Confessions of a ESR wannabe

[Ronnieboy]

I joined ER.org about two years ago, after seeing some updates from other members, I realize that I haven't been moving much or at all towards my ESR goals.

My goal is/was to ESR at 55ish (12 more years), it has always been semi-retirement due to the fact that I anticipated needing HI coverage and I don't HATE my job, just dislike it immensely. I could theoretically have a schedule that would have me work 2 ten hour days every week to maintain PT status and still bring in a salary that is just over the median household income.

In addition to the time goal, my financial goals would be 100% debt free, have a $500k dividend stock portfolio throwing off $20k/yr in dividends @ 55y.o. We should be able to live off the PT work, dividends and continue to max out 401(k), shooting for a $1.5 to $2M Roth/IRA/401k balance when ever we hit it, not necessarily at 55.

I've read quite a few success stories of people who went from nothing or negative net worth to being able to retire in the above time frame, I figured I can do it too. Haven't had much success though, or don't feel like it. One problem is we have some cc debt. I am glad to say we don't have anything over 10% interest, but I am torn between focusing on getting the CC's paid off or saving or both?

We have all seen the charts that show a 20 y.o. putting $5k a year in the IRA for 10 years, not putting another dime in and having more $$ at 65 than the 40 y.o. putting in $10k year for the next 25 years. That is part of my fear, if I don't save some now, I will miss out on the compounding vs focusing on paying off all debt ASAP, then being able to save double or triple the dollar amount in a few years.

I keep getting tugged in hundreds of different directions. I do not want to have such a focus on the above that I am sacrificing the 'now'. I would like to have my basement finished so the family can have more room and entertainment activities. I feel now is the time to do it with building supplies/services having tanked.

I want to max out the 401k and IRA, I want to fund the dividend portfolio, I want to get my CC's paid off, I want to save for a replacement car, I want to have a larger emergency fund, the list goes on an on.

So I guess the whole point of this rambling is to get suggestions from people who have had similar experiences. Did you have some CC debt and focus solely on that, then save for retirement? Did you put some in retirement and debt repayment? Did you make a large purchase because you felt the time/price was right and later regret it or it worked out fine?

Happy New Year

 

[Onward]

After you've set aside some emergency cash, pay off your credit cards! The interest you will save almost certainly dwarfs anything you can reliably make from investing.

 

[haha]

One problem is we have some cc debt. I am glad to say we don't have anything over 10% interest, but I am torn between focusing on getting the CC's paid off or saving or both?

I wojld definitely put enough into 401k, etc, to get fulll match. Next pay off that CC debt, and lock your cards away somewhere.

Ha

 

[NW-Bound]

Indeed some people here posted about their crash savings to ER in a dozen years or something like that. And not all did it with stock options either. I really do not know how they did it, as I have been saving all my working life.

However, if you can find some part-time work to ESR, and if it fits your experience so that the pay is good, then it becomes much easier. The pressure is off. If you can work whenever you feel like it, then vacation time becomes unlimited. You almost go back to work to have a break from vacation. It's great!

 

[Gumby]

I wojld definitely put enough into 401k, etc, to get fulll match. Next pay off that CC debt, and lock your cards away somewhere.

Ha

+1

I don't think you can go wrong by looking at all the potential uses for your money and picking the highest yielding one (adjusted for risk). As Ha notes, picking up a full 401k match is like earning 100% risk free on your money. Paying off your credit cards is like earning 10% or 9% or whatever your current rate is -- risk free. You'll never get that return in any risk free investment like a CD or a Treasury.

And the return from not adding to your current credit card balance is infinite. I'd suggest freezing them in a block of ice in your freezer (a 1/2 gal. milk carton would work). Then you'll have the time it takes to melt the ice to think about whether you really need to spend the money.

 

[Onward]

Indeed some people here posted about their crash savings to ER in a dozen years or something like that. And not all did it with stock options either. I really do not know how they did it, as I have been saving all my working life.

Not to get off topic, but to answer the question: I went from broke to FIREd in eight years. In years 1-4 I saved (incl. IRA/401k contribs) roughly 50% of my net income. I also w*rked a couple of temporary side j*bs. In years 5-6 I gradually doubled my salary by asking for raises and changing j*bs twice. In those years I saved roughly 60% of net income. In years 7-8 I smelled blood and saved roughly 75% of my net income. Vast majority went into domestic stock index funds. Never had any stock options or grants at w*rk, the bastards. I did not live a particulary full life during this sprint, as you can imagine. But that's the price I paid for starting late. I'm single and withdrew around $25k in my first year of ER.

 

[NW-Bound]

Not off topic at all! You showed how it could be done. Although having no family made it easier, it still took much fortitude. Kudos to you!

 

[Nords]

Not to get off topic, but to answer the question: I went from broke to FIREd in eight years. In years 1-4 I saved (incl. IRA/401k contribs) roughly 50% of my net income. I also w*rked a couple of temporary side j*bs. In years 5-6 I gradually doubled my salary by asking for raises and changing j*bs twice. In those years I saved roughly 60% of net income. In years 7-8 I smelled blood and saved roughly 75% of my net income. Vast majority went into domestic stock index funds. Never had any stock options or grants at w*rk, the bastards. I did not live a particulary full life during this sprint, as you can imagine. But that's the price I paid for starting late. I'm single and withdrew around $25k in my first year of ER.

Jacob Lund Fisker describes the acceleration process in detail at EarlyRetirementExtreme.org, and I ran a series of "how long does it take" numbers on the blog in a post that goes up 5 AM HST Monday 3 Jan.

Let's see if the HTML table displays correctly: Nope. Looks like "HTML code is Off". Maybe I can figure that out and post an excerpt, or you could subscribe to the blog, or just wait patiently until Monday.

Anyway a military member could do it in just over 20 years by saving 40% of their income, with a COLA'd pension and cheap health insurance to boot. An extremely motivated veteran could do it in five years with just their military skills and discipline as their only "veteran's benefits" to help them save 75% of their pay.

 

[Ronnieboy]

Not to get off topic, but to answer the question: I went from broke to FIREd in eight years. In years 1-4 I saved (incl. IRA/401k contribs) roughly 50% of my net income. I also w*rked a couple of temporary side j*bs. In years 5-6 I gradually doubled my salary by asking for raises and changing j*bs twice. In those years I saved roughly 60% of net income. In years 7-8 I smelled blood and saved roughly 75% of my net income. Vast majority went into domestic stock index funds. Never had any stock options or grants at w*rk, the bastards. I did not live a particulary full life during this sprint, as you can imagine. But that's the price I paid for starting late. I'm single and withdrew around $25k in my first year of ER.

These are the types of success stories I am talking about. I have read about yours and others on this board and am encouraged by it.
There is no way in heck though, I would be able to talk the wife into the college student lifestyle again

I am gathering from the tone of the replies though, I should focus on getting debt paid off, then through all of that into savings/retirement (after company match on 401k). I suppose the two or so years it might take is nothing in the whole compounding scheme of things?

 

[BigMoneyJim]

I am gathering from the tone of the replies though, I should focus on getting debt paid off, then through all of that into savings/retirement (after company match on 401k). I suppose the two or so years it might take is nothing in the whole compounding scheme of things?

Yup. Fund 401(k) to company match point, then pay off consumer debt.

I've gone through similar thoughts. It can be discouraging here to read people younger than you with more money, but once you pay off debt and start building savings you can look back at your history and see progress.

Here are some posts of mine at this forum going through similar decisions and processes:

http://www.early-retirement.org/forums/f28/paying-off-debt-vs-401-k-contributions-13988.html
http://www.early-retirement.org/forums/f30/light-at-the-end-of-the-debt-tunnel-14330.html
http://www.early-retirement.org/forums/f30/debt-countdown-update-14711.html
http://www.early-retirement.org/forums/f27/woohoo-woohoo-yippee-happy-14748.html

It was in 2000 at age 30 I started taking better control of my finances, but at the time I had $60k in a 401(k). I was tempted several times to use the 401(k) to pay off the debt, but due to taxes and penalties it would have wiped out the 401(k). I think aggressively paying it down instead of cashing out has helped me learn to trust my ability to control spending and perhaps taught me how in the first place.

Since the first payoff I got into debt again after being jobless a while and paid it off again. I also borrowed to buy a used car and paid it off. With less job security I got nervous about not having an emergency fund and fretted at times whether I should pay down debt first or build an emergency fund first. I ultimately paid down debt first, and I think that is the right decision.

Currently I have no debt, about $10k in PenFed CDs as emergency funds and am contributing to pretax and after-tax savings accounts invested roughly 60/40 stock funds / bond funds. It took a while to get here, but I met all my medium-term financial goals. It's worth the effort, time and patience to do it right. I kept wanting to fund more emergency savings or start an after-tax investment account before I had properly paid off debt and/or build up my initial emergency savings, but I managed to stay on track.

Edit: Reemphasizing: Don't get discouraged comparing yourself to others on this board. First, I think there is a bias for reporting success stories as people are hesitant to put out there "yeah, I screwed up some opportunities...." Make some financial goals and work towards them, but life happens, and sometimes that helps financial plans, and sometimes it wrecks them.

 

[lhamo]

If you aren't doing so already, tracking your expenses diligently may help you discover places in your budget where you are overspending and/or could cut back. I think if you really want to make progress toward your goal you need to look carefully at why you have accumulated credit card debt. Until you are able to live below your means, you will find reaching an ER goal (even an ESR goal) to be difficult.

lhamo

 

[clifp]

Yup, 401K contribution up until the match, if you have company employee stock purchase plan with a discount then fund that next. Next kill the credit card debt.
Then savings.


Remember a couple of Kimo's Hawaiian rule
two ways to be rich; earn more or desire less
the best things in life aren't things.

 

[ronocnikral]

There is no way in heck though, I would be able to talk the wife into the college student lifestyle again

To me, this is the greatest obstacle for married couples. It's getting on the same page! DW is frugal and she gets that working because you have to stinks. I know family members who have one spouse on one track and the other going the other way. And both get upset. The point: your goals and your wife's goals need to be aligned. The rub is getting to that point. And maybe you don't go back to the college life, but perhaps you look at the budget and cut out some fat.

I track both budget and NW monthly (a little obsessive, but I'm an engineer and like to have data). It helps for me to look at the numbers regularly.

 

[Nords]

... and I ran a series of "how long does it take" numbers on the blog in a post that goes up 5 AM HST Monday 3 Jan.
Let's see if the HTML table displays correctly: Nope. Looks like "HTML code is Off". Maybe I can figure that out and post an excerpt, or you could subscribe to the blog, or just wait patiently until Monday.
Anyway a military member could do it in just over 20 years by saving 40% of their income, with a COLA'd pension and cheap health insurance to boot. An extremely motivated veteran could do it in five years with just their military skills and discipline as their only "veteran's benefits" to help them save 75% of their pay.

OK-- the military version of the "How long does it take to become financially independent?" post is up on the blog.

 

[Ronstar]

Sounds like you have a great plan.

Like others have said, We:
Maxed the 401k
cut the credit cards
saved an emergency fund
then paid off the mtge

I ESR'd at 55 - started with a 4 day work week and went down to 3, looking to go to 2. The key for me was getting expenses down below pt income levels while still funding 401k. (In ESR, its easier to cut expenses than it is to increase earnings.) Also bulked up the emergency fund to be able to cover all expenses till 59.5 in case I wanted to fully retire.

Once you get your 401k/savings up to a retirement sized nest egg, and get expenses down below anticipated part time earnings, and fund the capital intensive things you mention, you can ESR comfortably.

 

[obgyn65]

Agree.

I think if you really want to make progress toward your goal you need to look carefully at why you have accumulated credit card debt.
lhamo

 

[Aiming_4_55]

Agreed, also I would look at discretionary spending not on credit card debt too. Cash out can impact ESR goal and/or savings. YMMV

If you aren't doing so already, tracking your expenses diligently may help you discover places in your budget where you are overspending and/or could cut back. I think if you really want to make progress toward your goal you need to look carefully at why you have accumulated credit card debt. Until you are able to live below your means, you will find reaching an ER goal (even an ESR goal) to be difficult.

lhamo

 

[flyfishnevada]

From a more philosophical perspective, attack the problem from both sides. pay down that credit card debt and save but at the same time downsize and reduce your spending. A smaller home, used cars and such can save you a lot of money that can then be saved or used to pay down debt. As a bonus, once you get to retirement your expenses will be less and therefore you won't need as much money to live on.

 

[oneils]

OK-- the military version of the "How long does it take to become financially independent?" post is up on the blog.

Hi Nords, is it on the ERE blog? I can't seem to find it there.

Thanks.

 

[Gumby]

Hi Nords, is it on the ERE blog? I can't seem to find it there.

Thanks.

Here's the link

Military Retirement & Financial Independence | Financial independence & early retirement for veterans

 

[Ronnieboy]

Sort of an update. Have paid off two cc's ~$3k. I have pared down the 401(k) to matching only.

The thing I am looking at now: I am wondering if I should try and fund our 2010 IRA contributions before 4/18/11 or pay off another card or two. I am nervous because you can't go back in time to fund the IRA and can't put in more than the $5k/ea when all the bills are paid off....

We are not adding any $$ to the cc's just slowly paying them off.

Would it be better to contribute to IRA for 2010 or put towards a bill(s)

 

[Sarah in SC]

I agonized over this, Ronnie, when we were getting things paid off. I kinda split the difference, putting half into the IRAs by the deadline and using the rest for paying off debt. That way I covered both rather than an all-or-nothing program.

 

[Meadbh]

Credit card interest rates are so outrageously high that getting rid of credit card debt ASAP has got to beat any other move, I think. And the sooner you do, the more money you will free up for savings.

 

[ziggy29]

I agonized over this, Ronnie, when we were getting things paid off. I kinda split the difference, putting half into the IRAs by the deadline and using the rest for paying off debt. That way I covered both rather than an all-or-nothing program.

Plus, if it's a Roth, you can always withdraw your contributions without taxes or penalty if you really need that cash -- but you can't "change your mind" and fund the IRA for 2011 in, say, 2013.

 

[Bestwifeever]

I have to vote to pay off the credit cards first, Ronnie.

Great that you've been able to "retire"--two of your credit cards, that is!