance, or insurance against accidental death.

[MDM]

EconDiva, nice scenario.

The questions are:
-Could this person retire at 50 with enough income to continue to live the above lifestyle (or very similar)?  If not, at what age could they do so?

1) No, not a chance.
2) Answer depends completely on how "not very similar" she is willing to live. 
  - With no change, she is looking at another ~30 years.
  - With significant changes, 10 years is possible.

-What adjustments would they need to make financially in order to do this (what things would you suggest they cut, and by how much)?

Main thing would be to start saving more, particularly in a 401k (tax advantage and employer match).  Cable, food, miscellaneous, phone, and travel seem adjustable.

-Should this person consider buying a home before or by the time they retire (let's say they are on the fence about doing so and don't have a preference to owning versus renting...and plan to stay single forever)?

Always ok to consider things, but locking investment dollars into a house is unlikely to be a favorable choice when she has little margin for error.

-In your personal opinion, is this person 'irresponsible' for wanting to stop working their $50K/year full time job to retire at 50?  Let's say their main motivation is simply to leave the "rat race" and have a less demanding/more leisurely lifestyle.

Not at all.  Irrationally optimistic perhaps, based on behavior so far, but not irresponsible.

[SwordGuy]

Can you do your job outside the USA?  If so, you'll pay zero federal (and maybe state) income taxes, your health insurance might cost a pittance, and your monthly costs might also be greatly lowered, too.

You might even be paid more!

[MDM]

EconDiva, nice scenario.

Some pictures from the the attached spreadsheet (contains entries from the OP) shown below.

Some notes:
  - spreadsheet uses actual federal tax calculations instead of the assumptions given a few posts back.
  - Blank spreadsheet is the one from this post.
  - One can play "what if?" with various scenarios and see the results.


The situation as described in the OP:



The situation with significantly more 401k saving, less spending, and extra income in "retirement":

[teen persuasion]

I wrote up a long answer, but first I need this answered:

Annual gross income: $50K
Monthly income: $3125

Where is the other 1000/mo going?  (50k annual =4167/mo., yet take home is somehow 1000 less than that.)  Some should be going to taxes, yes, but that seems extremely high.

And it can't be going to retirement savings, as those were counted in the spending as part of the $3125.  If it is retirement savings that's being taken out before the $3125 received, than there's spending missing from the $3125, as it's being taken out twice (from the 50k gross to net 3125 and from the 3125).

Find out where that missing money is and then I can more accurately answer your questions.  :)

10 year FIRE is totally possible, especially when you have the $500/mo pension coming.  But probably not on that low 20% savings rate (625/3125).

Figure out the above missing money though and we can tweak things to see 1) What age you can FIRE with that savings rate, and 2) What you'd need to tweak to FIRE at 50.

The $3125 is net (after taxes and insurance).  I didn't think that was too high...when I was making $52K I was paying $900-something monthly in taxes and insurance.

That doesn't answer my question.  What insurance?  Health insurance?  Car insurance? (Probably not, as it's mentioned in the main budget, but can be taken out pretax at times.)

Can you break down the $1000+/mo that's missing and where it's going?

It's important not only for current savings but also to see what is necessary for the future and in FIRE.

Also we need to see what we can to do get that tax rate closer to 0% - saving 500-1000/mo on taxes can and will make a huge FIRE difference.

Ok then let's assume the following:

Federal: $590
FICA: $80
State: $190
Medical: $120
Dental: $15
Vision: $10
Life: $20
Accidental: $15
Total-$1040

I'm having trouble with these numbers, especially the FICA.  How do you only pay $80/ month in FICA on $50k?  I'm also calculating only $400 / month for fed tax.  No idea about state taxes, though.