There seems to be a strong movement underway from younger generations who want to achieve FIRE status. (FIRE = Financial Independence, Retire Early.) There are a number of blogs and websites dedicated to that idea of retiring early. (See Financial Samurai, Retire By 40, etc.) But I wonder how many people are really planning to retire that early, and what the lifestyle of some of those people will be.
The real question everyone seems to want answered is: “Will I Be Able to Retire Early?” For nearly every one of the aggressive savers out there, the answer is YES.
But before we all rush to put on our cheerleading gear and start leaping up and down shouting encouragements at each other, we need to really examine our own financial pictures and ask the follow-up question: “What Will My Retirement Look Like If I Retire Early?” This is the more difficult question to answer.
Part of the reason it’s so difficult to answer is because everyone’s financial picture is a little bit different, and nobody, I mean NOBODY, is willing to fully disclose their financial picture on a public forum. There are many good reasons for that, which is why I’m not going to do that, either. But we can examine some hypotheticals and compare them to our own financial scenarios to see what might be realistic.
Exhibit A: the rich kid with the graduate degree.
Exhibit B: the kid with a Bachelor’s degree from a public university and limited family means.
I’ll bet you can already see how these individuals are going to have very different financial trajectories.
Exhibit A goes to Harvard, graduates somewhere in the middle of his class, and due to family connections, he is promptly offered a job as a Big Law attorney upon graduation, earning $165,000 per year. He moves to New York, where his family puts him up in a condo that they already own in the city. The kid has very few actual living expenses and no student loan debt, and lives close enough to work that he can use public transportation. Without any housing costs or vehicle costs, he can sock away the maximum amount of money in his employer-offered 401(k), and still have plenty left over to eat dinner out and participate in a regular amount of leisure activities with his friends. Because he is financially responsible, he also socks away an additional 40-50% of his after-tax income in savings and brokerage accounts.
He quickly amasses enough for a down payment on a rental property in the suburbs, and becomes a landlord by age 30. By age 40, he has acquired a couple more rental properties, and between those properties and his family money, he has enough income to quit his job and to continue to live his comfortable lifestyle. When he reaches his typical retirement age, he will have a healthy inheritance from his parents to supplement his rental properties and to cover the additional medical expenses that the late stage of his life will bring.
Exhibit B goes to the University of California, Riverside. Both of his parents have Bachelor’s degrees from public schools, but they have limited means. His father is an elementary school teacher, and his mother is a librarian at the local community college. His parents bought their home thirty years ago, and now own it free and clear, but that is their primary asset apart from a few hundred thousand dollars in their retirement account. Due to their limited salaries, they can’t afford to pay their son’s tuition. For the first couple of years of college, Exhibit B lives at home and commutes to class. For the last two years, he gets a relatively inexpensive apartment with a friend near school, which makes it easier for him to work and attend class.
After graduation, he moves back home and applies for jobs everywhere he can think of. He finally lands a job in sales, earning $40,000 per year. He continues to live at home for a couple years and spends all of his spare cash paying off his school debt. Finally, at age 24, he moves out into a modest apartment. He works for a small employer, so he doesn’t have a 401(k) option. Instead, he saves as much after-tax income as he can, and puts money in a Roth IRA.
We don’t even have to finish B’s story to know that B is going to have a much tougher time achieving FIRE than A is. If B makes it, it’s going to be because B is aggressively cutting corners in his life, and because he is willing to accept a much lower standard of living in retirement than the lifestyle A is living. And that is perfectly fine, if that’s what B wants. The problem only arises when B gets the impression that if he passes up enough lattes, he’s going to be living large on the beach by age 45.
Before anyone becomes offended by either of these scenarios, or thinks that I am pitching them out there to complain about my status as a B example, let me say that I am neither a B nor an A. I’m somewhere in between. But when I think about retirement planning, the first question is “When would I like to retire,” quickly followed by “What would my retirement picture look like at that age?” I’ve penciled it out a number of different ways, and I’m still not sure I have my plan set in stone yet.
What is your plan? How soon do you plan to retire, and what will your lifestyle look like at that point?