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How to retire at age 45
Old 01-22-2011, 01:22 PM   #1
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How to retire at age 45

I guess as I have been approaching early middle age, I have gone through various what-if's concerning financial and career decisions I have made earlier in life. It seems that if someone can claim a wage average of about $50K/yr for 22 years between the ages of 23 and 45, he should have no problem being able to retire early, especially now that there will no longer be an issue with health care (i.e., the new law that goes fully into effect in 2014.)

Someone making $50K/yr would be able to sock away 15% into his 401K, plus typically an employer match of 5%, so there would be $10K/yr invested right off the bat. Then, he can sock away another $5K/yr in a Roth. Over a 22 year period of equal yearly contributions, presuming a return of 8%, the total grows to about 55 times that yearly contribution, which would mean about $550K in the 401K and $275K in the Roth. Then when he becomes obsolescent labor, he would be able to keep his standard of living without resorting to bankruptcy, etc. (and with the beauty of bankruptcy laws, even if he were to file bankruptcy, the 401K & IRA would be exempt from liquidation.)

That my friends is FIRE! Of course, a conscious decision would need to be made to forgo buying the McMansion, SUV, high maintenance spouse, etc. instead of socking it away.

And another thing going forward is that as the labor value of the American worker is tending toward that of China & India, it would behoove a person to be forward thinking enough to have a family nest egg so that his progeny would not need to be subject to a brutish existence, but could live decently on the proceeds of the nest egg; all that would need to be passed down is thrift and the knowledge of Einstein's personal wonder of the world - the power of compounding!
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Old 01-22-2011, 01:39 PM   #2
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550k+275k = 825k which is only 22 times higher than 37.5k/year. This is not enough---the withdrawal rate is not considered "safe". I got the 37.5 by assuming 15% of the 50k + 5k goes into savings and the rest is expenses.
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Old 01-22-2011, 01:39 PM   #3
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Don't you think 8% is a little aggressive?
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Old 01-22-2011, 01:48 PM   #4
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Don't you think 8% is a little aggressive?
Presumptious & unrealistic perhaps... but not as aggressive as some of the assumptions we've seen on this board.
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Old 01-22-2011, 02:03 PM   #5
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And another thing going forward is that as the labor value of the American worker is tending toward that of China & India, it would behoove a person to be forward thinking enough to have a family nest egg so that his progeny would not need to be subject to a brutish existence, but could live decently on the proceeds of the nest egg; all that would need to be passed down is thrift and the knowledge of Einstein's personal wonder of the world - the power of compounding!
It's a great idea - that we can pass our portfolios down to our kids so that they can live off the proceeds, and future generations don't need to rely too heavily on the fruits of their own labor, beyond a little re-balancing each year. The one flaw in this way of thinking in my opinion, is that while some kids might effectively manage the money given to them by their parents, most won't, unless they've been taught the value of money by having to earn it themselves.
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Old 01-22-2011, 02:29 PM   #6
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Unless you have kids later in life or you die at a young age, I think that your kids will already be pretty old by the time they inherit your nest egg. If you live to be 90, your kids will probably be nearing the end of a long career by the time they get your stash. So, unless you are willing to share with them the income of your portfolio while you are still alive, they still gonna have to fend for themselves. And that's not a bad thing in my opinion. My wife and I have no kids and only one niece. She is the only person we consider bequeathing money to upon our death. But she won't get everything. The little darlin' will have to work hard and make her own money like everybody else. We will give her just enough to keep her off the streets in retirement.
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Old 01-22-2011, 02:50 PM   #7
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What about kids, poor investment choices, divorce....life just isn't as simple (or inexpensive) as the OP assumes. He says he doesn't have to worry about health insurance.....well the new legislation only puts a patch on the cost issues and uses the same approaches to paying for and delivering health care that makes the US's version the most expensive and least effective in the developed world. Also 5% 401k match is something than many don't get and if the decline in workers' benefits continues the goal of "ER at 45" will become even more of a fanatasy than it its today.
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Old 01-22-2011, 03:08 PM   #8
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It's a great idea - that we can pass our portfolios down to our kids so that they can live off the proceeds, and future generations don't need to rely too heavily on the fruits of their own labor, beyond a little re-balancing each year. The one flaw in this way of thinking in my opinion, is that while some kids might effectively manage the money given to them by their parents, most won't, unless they've been taught the value of money by having to earn it themselves.
Well, the beauty of this system is that when you are alive, you get to choose how much to give to your struggling children. If they want to use the money to smoke dope, you just don't give the money, etc. If they become obsolescent in the labor market after working hard to attain a degree and work a job, and can only find work doing something stupid at $8/hr, then you can choose to give them money. And once you pass on, they will inherit the IRA, and hopefully by then they will understand the value of money and be wise as to its use.
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Old 01-22-2011, 05:20 PM   #9
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This is such an individual thing. I have a friend who built up a small business in the Midwestern USA starting when he was in his teens. Amazingly (to me) he had a goal of retiring when he was 40.

He was extremely good at what he did, and he managed to sell his company to a Japanese firm for $4M before he reached his 41st birthday. This was a quarter century ago. He was thrilled and totally fulfilled.

Unfortunately, he was also the classic entrepreneur. Within a year, he started another company, and is still running it today. I doubt he will ever really retire.
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Old 01-22-2011, 06:20 PM   #10
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Unfortunately, he was also the classic entrepreneur. Within a year, he started another company, and is still running it today. I doubt he will ever really retire.
Why is that unfortunate, if it's what he wants to do?
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Old 01-22-2011, 07:07 PM   #11
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it would behoove a person to be forward thinking enough to have a family nest egg so that his progeny would not need to be subject to a brutish existence, but could live decently on the proceeds of the nest egg; all that would need to be passed down is thrift and the knowledge of Einstein's personal wonder of the world - the power of compounding!
Nice idea. There's an old saying that wealth doesn't last 2 or 3 generations - estate taxes and children born with a "silver spoon" never develop the gumption to advance the multi-generational family wealth.

I wondered one time, "What withdrawal would theoretically be sustainable indefinitely through successive generations ?"

If each generation had 2 kids - then the portfolio would need to double every 25 years (to be able to split and give each child) - so you'd need 3% growth to cover the "doubling needs". Add to that 3% growth each year to offset inflation.

So if your balanced portfolio returns 7% on the average, you maybe could take a percent out each year - rest of the gain is to fund the "perpetual motion" needs of the portfolio....
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Old 01-22-2011, 07:14 PM   #12
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Why is that unfortunate, if it's what he wants to do?
Excellent point.
I considered it unfortunate, just because I thoroughly enjoy my retirement and he will always enjoy his w*rk. As long as we're both enjoying ourselves, there's no difference. The key is that he is doing what he truly enjoys. My salaried jobs were not as enjoyable, so I overlaid my perspective on his life. You're absolutely right.
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Old 01-23-2011, 09:42 AM   #13
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Reminds me of that old Steve Martin routine" How to make a million $ and pay no tax"
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Old 01-23-2011, 10:10 AM   #14
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Having seen many wealthy families over the years, my opinion is that the brains that originally was behing the accumulation of the wealth in the first place is usually bred out of the family by the third generation.
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Old 01-23-2011, 11:33 AM   #15
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Having seen many wealthy families over the years, my opinion is that the brains that originally was behing the accumulation of the wealth in the first place is usually bred out of the family by the third generation.
With the brains of a first generation like that, there's not much imperative for the second or third generation to develop them...
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Old 01-23-2011, 11:37 AM   #16
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With the brains of a first generation like that, there's not much imperative for the second or third generation to develop them...

so, what your saying is that somewhere, 2 or 3 generations back my family was really rich? YAHOO! There had to be a reason God made me with and under-sized brain. All I need to do now is wait for the cash to roll in!! Now that's a job I can handle!
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Old 01-23-2011, 07:19 PM   #17
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Please forgive me if I'm missing something but the OP's plan gets one to 45 with a nice 401k and IRA savings (assuming the growth happens as described). However, barring certain circumstances, you can't tap those funds until 59 1/2. I point this out because this is the dilemma I will be facing. Reasonable savings in tax-deferred retirement plans but not enough funds in other accounts that can hold us until 59 1/2.
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Old 01-23-2011, 08:25 PM   #18
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Please forgive me if I'm missing something but the OP's plan gets one to 45 with a nice 401k and IRA savings (assuming the growth happens as described). However, barring certain circumstances, you can't tap those funds until 59 1/2. I point this out because this is the dilemma I will be facing. Reasonable savings in tax-deferred retirement plans but not enough funds in other accounts that can hold us until 59 1/2.
Google "72(t) exception" or try here:

Retire Early: Can I withdraw money from my IRA before age 59 ?
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Old 01-23-2011, 08:28 PM   #19
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Having seen many wealthy families over the years, my opinion is that the brains that originally was behing the accumulation of the wealth in the first place is usually bred out of the family by the third generation.
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With the brains of a first generation like that, there's not much imperative for the second or third generation to develop them...
And yet, some continue to insist we have an "Estate Tax" (I actually prefer what I consider to be a more accurate term, "Death Tax", despite it's connections with certain groups) because we don't want to build generational dynasties. It seems that the problem tends to take care of itself. And if not, who better to control wealth than those who understand how not to 'blow it'?

-ERD50
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Old 01-23-2011, 08:52 PM   #20
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And yet, some continue to insist we have an "Estate Tax" (I actually prefer what I consider to be a more accurate term, "Death Tax", despite it's connections with certain groups) because we don't want to build generational dynasties. It seems that the problem tends to take care of itself. And if not, who better to control wealth than those who understand how not to 'blow it'?

-ERD50
I don't generally spend a lot of time being bent out of shape about any aspect of the tax code: I cannot change it, all I can do is try to minimize its impact on me reaching my goals. But in the case of the estate tax, I can see a legitimate argument that preventing massive concentration of wealth in a few hands over time. Don't really have strong feelings either way.
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