How much real dollars for FI

[honydonk]

Hi,

I have been thinking and trying to work out the numbers. Maybe some of you can help me. How much does one put away each year . I would like to FI by 40 . I understand compounding plays a part but how much

My calculation right now for married is 40K right now. How much should i aim to put away.

We are LBYM kinda of people. We spend about 1200 in expenses other than our mortgages.

Age : Less than 30.

[Midpack]

Rule of thumb, you'll need 25X your annual before tax living expenses, based on the 4% SWR rule. So if you intend to spend 40K/yr, you'll need $1,000,000. But that's for a 30 year retirement and based on past history. Sounds like you're expecting a longer retirement, so you might need more. Most people here don't advocate the 4% SWR for spendout, myself included, but it's gives you a good target number to start with at your age.

You haven't told us enough for any of us to tell you how much to save. There are calculators all over the internet to do that, here's one: Calculators - Savings calculator

[ziggy29]

If you need the current equivalent of $40K then I'd suggest about $1.33 million in current dollars, based on an inflation-adjusted 3% withdrawal rate. The usual 4% that's quoted is a little less certain over a retirement expected to last 40-50 years, so I'd cut it to 3% at age 40 to make it safer.

Have you factored paying for health insurance into this? Seems to me that it's pretty hard for even the simplest living to make it on $40K when you have to pay for all of your health insurance. In a low cost area with no mortgage or rent, maybe, but that still seems a bit tight.

[Niko]

I am also in my 20s. I made the realization a while back that it makes little sense to set such a concrete plan at such an early age. I recommend saving your pennies (as much as you reasonably can afford) and spend the next few years reading up on some of the books you see recommended here (Your Money or Your Life, Four Pillars, Work Less Live More, etc). If you save a lot, spend little, and read a lot, by the time you are in your mid 30s, you should have a much better idea whether FIRE at 40 is possible.

[Midpack]

Quote:

Originally Posted by Niko I am also in my 20s. I made the realization a while back that it makes little sense to set such a concrete plan at such an early age. I recommend saving your pennies (as much as you reasonably can afford) and spend the next few years reading up on some of the books you see recommended here (Your Money or Your Life, Four Pillars, Work Less Live More, etc). If you save a lot, spend little, and read a lot, by the time you are in your mid 30s, you should have a much better idea whether FIRE at 40 is possible.

True enough, but as you know, the later you start, the more painful it will be financially. A trade off we all have to face continuously throughout our working years, where's the right balance between live/enjoy now and live/enjoy later. If you're saving 10% in your 20-30's (and get matching from an employer ie, 401k), you will probably be well on your way...

[honydonk]

Hi,

I think there is a question that i created with my post.

I believe i mentioned that my DW and me spend 1300 per month in expenses.

So annually we need = 1300* 12 = 15600 + 4000 ( misc). = 19600.

With a kid i am not sure how much it will go up.

Right now i am socking away 40k a year for retirement. What i was trying to get to .. for the FI people how much did u sock away . I am just trying to keep a number in mind so that i can attack that number.

Ex: if someone say 60K is the good number. Then 60K compounded at 6% return for 30 years = 344K. (formula used = P* (1+return/100)^years).

Is this right.

thanks
amit

[Johnphx]

Don't just look at your expenses, but the amount of taxable income required to meet those expenses. Put another way you have to make more than 20k to meet your 20k worth of current expenditures.

But if you are saving twice what you are spending on an annual basis you are doing VERY VERY well.

[aaronc879]

Quote:

Originally Posted by ziggy29 If you need the current equivalent of $40K then I'd suggest about $1.33 million in current dollars, based on an inflation-adjusted 3% withdrawal rate. The usual 4% that's quoted is a little less certain over a retirement expected to last 40-50 years, so I'd cut it to 3% at age 40 to make it safer. Have you factored paying for health insurance into this? Seems to me that it's pretty hard for even the simplest living to make it on $40K when you have to pay for all of your health insurance. In a low cost area with no mortgage or rent, maybe, but that still seems a bit tight.

I don't understand it when people say you can't live on 40K/yr. Majority of people in this country live on less than that. I make 45K/yr and max out 401k and Roth. So that leaves me with 30K pre tax income after maxing 401k. If I substitute the $5000 for a Roth with health ins. premiums in retirement, living off of 30K/yr pre-tax in retirement will be the same as living off 45K/yr pre-tax and pre-401k. Right now i'm living off of $1600/mo take home pay and I save enough of that so I can max my Roth on Jan 2nd every year. And i'm living on that with a mortgage. I realize there are more expensive places than the upper midwest but for most people saying that you can't live off 40k/yr is rediculous. 30K/yr in today's dollars will be a Very comfortable living for me in retirement even with insurance costs. Not saying everyone would be happy with that income but it can certainly be done. I plan to retire with 1.5MM in 21 years at age 49. With no mortgage I should be quite well off by my standards.

[Midpack]

Quote:

Originally Posted by aaronc879 I don't understand it when people say you can't live on 40K/yr. Majority of people in this country live on less than that.

You're absolutely right, millions of people live on 40K per year...if you're smart and LBYM, you can live well and comfortably.

[rogersteciak]

Quote:

Originally Posted by honydonk I have been thinking and trying to work out the numbers. Maybe some of you can help me. How much does one put away each year. I would like to FI by ...

What I did over a dozen years ago was to create a detailed cashflow spreadsheet. It goes out by month until I'm well into retirement. By using the IF-THEN-ELSE feature of EXCEL, I set up the spreadsheet to simulate investing an amount of money (e.g., $1,000) whenever my checking account balance gets over a certain number of months of "cushion" (e.g., 3 or 6 months of living expenses).

One advantage of this approach is that I can automate the management of my cashflow (it gets easy once it's set up). The other advantage is that I can tweak things now to see the impact on the future. For example, what if I can reduce my expenses by $100 a month and invest that amount instead? My spreadsheet lets me see the impact a decade or two or three in the future. With this type of simulation, I can see how current changes in my finances impact my financial future.

In broad numbers, it takes between 25x and 40x of income-producing assets to be able to retire, where x is my annual living expenses including taxes (that is the top-down approach). With a detailed cashflow budget that goes out decades into the future, I can see how small changes now can impact my future (that is the bottom-up approach). The two approaches complement each other to create confidence in the plan I devised for myself.

This dual approach also allows for changes in my financial situation to be immediately reflected in my long-term plan. What if I decide to buy that non-essential luxury item I just have to have, for example? I can see how my financial freedom day gets pushed out in time. There is no right or wrong answer here; rather, a detailed cashflow spreadsheet is a tool that empowers me to have control over my financial future to keep my FIRE goal on track. I'm still using this spreadsheet today, even though I reached early semi-retirement a couple of years ago.

[ziggy29]

Quote:

Originally Posted by aaronc879 I don't understand it when people say you can't live on 40K/yr. Majority of people in this country live on less than that. I make 45K/yr and max out 401k and Roth.

Since you replied to me, I'll respond by saying that I never said that.

Just the same, I think most people would prefer to have a little more cushion than that. There's only so much you can tighten in really inflationary times, and starting from a base that low, LBYM or not, it could be hard to pinch pennies harder if prices skyrocket. It also doesn't give you much wiggle room in terms of budgeting things like major home repairs, car purchases, et cetera.

I'm sure people can do it, but I don't think a lot of people who want to FIRE are going to try to do it on a shoestring.

[Rambler]

We're targeting a 3% SWR, We will be punch out before 50 but after 48. We would not be able to make do with 40k per year. Prop tax, homeowners, and health insurance alone will eat over 25k...

R

[bongo2]

Quote:

Originally Posted by honydonk Right now i am socking away 40k a year for retirement. What i was trying to get to .. for the FI people how much did u sock away . I am just trying to keep a number in mind so that i can attack that number. Ex: if someone say 60K is the good number. Then 60K compounded at 6% return for 30 years = 344K. (formula used = P* (1+return/100)^years).

The amount you need to sock away depends on your goals, spending, timeframe, etc. Saving twice your spending is impressive; I think that's a fine goal.

A single $60k payment turns into $344k over 30 years, but I think you're looking for $60k per year year over 30 years, which becomes $4.7m. If you use excel you want the "PV/FV/PMT/RATE/NPER" family of functions to do this, or you can find the formula here: Annuity (finance theory - Wikipedia, the free encyclopedia)

Quote:

Originally Posted by aaronc879 I don't understand it when people say you can't live on 40K/yr. Majority of people in this country live on less than that.

Are you single? Many people are thinking of a couple. Median household income in 2006 was about $48k, but median income for a couple was about $70k. In addition, most people's reference point is "like me" (in my case college educated, professional, couple, suburban, children, middle-aged, etc.) and the median income here is going to be even higher.

[DJRR]

Quote:

Originally Posted by honydonk Hi, I believe i mentioned that my DW and me spend 1300 per month in expenses. So annually we need = 1300* 12 = 15600 + 4000 ( misc). = 19600. With a kid i am not sure how much it will go up. Right now i am socking away 40k a year for retirement. What i was trying to get to .. for the FI people how much did u sock away . I am just trying to keep a number in mind so that i can attack that number. amit

You are already doing better than most people on this board ever did with $40k per year. I feel fortunate to put away $20k per year with another $11k for charitable donations.

If you are really only spending $20k per year then you need ~ $500k to be financially independent. Assuming you start from $0 and can keep saving $40k per year and earn 8% per year you will have the $500k in a little less than 9 years. You will have to adjust some for inflation, but I assume you have some savings now and can increase your investments by the amount of inflation.

Once you get to financial independence, then you need to decide if you can maintain it. Depending on your actual expenses, investment performance etc. you can evaluate as you go along. Ten years from now should give you a much better picture. At that time you may wish to keep working for a few years to give yourself a larger margin of error for a very long retirement.

Many people would suggest working until you reach a 3% withdrawal rate if you want to retire in your 40's or if you do not have access to low cost healthcare. Worst case you will know that your investments can provide your current living expenses and you will not have to worry about your job like someone living paycheck to paycheck. I think $40k is a great number if you can keep it up.

[honydonk]

Hi,

Thanks for all the encouragement thrown out. The reason i am able to sock away so much if we dont have kids right now. Once the kids come along there will definitely be a reduction in the savings. We are looking to start a family in 2 years but really want to sock away as much as we can for the next 2 years for retirement.

I dont see myself retiring early in the 40's but will definitely want to be FIRED by 40 dont want too much tensions in life later.

I am right now setting my IRA with dividend stocks so that just the dividends cover up all the income but lets see how that plan goes.

On an average though i believe married couples end up saving 40k a year

His+her 401k - 15500* 2 = 31000
His+her roth - 5000*2 = 10000
Taxable account

So we are just doing ok as compared to the median house hold. What would be interesting to look at is the taxable amount people save per year.

That is a very interesting number i am looking for.

I am aiming for 1000 over the above -- last year very successful -- this year right now ahead but need to save more.

Sorry for going on and on.

thanks

[bongo2]

Quote:

Originally Posted by honydonk On an average though i believe married couples end up saving 40k a year

I think you are overestimating the median savings. Frequently you hear about a negative savings rate - though there is some debate about how useful that number is. I believe the median 401k balance is only about $20k, so most people are contributing far less than the max.

If you want to be FI by 40 then you will need to do a lot better than the median.

[kaudrey]

Since you like numbers: I save $15.5K to 401(k) and about $22K in savings and brokerage account a year.

I wasn't doing that when I was 30, though (probably more like $20K total a year back then, 9 years ago). I increase the amount each year almost to match my raises, and I plan to retire at 52 in 13 years.

I hope to have about $1.25M by then...but I also have a pension, which I'll start getting when I'm 60.

[retire@40]

Quote:

Originally Posted by ziggy29 If you need the current equivalent of $40K then I'd suggest about $1.33 million in current dollars, based on an inflation-adjusted 3% withdrawal rate. The usual 4% that's quoted is a little less certain over a retirement expected to last 40-50 years, so I'd cut it to 3% at age 40 to make it safer...

Another option is to keep it at $1mil and make up the rest with some part-time work.

That extra .33mil will give you $13,333 in additional withdrawal. So by working enough to make $13,333, it will allow you to semi-retire a little sooner than it would to fully retire.

[honydonk]

Hi,

Bongo2 -- what would be a good number that you can throw out . The reason i am going for numbers .. Warren Buffet said not to expect more than 6% going forward . Everything else being the same -- based on how much u save thats how fast u can retire.
Based on that i think 50k a year is pushing it. I dont think I will be able to save more than that .

Kaudrey-- thanks for sharing the numbers. Its interesting what you are doing. I will try and emulate what you are doing.

My wife will hopefully get a pension by the time we retire -- not adjusted for inflation but its still something better than nothing.

All i can hope for is a period of low inflation so that our numbers can look better lol. Not going to happen anytime soon.

[bongo2]

You said your goal is to be FI by 40 and you are "under 30". FI in 10 years is a very aggressive goal - especially starting out in life. There are a few people here who achieved quick FI through a windfall, but that was after they had achieved a lot of success working / owning a business. Again, it can be done, but it is a very lofty goal.

You want me to throw out a number for what? The median savings, or what you should save? I don't know where to find the median savings - if you do see a statistic I'd be interested in what you find. But in any case, you need to do much much better than the median. Right now it looks like you are saving something like 2/3 of your income (if there is $20k spending and $40k savings - I know this ignores taxes). This is very very good. It would be very unusual for someone to maintain this level of frugality their whole life. I'm not saying you can't do it, it's just rare. I would recommend that you not deprive yourself, keep your savings rate high, and see where you end up in a few years. If you want to play with FIRECalc or online calculators or excel you can see where $40k a year ends up after 10 years under various assumptiosn. Have some fun with that - but don't take it seriously. The market and your life can throw you a lot of curves that make long term planning a rough guide at best.