Can I accelerate my goal of retiring early?

[joer1212]

Hello, everyone, this is my very first post on this site. Hope you can give me some good advice.
Here's my situation:
I am a 42 year-old single male (no kids) with a full-time job as a New York City subway train operator (a.k.a. 'motorman' or 'train driver'). I've had this job for a little over 3 years.
I currently earn about $75,000 a year.
Since I started this job I made a goal for myself to retire by age 50. My reasoning was that if I could accumulate at least 500k in about 10 years, I could live off the interest of this principal for the rest of my life.
Now, don't get me wrong, it's not that I don't enjoy my work, I do. I just don't enjoy my job. In fact, I don't enjoy any job. It's simply too smothering, and I love my free time too much to hand 2/3 of it to any employer.
Right now I have 74k (face value) in 4 corporate bonds:

(1) 20k in Goldman Sachs; 6.3% annual interest
(2) 12k in Selective Insurance Group; 7.4% annual interest
(3) 30k in Pactiv corp. (Teneco); 8.3% annual interest
(4) 12k in Sara Lee corp; 6.1% annual interest

I also have another $29,000 in cash at my local HSBC bank.
I have no debt whatsoever, so my net worth is currently about $103,000.
Last year, between my salary and my investment income I made $81,000, before taxes.
I have no car and no cable tv. I have a $35/month cell phone plan, and a $49.95/month internet bill. I also pay about $30/month for electricity.
Now, for my living situation.
I live by myself in an apartment of my parents' 3-family house. I live virtually rent-free. I've offered to pay at least 50% of market value rent to them, but they simply refuse to take my money. They are fairly well off, and really don't need it.
I have a close relationship with my family, so I won't be going anywhere any time soon.
I calculated that my annual living expenses is about 17k. I like to travel twice a year internationally, so this jacks up my costs, otherwise I could probably get by with about $12,000 a year.
My question is, what is the fastest way I can reach my financial goal? Please keep in mind that I will never be touching my principal, only most of the interest (the rest will be reinvested to offset inflation).
I am getting some decent interest on my corporate bonds, and my initial plan was to just keep buying these until I had half a million's worth, but I have read some books and articles and have expanded my investing knowledge a bit.
There are many options, and I am confused and paralyzed as to what to do.
These are some of the options I am aware of:

*Corporate bonds (pros: stable, reliable income. Cons: BBB bonds may be too risky, and I may get a better overall yield elsewhere with similar risk. Higher grade bonds yield too little).

*Dividend-paying stocks (pros:potential for great growth. Cons: a dip in their share value can undermine my retirement income).

*Mutual funds, stock/bond index funds, etc (pros: safety in numbers; low risk of default. Cons: yields may be too low precisely because of its safety).

*Reits,ETF's (pros and cons same as stocks).

*Municipal bonds (pros: tax-free stable income. Cons: yields are too low).

*Annuities (pros: I may be able to get a higher annual income from these than is possible with other vehicles. Cons: you must forfeit your principal, and they don't pay that much more to do this. Also, risk of insurance company default).

*Purchasing real estate & collecting rent(Let's not even go there. I DON'T want another job after I retire. Plus, people move out, don't pay...the headaches are anathema to everything I am trying to accomplish).

*Starting a business (no comment).

Maybe you guys have other ideas?

FYI: I SHOULD get SSI when I am 65, plus I will get a partial pension from the MTA at 62. The problem is having enough money from my retirement savings to live off the interest between 50 (at the latest) and 62.
I don't ever plan on getting married or having kids. No, thanks.

[arebelspy]

Inflammatory statement: I calculate that you can retire in a year and 1/2, at age 43 1/2, without changing ANYTHING you're doing (don't have to cut expenses, earn more, anything).  If your post is honest.  ;)

Here were my stream of consciousness thoughts as I read your post.

-----------------------------------------------------------------------------------------------------------------------------
Random thoughts as I read though...

EDIT: Some stuff is slightly wrong because you addressed it later, but I'm going to leave it as-is, so you can see my thought process.

Thought 1:
You say you're 42, and your goal is (was) retire at 50 after 10 years (so I'm assuming this goal started two years ago, at age 40) with 500k in your portfolio.

To retire that young 50, with potentially 40+ years left, you'll want a SWR at about 3% (maybe a bit lower, to deal with potential for high inflation).  That means 500k * .03 = 15,000/yr.  Can you live on that?

I note that after two years at a 75k job you have 74k saved.  That's about a 50% savings rate, meaning you spent 37.5/yr, double what your retirement expenses can safely be.  You basically need to cut your expenses in half.

The math on retirement says that to retire in 10 years, earning, say, 6% on your money in those 10 years, and assuming a 3% SWR, you need to be saving a little over 70% of your money for the next 10 years.  Now that you've done 50% for two years, to get to FI in 8 more years, you're likely looking at more like a 75%+ savings rate. That matches the math above about cutting expenses in half.  Either way you slice it and do the math, you're spending about twice what you should be.  That's a big jump.

EDIT: Read a little further and saw you also have cash, I had stopped at the 74k in bonds.  So those percentages are slightly off, but not much, especially since you're certainly earning less than the 6% I assumed with almost 1/3 of your portfolio sitting in cash.

Thought 2:
Yikes, that asset allocation scares me.  If one of those companies gets in trouble, that affects a HUGE portion of your portfolio.  I'd strongly recommend index funds, with some bond funds.  If you're a huge bond fan (and I don't mean 007), fine, do a higher percentage of bond funds.  But the lack of diversity there leaves a lot of risk in your portfolio right now.

Thought 3:
Got to the part about your expenses.  So maybe you can live on 15k/yr.  You claim 12k-17k, yet have only saved 100k after making 81k/yr the past two years?  Those numbers just don't add up, you should have more saved if those expenses are accurate.  Often when people project expenses they remember the big things, and forget about the many small things that do add up (one time costs, but lots of different ones means there's constantly one off costs).  Do you ever plan to move out of the parents'?  That will increase those expenses.
 
Thought 4:
Well *, if all you need to do is get from 50 to 62, on 15k/yr, then (assuming 3% inflation and a 0% return on your money - i.e. leaving it all in cash), 500k is waaaay more than you need.  A portfolio of $212,880.44 will give you 15k/yr (year 1) increasing 3%/yr (to 20,763.51 in year 12).  If your SS and pension actually cover you after that, you should easily be able to retire before 50.  Hell, using a time value of money calculator I see that at 6% the 100k you have now, withdrawing 15k/yr, will last you 9 years (from 42 to 51).  Let's see then.... if you save 50k/year, as you've done the last two years (ignoring my above comments about cutting your spending, and leaving it the exact same, and saving 50k/yr), then in two years, when you're 44, you'll have approximately 203k.  At 6%, withrawing 15k/yr, you'll be able to make it to 62 (18 years later) and STILL have 115k of that 203k left!  You could retire in as early as a year and 1/2 from now!  (saving 50k yr 1, 25k in the next half of the year, to a high portfolio amount of 178k, you end with a portfolio of 44k at age 62)...but I'm a bit skeptical of that 15k spending, as well as the SS and pension being able to cover you (mainly based on the spending, however).  All of that 3% SWR above is intended to make your 500k last forever, and never run out.  But if you just need to make it to 62, that's easier than pie!

Here's my bottom line takeaway: actually calculate what you need.
1) Find out your true expenses by tracking them.  Based on your income and calculated expenses, you're leaking money somewhere, and you need to find and plug that.
2) Calculate what your SS and pension actually will cover.  If 12 years is all you need a portfolio to cover, that's simple.

You have this number in your head, 500k, that you just pulled out of thin air, I feel like.  Figure out what you actually need.

As far as your many investment options, KISS.  Buy a mix of index and bond funds and forget about it.

As far as your many investment options, KISS.  Buy a mix of index and bond funds and forget about it.  You need more diversity in your portfolio.

Hope this helps, and if I was too harsh, I apologize, trying to help.  :)

[tannybrown]

I don't want to speak for the original poster, but it's possible that his $17k annual expenses are a more recent reality, and not something he's been doing since, you know, forever.   That would explain why it would seem he should have more saved when you take a look at his situation today and project backwards.  Hell, we all probably should have more invested than we currently do.  Hence the need for the MMM transformation, that unfortunately doesn't begin the moment we fall out of our mothers' wombs.

Agreed on the diversification and index funds.

$15,000 divided by .03 (safe withdrawl rate) is $500k.  I'm assuming that's where that figure came from, rather than thin air.   Using up a majority of the principle on his path to 62 is fine as long as he has faith that SS and the pension are going to pay enough going forward to cover all expenses.

Back to the original question of accelerating the drive to FI, I think joer's in a weird situation wherein he could only reduce his expenses so much further.  He could go from $17k to $12k tomorrow, but is that sustainable over the next 40 years?  That is to say, if $5k in travel is in his ongoing FI life plan, then the extra $5k invested today isn't going to move the needle that much.

joer, you should definitely address expenses as much as you can but it seems you're doing an okay job of that.  To get to FI quicker though, I'd say look to just increase income.  Is a promotion in your future?  Asking for a raise? 2nd job?  A lot of the ideas you posted aim at getting better rates of return, which is important.  But when we're talking about the difference between a 7% ROI and a 11% ROI with 100k, an increased or a second stream of income can have a much larger impact.

[arebelspy]

$15,000 divided by .03 (safe withdrawl rate) is $500k.  I'm assuming that's where that figure came from, rather than thin air.   

That IS pulled from thin air.  3% SWR is supposed to (hopefully) make your money last indefinitely.

By if he needs it to only last until 62, then he doesn't need anywhere close to that, as I demonstrated above.  So picking a number to make your money last indefinitely is pulling a number out of thin air.

Thus my imploring to actually figure out what he needs.

Good points about the living expenses possibly being a more recent thing, but based on his comment about how he's "calculated" his living expenses at that, I'm betting he may just be missing some (like one off costs).  Thus why he needs to actually track exact expenditures.

[joer1212]

Thanks for the feedback, guys
Well, if I start to tap into my principal I would be permanently reducing my income. While I can live on very little, more money earning me interest is certainly preferable.
Keep in mind that I can only safely draw some of my interest to live on. The rest has to be reinvested to offset inflation.
Also, I still think it's kind of scary for me to just drop my job, where I earn so much. I'm very insecure about this to begin with (as much as I want to), so I want to make sure that once I make the big decision to quit my job, I have as big a nest egg as possible earning me money. I don't like the idea of barely eking by. Even though I live on only 17k a year now, I know that I have more money to fall back on should I need it. Once I quit my job, however, it will be gone forever. I will have nothing to fall back on, no safety net.  So, it is in my best interest to have as much as possible, rather than just getting by with no margin for error.
Also, as I get older, I may have unexpected medical expenses and other scary surprises. So, at the risk of sounding very 'unmustachian', the larger my principal that earns me interest, the better.
To address arebelspy:

I'm sorry, but I failed to mention that my first year working for the MTA I only made 56k. I only recently reached top pay. Not only that, but I didn't start working on my early retirement until about 8-10 months after I was hired.
Also, keep in mind that the government rapes me with taxes. Especially that I'm single with no kids. So, while my salary may sound like a lot, after taxes it isn't as much as you'd think. After Uncle Sam is done with me, I only manage to save between 25-31k a year from my salary.
As for how much I spend every year, I can break it down:

- $150/wk pocket spending money (for groceries, restaurants, entertainment, and other daily expenses).

- $5,000/yr for travel

- $1,850/yr for consumable products (detergents, toiletries, printer ink, etc)

- $35/mo cell phone

- $30/mo electricity

- $500/yr clothes

- $1,000/yr gifts and unexpected costs

- $49.95/mo internet bill

- $250/yr stationery

- $750/yr art supplies (oil painting is a major hobby of mine. I went to school for this in my early 20's with the intention of making a career of it).


The rest goes into investments.
Please don't get too hung up on the funds I allocate to various categories. That is not necessarily how much I actually spend on them. For example, I Allocated $500 a year to clothes, but I rarely spend this much. I just earmark this amount for this purpose if the worst-case scenario should unfold. I, basically, run my life like a corporation, with different departments and various budgets. But, I don't go over the sums I allocate to each category.
I know 5k on travel annually seems generous, if not extravagant. But, in 2-3 years this should quiet down, as I would have gotten it largely out of my system. There are just a handful more countries I want to visit, then I'll probably travel locally, or in the U.S./ Canada mostly, bringing my costs down significantly.

[arebelspy]

Good answers, joer.

Here's what you need to figure out:
What do you want your income in retirement to be?
What will your pension bring in?
What will your SS bring in?

Figure out those three, and we can figure out a very direct plan for you. 

[joer1212]

I know exactly how much I will need. Of course, the more, the better.
If I were to retire today, I would need enough principal to yield at least $25,000 a year after taxes.
Add about 3% a year on top of this to account for inflation.
This is cutting it very close, with little wiggle room for unexpected expenses or surprises, and to reinvest some money to offset inflation and actually slightly grow my principal over time.
Mind you, this is the minimum annual income I would have to get to even consider leaving a 75k/yr job with full benefits. And this income would have to be pretty steady and reliable.
I'm not counting my partial pension from the MTA, nor SSI, as these won't kick in until I'm in my 60's, and even then they won't be that substantial. I want to treat this early retirement as if I only had to depend on my own assets. Anything that comes in addition to this is a great bonus that will just be reinvested into my principal for greater wealth over time.
I may actually need slightly more than a 500k nest egg to accomplish the above. That's the reason I'm posting here, so maybe I can get some ideas and different points of view on how to invest creatively and effectively to best achieve this.

[arebelspy]

Why wouldn't you count the pension and SSI, when you're so close to getting them (10-15 years after retirement)?  Seems silly to not count all your assets. Firecalc sure does.  You sure will count it when receiving it.

/shrug

Seems like you're asking for other ideas and points of view, then dismissing them (i.e. the questions above). 

In any case, now you're saying you need at least 25k.

When you say stuff like "Add about 3% a year on top of this to account for inflation" it shows some minor misunderstandings.  Ignore inflation, it's calculated into SWR.  Thus why you need to be specific on what you need, because we can help you figure out the rest.

Anyways, if we assume your new number of 25k is correct, rather than 15k, then you'll need more like 825k portfolio at a 3% SWR, ignoring any pensions and SSI.

Though again, that could likely leave you with way  more than you'd ever need (i.e. dying with millions in the bank, for no real reason), if those other numbers end up being substantial.  You may just need to bridge the gap, as you mentioned earlier, but now seem to be backing off on.

Anyways, I guess at this point since you'd rather not get specific here for more specific advice, I'd just encourage you to run your numbers through FIRECalc.  That will give you a good idea of what sort of portfolio you can expect to need.  Good luck!

[sol]

If I were to retire today, I would need enough principal to yield at least $25,000 a year after taxes.

Remember that early retirement is not a one way street. 

Just because you quit your day job to make a go of living on 17k/year doesn't mean you are forbidden from ever working again for the rest of your life.  You can always go back to work, or take on part time work to supplement your income.  Especially for folks who retire in their 30s or 40s, it's not like you will be too old and decrepit to ever be useful to an employer again.  If you decide you want more income, just get a new job.  With expenses that low, even a low stress part time minimum wage job would provide a significant fraction of your total necessary income.

Personally I think I'd rather "retire" ten years years earlier and do seasonal work as a park ranger or something instead of sitting in a cubicle for all of those years and then doing nothing afterwards. 

[tannybrown]

sol's advice is likely the best to address the original question of accelerating FI.

If you are open to the idea of enjoyable, part time work that pays maybe $100 a week, you can accelerate the plan a whole lot.  If your expenses are only $15k (rather than 25), you have a ton of flexibility that a lot of people on this forum might not.  You only need a baby stach along with a small stream of income to get out of the rat race.

[sol]

Q:  If you retire and find that you don't have enough income, what's the absolute worst case scenario?

A:  You have to go back to work, and you find yourself right back where you are right now anyway.  Oh noes!

I only see upside.

[arebelspy]

That's not worst case. Worst case is you need the money, but can't go back to work.

IMO.

[joer1212]

"Q:  If you retire and find that you don't have enough income, what's the absolute worst case scenario?"

"A:  You have to go back to work, and you find yourself right back where you are right now anyway.  Oh noes!"

Well, I wouldn't be where I am now. Right now I make an average of 75k/yr. Once I leave this particular job it ain't coming back.
But, I see where you're coming from. Yes, I can always take up part-time minimum wage or low wage work. But, anything more than two days a week of this, and I might as well just stay at the job I'm at now.

"Anyways, if we assume your new number of 25k is correct, rather than 15k, then you'll need more like 825k portfolio at a 3% SWR, ignoring any pensions and SSI."

I'm sorry if I misled you, but I cannot find where I said that I need just 15k a year. 
I currently spend a little over $17,000 a year. To give me a reasonable cushion (so I'm not fighting for my financial life) I'm estimating to need about 25k. This would be very comfortable, and leave some wiggle room for nasty surprises.
I agree that I will need more than 500k for this.

"Personally I think I'd rather "retire" ten years years earlier and do seasonal work as a park ranger or something instead of sitting in a cubicle for all of those years and then doing nothing afterwards. "

I have thought of this option, and it is still on the table.



"Though again, that could likely leave you with way  more than you'd ever need (i.e. dying with millions in the bank, for no real reason)"

I have thought about this a lot. But, unfortunately it is a necessary evil, as none of us knows exactly when we're going to go, otherwise I would just spend down my principal so I have 0 dollars on the day I croak.


I'm going to try the FIRECalc. (I never heard of this). Thanks.

[boy_bye]

Also, keep in mind that the government rapes me with taxes.

joer, i wish you luck with your FIRE goals, but can i please ask that you take a look at comparing taxes to rape? having to pay more taxes than you'd like is NOT the same AT ALL as being held down and physically penetrated against your will. not even remotely in the same ballpark, to be honest.

with 1/4 of women having been raped at one time or another, it makes sense to be more careful with our language so as not to trivialize actual, you know, rape.

don't mean to jump down your neck, just wanted to share my perspective on this. i hope you will consider it.

[arebelspy]

"Anyways, if we assume your new number of 25k is correct, rather than 15k, then you'll need more like 825k portfolio at a 3% SWR, ignoring any pensions and SSI."

I'm sorry if I misled you, but I cannot find where I said that I need just 15k a year. 
I currently spend a little over $17,000 a year. To give me a reasonable cushion (so I'm not fighting for my financial life) I'm estimating to need about 25k. This would be very comfortable, and leave some wiggle room for nasty surprises.
I agree that I will need more than 500k for this.

You said:
"I calculated that my annual living expenses is about 17k. I like to travel twice a year internationally, so this jacks up my costs, otherwise I could probably get by with about $12,000 a year."

15k is between your 12k (minimum necessary) and 17k (with bonus international travel).  Thus I worked off that number.  Now you're saying 25k, which is fine (and low enough), but a big difference (we're talking hundreds of thousands) in the retirement portfolio needed.  Just, like I've said, figure out what you actually need/want at retirement.

I have thought about this a lot. But, unfortunately it is a necessary evil, as none of us knows exactly when we're going to go, otherwise I would just spend down my principal so I have 0 dollars on the day I croak.

Not strictly true, due to annuities.  That aside, it may not be possible to "die broke," as it were, however you can definitely do things to avoid having so much extra at death.  I.e. working 5+ years more than necessary (to have a portfolio that kicks of 25 or 30k, when you only need 17k) so that you replow the principal back in over and over and die with 10x, or more (inflation adjusted), than what you started.  When you could have retired 5 years earlier, ended with what you started with (inflation adjusted - i.e. so you never ate at principal, which is what you seem very worried about) and had 5 more years of FIRE. 

Thus why it's so crucial to figure out what you need and what you have (ala the pension and SSI).  Glad you're taking a look at FIRECalc; it's a good tool.

[joer1212]

Thanks for the answers, guys. I appreciate your input.
Not to prolong this discussion, but one final question: What do you think of annuities? I know that this is kind of a generalized question, as it depends on the terms of the annuity, but I was considering this as an alternative to investing.
Are there any specific annuities that you would recommend to someone in my situation? Has anyone here considered or bought an annuity? What were the terms?
The annuities I've looked at so far require that I forfeit the principal in exchange for a fixed payout for the rest of my life. However, when I ran the numbers, I found that these only pay very slightly more than I could get if I invest that money on my own at a 5% rate of return after taxes.

[nondualie]

Also, keep in mind that the government rapes me with taxes.

joer, i wish you luck with your FIRE goals, but can i please ask that you take a look at comparing taxes to rape? having to pay more taxes than you'd like is NOT the same AT ALL as being held down and physically penetrated against your will. not even remotely in the same ballpark, to be honest.

with 1/4 of women having been raped at one time or another, it makes sense to be more careful with our language so as not to trivialize actual, you know, rape.

don't mean to jump down your neck, just wanted to share my perspective on this. i hope you will consider it.

+1

Language matters. 

[arebelspy]

As a general statement, in the early retirement community, annuities are not looked upon very favorably.

Most are sold by some slimy people, so do your research - thoroughly - before getting sucked in.  In general I'd avoid.  Specific exceptions do exist.

[nondualie]

Well, I wouldn't be where I am now. Right now I make an average of 75k/yr. Once I leave this particular job it ain't coming back.

Believing this statement is true holds many of us back.

By taking time off and exploring your hobbies, passions, etc., you may discover strengths that allow you to earn twice that much in half the time doing something you really love.

Humans are rather poor at predicting the future...when it comes to things like money, events, etc. 

We tend to sell ourselves short on the possibility of the future looking much different than the present in physical terms.  It likely will.  But in the very few cases where the physical context looks the same; there is an extremely high likelihood that your relation to that context will have changed significantly.

Which is all the more reason to not get too locked into things happening in one specific way or extrapolating too tightly around SWRs, Index Fund Growth %, and the rest.

Do what you love, do your best to protect what you've worked to have, and then stay flexible to the changes that most definitely will come over time.

Doubt that?  Well, see if you can plan exactly how your day will go tomorrow, top to bottom, who you'll interact with at exactly what time, what you'll be hungry for, what you'll want to read.  Chances are you'll miss on at least 50% of it.  Now how good do you think your odds are at predicting next week? year? decade?  Hmm..

[joer1212]

Yeah, that's exactly the impression I got about annuities and the industry surrounding them. Very slimy, undignified hacks seem to push them. Not the way to impress a serious person like me.