Reader Case Study - 24 y/o to retire at 35-40?

[erplease]

Life Situation:
IRS filing status: Single. Zero dependants. 25 year old male living in Minnesota.

Gross Salary/Wages: 38,115.05 for 2016

Taxes: Federal Income Tax: 3716.59. SS Tax: 2363.13. Medicare: 552.67. State Tax: 1511.75.

Current expenses: 705 rent + 250 food + 100 misc + 60 internet/entertainment + 50 auto fund (maintenance/next used car) + 30 gas + 70 auto ins. + 35 utilities 100 health/dental = 1,320 total monthly expenses

Expected ER expenses: $15,840

Assets: Pretty much just my '09 Chevy Cobalt. Probably worth $3000-$4000.

Liabilities: $29,000 federal student loan

I tried to follow the template for the reader case study as best I could but I'm young and don't have a lot if money tied up in different things. My situation is pretty straightforward I'd like to think.

The above figures show where I will be come April 2017. (Full disclosure: Prior to April I'll still have an additional ~28,000 in private student loans and ~3400 left on the car. When I turn 25 in April I'll be getting around 40k from an inheritance. Getting rid of that high interest student loan first and paying my car off will leave me with just under 10k. Where should this 9-10k go? Emergency fund? House down payment? More debt?)

Anyway, assuming I never work overtime, never get a higher paying job, never cut my rent in half by getting roommates, and forgetting about that 10k surplus, the early retirement calculator puts me at 20 years until retirement. (https://networthify.com/calculator/earlyretirement) More like 21 because 1-2 years will be needed to knock out that federal student loan. A lot better than 40 years, I'll say, but how accurate is that early retirement calculator? What details am I not considering? Will netting $40,000/year, saving $24,160/year, really cut the time down to 14.1 years until ER?

Simply, it sounds too easy for a 25 year old with no kids to retire early. Am I on the right track? Am I fantasizing too much based off a simple calculator? Am I placing too much faith in how the stock market will perform for me? What am I not considering? If anything, am I right in thinking it can only get better because I'll inevitably be making more money and saving more?

Thanks for reading, hopefully you all can get me in the right direction.

[BigHaus89]

What is the interest rate on your student loan? You've got a good plan to use that inheritance effectively. Do you have a 401k at work? You want to look at maxing as many tax advantaged accounts as possible while still being able to pay your bills.

Since your expenses are pretty low, I would put $5500 of the $10k into a traditional IRA and keep the rest in an emergency fund(in a 1% savings account for instance). You are on the right track in that you will be debt free in the near term which gives you the opportunity to save as much as possible.

[erplease]

The average interest rate across the 12 loans is 5.4%. I do have a 401k Roth with an employer match of $0.50 for every $1.00 I put in. Current balance is only 400 and I'm not fully vested in the matches for another 4 years.

[prognastat]

Simply, it sounds too easy for a 25 year old with no kids to retire early. Am I on the right track? Am I fantasizing too much based off a simple calculator? Am I placing too much faith in how the stock market will perform for me? What am I not considering? If anything, am I right in thinking it can only get better because I'll inevitably be making more money and saving more?

The main problem is too easy turns to much harder when other people get involved. First being peer pressure and the need to conform/fit in is why a large portion of people are trying to keep up with the joneses and that is why they can't retire early. Secondly if at any point you get in to a relationship if they aren't on the same page financially this can also throw a wrench in any plans to retire early. Given that most people want to fit in and even of those that don't many will want to be in a relationship at some point in their life this complicates things in a way the calculator can't calculate.

However it sounds like you are recently out of college and in to the workplace(given the student debt and age) based on this you will likely grow your income significantly over the next decade or so as your improve your level of workplace experience in your field. The most important advice I would give is resists lifestyle inflation. Put any bonuses or raises you get towards your stache and don't get adjusted to a higher standard of living. If you do this chances are it'll be less than 21 years so long as no unforeseeable financial catastrophes occur.

Other tips:
- avoid buying the latest greats things, most of all cars. This behavior can quickly sink any budget if you get used to doing it.
- Find ways to reduce recurring costs, it adds up.
- Track your spending using something like Mint or Personal Capital so you know how much you are spending on various things.

[erplease]

Yeah, exactly, this really hinges around the single, no kids part. I honestly don't really see that changing much but who knows. Didn't meet anyone in college -- prime meeting time -- but if I do hopefully they'll have the same outlook which would make saving even easier on two incomes. Kids are where I see the problems coming in. In the meantime I seriously only go to work and come home which is why ER sparks my interest as being possible despite my lower income. It's only me I have to look out for and I don't have any Joneses to keep up with. And luckily I'm not a big car guy. I plan on running my '09 Chevy Cobalt to the ground until it's time to buy another A--->B car.

On another note, I've preliminarily checked out a mortgage calculator. If I buy a 100k or so house, pay around what I pay already for rent/month,  I could have the house paid off around the same time I'd be able to retire early, assuming I put 25-30k or so away per year. Is that a good plan or what should I consider about buying a house? Timing, buy it in cash vs loan,  etc.

[swashbucklinstache]

1) There is a New York Times rent v buy calculator that is a good place to start. There are more calculators than that too. The one thing I'll say is that these are very general. Remember that having a house might make you less mobile (say, to move 7 years from now to a new job making 20% more).

2) At your (our) age I'd strongly focus on saving money, getting paid more, and enjoying life over worrying too much about your exact FI #. Lots of things change over 10-20 years, and I doubt that's more true for anyone than someone under 30. Your expenses and FI budget needs may change dramatically even if your "mustachian" habits don't change. I've been happy with the approach of lowering my expenses over a 1-2 year period to where I'd say I'm 80% efficient at saving money, putting all raises etc. into investments, and kind of "wake me up 10 years from now" in terms of FI. My journal has estimated networthify years-to-FI numbers in the top post over several actual years of saving for me that you might find interesting to view.

Tangibly, aside from relationships you've got things like unforeseen recurring or single-hit medical/other expenses that may crop up. Things like healthcare premiums, tax rates, possibly longer-term changes in publicly-available investment returns that all may change fundamentally for everyone, let alone differing for someone aged 25 compared to 45. I guess one example is looking at the cost of open-market premiums for a 25 year old compared to someone who is 55 or 60 today and think how that expense difference would change your budget. Who knows what the age for Medicare or Social Security eligibility or the included benefits will be 10-20 years from now? Plenty of people get laid off or seriously ill over a 20 year period.

Of course, you asked "If anything, am I right in thinking it can only get better because I'll inevitably be making more money and saving more?" to get us to this point. Rather than get "worse" for an early retiree or you specifically things might get better too! Like lots of juicy raises between now and then for sure. We could see cheap healthcare for everyone, guaranteed. We might see very favorable tax rates for your tax bracket as a retiree or during your work career. We might see 13% annualized returns in the market from now til then. Or even universal basic income of 20k a year or something, implemented the year you retire with no means testing. Who knows!

Overall I'd say we'll all know a lot more about what the world will look like 20 years from now in about 19.5 years, and we'll for damn sure be happier if we've got 400k invested than we would if we had nothing saved.

[JLee]

The average interest rate across the 12 loans is 5.4%. I do have a 401k Roth with an employer match of $0.50 for every $1.00 I put in. Current balance is only 400 and I'm not fully vested in the matches for another 4 years.

Is there a cap on their match?  If they will give you $9k to your $18k, that's...amazing.

[erplease]

Yep,  I should have mentioned that. They'll match up to 5% of my annual earnings. Currently that's about 1900 a year if my pay stays the same.

[csprof]

Yep,  I should have mentioned that. They'll match up to 5% of my annual earnings. Currently that's about 1900 a year if my pay stays the same.

(1)  I'd still encourage you to fill out the case study template, because knowing the interest rate of each of your loans, for example, is handy.

(2)  Max that 5% ASAP.  yesterday!  Before even paying off the student loans, given that you've got a windfall coming in April.  50% free money outweighs any interest you'll pay in the next few months.

You may have optimization opportunities w.r.t. your health care - what kind of plan are you on, and does your employer offer a high-deductible plan with an HSA?  (note:  Don't do unless you've got ~$5k in your emergency fund / savings / whatever.)

[OvertheRainbow]

Assuming you have a good return on your investments, never get married or have children, stay out of debt and get moderate raises, you could possibly retire at around 45-50 (35-40 is very unrealistic). But that income...yikes. I would work on paying your debts off and getting pay increases before worrying about becoming financially independent.

[prognastat]

Assuming you have a good return on your investments, never get married or have children, stay out of debt and get moderate raises, you could possibly retire at around 45-50 (35-40 is very unrealistic). But that income...yikes. I would work on paying your debts off and getting pay increases before worrying about becoming financially independent.

Currently if he simply managed to keep his expenses to income ratio the same and invest the rest and gets average returns he would be able to retire at 42-43. If he actually managed the increase his income a decent bit, which is likely given someone only just starting their career this would only speed up FIRE. Now of course if gets bad returns, gets married to a spouse that does not help at all in his goals or gets kids this will slow it down. However if he gets good returns, a supportive spouse and no kids before FIRE this would also speed it up.

In your scenario of good returns, never getting married nor having kids and getting decent raises, by 40 is very much doable. I would agree that unless he works hard to raise his income while keeping expenses to a minimum that 35 might be tough unless the market treats him very well. However 40 is not out of the ball park with his easy start and if he works hard 35 is possible.

[debdoesnotbrew]

That extra $10k/year can go far, but think about what are your goals and in which order you'd like to accomplish them. You can't necessarily count on being single and kidless forever... and your write-up doesn't talk a lot about what are your joys, hobbies, motivators, etc. Are you buying a house just as an investment, or would you enjoy homeownership (and yardwork, and fixing things up,etc). What other side projects/hobbies could you be doing to enhance your life, and maybe make a little money on the side? Striving towards FI isn't just about "not working"... its about getting to experience the lifestyle you love and maybe getting more free time to pursue things that you wouldn't have been able to otherwise. Sounds like you could pursue a lot of that sort of thing now, even without being FI.

I found this order of priority helpful for what to do with "leftover" cash that is in the Case study template.

0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.