A few years ago, financial shock evangelist Suze Orman intentionally upset the early retirement establishment with her comments on retiring early. She stated that you need at least $5,000,000 (and probably $10M) to retire early. She said that retiring early is the biggest mistake someone can ever make and that 70 is the new retirement age. Basically, she’s telling people to never retire.
She caters to people that have a horrible retirement future. And for those folks (my oldest sister included), retiring at 70 is likely their only choice. But the FIRE (financial independence retire early) community took umbrage with her comments. These are people that have low expenses and high savings rates. Financially, they live the opposite of people that have no retirement savings. Most FIRE followers want to retire by 40 or even sooner.
There are “cons” of retiring really early (40 or earlier) … here’s a few I can quickly think of:
- Social security benefits are reduced for working fewer years
- Inflation combined with losing compound returns
- Inability to easily access retirement accounts
- Bored and/or finding purpose
- Healthcare uncertainty – This is a concern for early retirees and expensive; bad health can ruin early retirement
- Time uncertainty – A lot can can happen in 50-60 years of retirement, thus, the uncertainty
- Missing your peak earning years
But that’s retiring at 40 or earlier. And it’s hard to not think you’d need a good sum of money to ensure a stable 50-60 year retirement. I’m not advocating retiring at this age. To me, there is a different approach and a middle ground.
Why Financial Independence at 50?
I’ve written often about how lucky I’ve been to have escaped my horrible early-life retirement planning. I was 48 and had a net worth of $115,000 plus my two kids were approaching college for the next 7 years … things didn’t look good. I’m calling myself lucky because I was able to stay employed and get them through school plus start my own path toward retirement.
Last year, I read a new study that confirmed my attitude that being over 50 is a treacherous time. The Urban Institute found that nearly 60% of people over 50 involuntarily lose their jobs. The study also found that only 10% of those 60% will get back to their prior income level. Those are real numbers. This should be a time when people are achieving peak earning years but instead they take a big step back in income.
Financial independence is about having options!
That statistic is a warning of a reality that I’ve escaped (so far anyway). My job loses were earlier in life (30-35 years old) so I had time to recover. It’s why we were basically broke once I started working for my current employer. But those earlier job loses were devastating to my financial well-being. It would be even more crushing if it happened later in life and I was a late saver.
In 27 years when my youngest turns 50 years old, I don’t know if the study findings will still be relevant or true but I suspect it will. So, we have to prepare for that. We have to assume that when she is over 50 a job loss is imminent. That sounds depressing but it’s a blessing to be planning for such an event 27 years in advance. And this, my friends, is why we are focusing on financial independence at 50 years old.
What’s it take for my 23 year old to retire at 50?
The main purpose of today’s article is to provide a high-level compass or roadmap for my recent (and youngest) college graduate. She graduated in May 2020 and got a good job in July. COVID-19 changed what she thought would happen post-graduation but it turned out to be a blessing. She’s been living at home banking a $65,000 annual income and saving 91% of it.
I’ve said this before and I’ll say it again, having recent college graduates live at home for a year gives a significant financial boost to your kids. She’s already saved about $61,000 in 8 months (she got a signing bonus and relocation assistance too).
I’m not sure exactly how much she’ll need by age 50 because I’m not sure what her exact circumstances will be then. So, we’ll look at what she needs to save to have $3,000,000 by age 50. Who knows, maybe Suze Orman is right about needing $5,000,000-$10,000,000 to retire early. There are lots of uncertainty for the next 27 years and then she’ll need to live another 30-40 years in retirement.
“Someone is sitting in the shade today because someone planted a tree a long time ago.”
Warren Buffett
Here’s the rub though … I’m not asking her to retire at age 50. I’d like her to be financially independent by then and that is a huge difference. She needs the comfort of knowing that when she turns 50 that her job doesn’t control her life. She needs the option of continuing to work or pursuing her life passion. And just like I can’t determine how much she’ll need by 50, I don’t know what her life situation will be then either.
Will she be married with kids? Single? Will she be a single mother of 3 kids? Living in a high cost of living area? Will inflation be 8% in 20 years? She’s not a spender today but will she when she’s in her 30’s or 40’s? All I know is she needs to save as much as possible until she turns 50 so that she has options.
How Much to Save for $3,000,000?
When you are 23, seeing how much you need to save can be depressing. Knowing you are shooting for $,3000,000 or some really big number can seem impossible. But that’s the beauty of youth … you have time and compounding working in your favor.
Most self-respecting financial advisor would NEVER tell a 23 year old exactly how much they need to retire at 50. They’d never say you need $3,000,000. But today, we are just trying to show what it will take to attain $3,000,000. My daughter knows she may need more or she may need less; it just depends.
She’s already saved $61,000 and if she just saved and put her savings under her mattress or in a vault she’d need to save $108,851 per year for 27 years. She’d be earning no interest or growth. I guess that’s the curse of taking no risk. Since she makes $66,500 annually today, she’s already way behind the curve. In fact, she have to earn another $42,351 just to hit that savings number. I suppose she can forget about eating, having a roof over her head, or even living.
As we see in the above chart, taking no risk means you need to save more. At her salary, it’s just not going to be possible and that’s were many people lose hope. But if they understood the power of time and compounding, they’d see that even 5% returns over 27 years can dramatically cut the amount needed.
The chart below shows what a 5% average return can do to reduce the amount of money you need to save. At 5% for 27 years, she’s need to save $50,709 annually to achieve $3,000,000. For her to do that she’d need to stay living at my house. Knowing that’s not what she (or her mother and I) desire, there is still hope.
If she took more risk, meaning she has a higher portion of her investments in stocks (or other growth vehicle) then the return goes higher and she needs to save less. Below, it shows a 6% return over 27 years drops her annual saving down to $42,473. Still very high for someone making $66,500. She’d need a savings rate around 80% to achieve this number. Again, that’s hard to do and she’d probably still have to live at home.
In the final chart below, she probably need a starting savings rate of over 65% if she earned a 7% return for 27 years. Doing this would mean she have to save $35,188 annually.
This is the problem with just looking at static, linear retirement calculators. Life isn’t static and linear. Her savings rate would have to be so high in the early years when she’s making the least amount of money. If she were 40 years old, a $35,188 annual payment wouldn’t be as difficult as it is when she is 23.
The most important part of this process is to do the absolute best you can early in your life. That is something a financial advisor would say. They say, have a short (i.e. car trouble) and long-term (i.e. job loss) emergency fund and then eliminate your debt. Once you’ve done that then save away.
How Does She Save $3,000,000?
A big problem with retiring early, even at 50, is you have limited to no access to your retirement accounts. You really can’t touch these accounts (401k, Roth IRA, etc…) until 59 1/2 years old. So, if you retire at 50 then you have to sustain yourself until you have access to those funds. Honestly, there are an infinite amount of ways to get to the number but I’ve got some ideas.
If we are looking for $3,000,000 at 50 years old, I’d be shooting for something like this:
- $2,000,000 = 401k, Roth 401k, Roth IRA with a heavy weighting on Roth assets
- $1,000,000 = Taxable account
The $1,000,000 taxable account will carry for 10 years (from 50 to 60) until you have access to your retirement funds. For example, if you earned 5% for 10 years on your $1,000,000, you could draw ~$100,000 from your taxable account and still have $350,000 left over at 60 years old.
At 2.5% inflation in 27 years, that’s like having $52,000 annually today. Not a lot of money but if you are debt free and let your $2,000,000 IRA retirement funds compound for another 10 years (until you turn 60 ) then you’ll be sitting on $3,200,000 at 60 plus an additional $350,000 in your taxable account.
If you are following along, this means that at 60 years old you have about $3,550,000 (mostly in tax free retirement accounts) waiting to live the rest of your retirement. In 37 years, $3,550,000 is like having $1,500,000 today. In other words you should be fine. You won’t be stinking rich but you be in pretty good shape.
Before you can have financial independence at 50, you need to be able to do this at 60. First, I’d recommend maximum contribution to the 401k (mainly Roth 401k but some regular too) of $19,500 (2021 maximum). If she is able to save more then fund a $6,000 Roth IRA. And if she still has money left to save then add to her taxable account. Again, focus on financial independence at 60 first and, if that works, then focus on adding to taxable accounts, with a goal of having financial independence at 50.
Summary
After doing the numbers, $3,000,000 doesn’t seem like a lot of money in 27 years. As scary as that sounds, we should probably bump it up some. All she can do is her best. Save like crazy and minimize debt … that’s how the life should be in a perfect world.
Saving $3,000,000 is going to be hard. The hardest part is saving so much in early in her career. I’d imagine she’d need a 60-65% savings rate for the first 5-10 years. And by the time she got into her 40’s she’d be dropping the savings rate down into the low 30% range. That’s if we do it in a simple linear fashion. But life and careers isn’t so simple and linear.
“Be financially independent by age 50 and then decide what work/life looks like.”
She’ll probably have good income growth in her first 10 years so that 60-65% savings rate can come down to 50% pretty quickly. She’ll likely get a promotion or two along the way too. If she keeps her savings rate above 50% then I’d bet she’ll have over $3,000,000 at 50 years old.
But who really knows? All we can do now is give her a number to shoot for, tell her to save as much as possible, and to keep her debt down. I’m not sure what her career will exactly look like or how much she’ll really save or what kind of returns she get in the future. She has a number she can target that we’ll update periodically and she’s in a much better place than I ever was. Remember, I was 43 years old and only had $74,762 in my investment portfolio. Both my kids have nearly matched that and they are only in the mid-20’s (23 & 26).
I really don’t care when the kids retire because that’s not the message I’m sending them. I want them to have options no later than 50 years old. There are so many people “stuck” in life, feeling like their life is only about waking up, driving to work, grinding their way through the day, driving home and then doing it all over again. Many people will work 85,000-100,000 working hours of their life. If you know that’s the future then financial independence as early as possible seems like a fair consideration.
We’ll keep updating both the kid’s progress … it should be fun!
Thanks for reading!
Mr. TLR