I’ve had the pleasure of talking to a lot of people about income, expenses, and life when I announced my retirement at 36. I also keep getting questions and feedback through the blog and realizing the ability I have to help people. The majority of the people who’ve reached out are young professionals. Maybe they’ve recently discovered financial independence or are in the middle of their journey and trying to figure out the right balance of saving and spending. The opportunity given me to ask questions and give advice is a lot of fun.
I’ve been asked if we reached early retirement through frugality or growing our income. The answer is both. Long before our incomes accelerated, we lived frugally and managed to get the first $500,000 invested by the time we turned 31. That original $500,000 saved has done yeoman’s work for us in our journey to early retirement. $500,000 invested at a relatively early age is the number that sets you for life. Save this amount by 30, 35, or 40 and you never have to contribute to a retirement/savings account for the remainder of your life and still retire as a multimillionaire.
JL Collins put together this remake of John Goodman and Mark Wahlberg from The Gambler discussing the “Fortress of Solitude”. (warning – explicit).
This is one of my favorite FI clips, created by a great personalities. I think $500,000 saved at an early age is just like “getting up $2.5mil”. – It is your fortress of solitude!.
Below are three illustrations using a real rate of return of 7%. The S&P 500 has averaged more than 10% over its history that these numbers are discounted for 3% for the impact of inflation. This makes the illustrations effective in today’s dollars.
Example 1: The High Achievers
The first example is of the super high achiever (and likely couple) – What happens to them by savings $500,000 by 30?
They are well on the path to an earlier retirement. However, if they choose to stop contributing to their accounts at 30 and just earn enough to live on, this couple will still have $5.7mil in inflation adjusted dollars.
Example 2: The average professional
What if you’re not the super high achiever, but you can manage to run a good savings rate from the time you graduate college until 35? This equates to putting around $22,000 per year into the market.
This individual or couple still ends up with over $4mil in inflation adjusted dollars by the time they reach traditional retirement age without a dollar contributed after turning 35.
Example 3: The Late Starter
Suppose you had a number of circumstances that made it tough to save money early in your career. Your salary is low, you got into financial independence late, or had family pressure on your expenses that were unavoidable. All of this means it takes until 40 to reach the the $500,000 fortress of solitude.
This person/couple stops contributing at 40 once the reach $500,000 and still have $2.9mil at a traditional retirement and well above what the average American is retiring on.
The predictability/unpredictability of market returns
You can predict the average return on the market but you can’t predict the return by year. In our last 10 years investing, the market had three bad years (-4.45% in 2018, 1.34% in 2015, and 2.06% in 2011). Conversely, it had three years in excess of 20%, including a 32% return in 2013. We managed to invest $500,000 by the time we turned 31. This happened to be the same year as the 32% market return and it skyrocketed our investments. The market will not give you consistent returns, but it will give you a pleasant surprise every few years. Get the $500,000 invested in the market and look forward to that surprise year!
Advice on getting to the first $500,000
Here are some money saving tips to help you get to the $500,000. Warning, these may not be sensitive after over a month straight of hearing people say “I wish I could do that” or “I can’t do that” when seeing my early retirement. Many of these are former coworkers who are already winning on income, but are foregoing perfectly reasonable expense decisions that would allow them to retire early.
- Stop prepaying your low interest rate debt. I’m sorry you took out student loans, a big mortgage, or the fancy car loan, but if those loans are below 5%, don’t pay more than the minimum. Invest it an index fund instead and its a bonus if you can do it in tax deferred accounts.
- If you can’t buy it from Aldi or Costco and cook it at home, you probably can’t afford it. Stop eating out at restaurants and drinking at bars. Try going for a walk in the park with friends or joining a running club instead, its better for your health than eating out. You aren’t sixteenth century royalty, you don’t need to say “come hither peasants and bring me thy food”. Learning to cook at home is a lifelong skill, the better you cook the less appealing restaurants are.
- Speaking of weight/health, exercise but don’t pay insane money to do so. You can get a perfectly good gym membership including group classes for under $50/person. You don’t need personal training or the $150/mo affinity gym. You aren’t wealthy enough for that yet.
- If you have to have a car, “drive an economy shitbox”. Your car is a tool to transport you to/from work. Buy the minimum acceptable car and move to. Think you need a nice car to get a date or impress potential clients? Try talking less and listening more. Don’t be a jackass and you’ll be fine.
- Get roommates. You don’t have to “live alone” to be an adult. If you want more control and don’t want to be beholden to a landlord consider buying a house and renting out rooms in it. Splitting the cost of common areas and utilities has incredible value.
- Vacations: You can and should travel in your 20s, but don’t be stupid on expenses. Travel in the offseason. Get a beach house with friends and split the costs. You don’t need to fly to Europe at the peak of summer. Manage your credit cards and hit 2-3 signup bonuses a year for points. You can’t get your time back and should travel when you’re young, but you aren’t yet ready to stay at the Ritz or St. Regis. “Treating yourself” by paying full price at a five start resort is a dumb idea. Most of the people there are going to be old anyways
In addition to ways to not spend your money, here are some ideas on how to earn more money:
- Work more. If you have time to get on social media and argue with people about politics, sports, or reality TV, you have time to work more. Take a look at this post about how to earn more money in your 20s and 30s. Worry not, once you’re old and rich, you can argue that same stuff on Nextdoor with your free time. (seriously, one 74 year old in my neighborhood has made Best of Nextdoor repeatedly for his incoherent rants). Side hustle or invest in your own career to increase your earnings.
- Invest in your breakfast hour. Its a great time to network. The meals are cheaper than going out for lunch and drinks. Successful people are more willing to meet you at 7am when they can’t for lunch/dinner. Waking up early to meet someone also shows life motivation. I’ve had positive career moves and business deals that started over breakfast.
The first $500,000 is an achievable goal. It takes discipline, but this is a game that is won by making small decisions as small as $10 every day for nearly a decade. The choices are difficult, but not complicated. The first $500,000 saved will allow for the flexibility for career changes, career breaks, college educations, Coast FI, and lay the foundation for early retirement. Practice daily discipline with expenses and create flexibility and freedom for the rest of your life.