FIRE comfortably at 42?

[FIREd]

My nephew just moved to Manhattan, and rented a little studio for $2K/month somewhere near the UN. He said neighbors of his included a retired couple, who had a real apartment which would have cost quite a bit more. I guess if one wants an exciting city life, one has to pay. I am glad my tastes run cheaper.

Moving from the deep south to San Francisco, we have seen our cost of living increase dramatically... But it's almost entirely due to housing and state income taxes. Surprisingly, the rest of our budget has remained virtually unchanged.

Housing cost went up because we went from living in a paid for house to renting an apartment near downtown SF. Owning a condo outright instead of renting would probably go a long way towards reducing those housing costs.

 

[catccc]

In some parts of the country $35-45K is considered subsistence living.... and the only travel is to the food pantry. Respectfully, can you really live 'middle class' on $35K? (45K minus 10K travel)

It certainly depends on where you live, and remember he has no debts. When my financial obligations of my child ends next year, I will be at that level. In fact, paying for my own HI, having a mortgage, factoring in a new car payment with no money down the road, and budgeting $500 on month on entertainment, my yearly retirement budget expenses are still slightly under $40k. My budget really isn't even determined by my finances, as I still have close to $2k a month left over each month ($3500 counting my PT job). I don't lack for anything, so yes it's certainly doable in the right location. Of course being single, and healthy certainly helps in my expenses being lower, though, but a lot of people also don't carry a mortgage, or car payment either while retired, which certainly lower their costs.

We are at that level of spending ($40-$45) for a family of 4 (and children are 4 & 1, so still our financial obligation for quite some time). We live well below our means and I will also agree that we don't feel that any area of our lives is lacking. In fact, I still see many areas in which we could spend less and have less stuff. We are in Philly suburbs. Not a low cost rural area, but not the SF bay area, either.

To the OP, the numbers look good. Go for it.

 

[haha]

Sure! In 2011 the median household income was right at $50,000. Statistically, I would say that amount of income affords one a middle class existence, since half the households in the US live on less than that (some of which periodically visit the food pantry).

You mind is made up, so congrats. But remember that at least 25% of that bottom 50% are getting aid and non-cash services and even some cash not counted as income. A free cell phone, a book full of food stamps, subsidized lunches for the kids, Medicaid, Section 8 subsidies, et cetera can make a big difference.

And I am sure that those food stampers I see in the market wearing fashionable shoes and long leather coats are getting some cash that wolud not be counted in your income statistics.

Ha

 

[FUEGO]

You mind is made up, so congrats. But remember that at least 25% of that bottom 50% are getting aid and non-cash services and even some cash not counted as income. A free cell phone, a book full of food stamps, subsidized lunches for the kids, Medicaid, Section 8 subsidies, et cetera can make a big difference.

And I am sure that those food stampers I see in the market wearing fashionable shoes and long leather coats are getting some cash that wolud not be counted in your income statistics.

Ha

Ha, you know I'm defining middle class living as living at the median HH income, right? The governmental transfers to the bottom 25% of the bottom half of the population has zero direct impact on the median HH income. I am also certain that some of those households earning $50,000 are receiving some of this government largesse that you are talking about. But many middle class and upper class families do (mortgage interest deduction, anyone?).

Informal income earned by the bottom quintile or quartile or third of the population also has no impact on the median HH income. Although, again, I am certain that some households even at the median income level still receive some informal income. That doesn't water down my basic assertion that you can live a middle class income at $35k/yr (as an ER) or $50k per year (as a wage earner). I understand that costs of living vary greatly region to region, so maybe that is why I see things one way and others don't see it the same way. I certainly wouldn't want to ER to a large NE city or a big Pacific Coast city on $35k/yr. It wouldn't stretch nearly as far as it does here in the city in the southeast US. But what is the point of discussing it, our minds are made up.

 

[haha]

Ha, you know I'm defining middle class living as living at the median HH income, right? The governmental transfers to the bottom 25% of the bottom half of the population has zero direct impact on the median HH income. I am also certain that some of those households earning $50,000 are receiving some of this government largesse that you are talking about. But many middle class and upper class families do (mortgage interest deduction, anyone?).

Informal income earned by the bottom quintile or quartile or third of the population also has no impact on the median HH income. Although, again, I am certain that some households even at the median income level still receive some informal income. That doesn't water down my basic assertion that you can live a middle class income at $35k/yr (as an ER) or $50k per year (as a wage earner). I understand that costs of living vary greatly region to region, so maybe that is why I see things one way and others don't see it the same way. I certainly wouldn't want to ER to a large NE city or a big Pacific Coast city on $35k/yr. It wouldn't stretch nearly as far as it does here in the city in the southeast US. But what is the point of discussing it, our minds are made up.

Agree on the bold! Way too much waffling today!

But maybe I don't understand how median household income is determined. I have never looked into it.

If a family has low enough income to qualify for goodies, do they not get counted as a household? "Hey you, stand over there, you're no household!"

Ha

 

[obgyn65]

Yes. I live on $30,000-$40,000 a year (I live on my own) which is a small percentage of my income. My standard of living is "middle class" although my income is "upper class".

Respectfully, can you really live 'middle class' on $35K? (45K minus 10K travel)

 

[ShortInSeattle]

Seems that housing cost is the real wildcard, aside from health insurance. We pay more in HOA dues alone than some of the mortgage amounts described.

I suppose this is why some folks retire comfortably on 1.2 million, while others need twice that to meet expenses.

SIS

 

[FUEGO]

Seems that housing cost is the real wildcard, aside from health insurance. We pay more in HOA dues alone than some of the mortgage amounts described.

I suppose this is why some folks retire comfortably on 1.2 million, while others need twice that to meet expenses.

We don't plan on needing a lot more than that (unless we are just running up the score). No HOA does help, and property taxes of only $1400/yr (yet great municipal services are provided).

I totally get that $35000 net a year in, say SF or NYC or Boston would not provide a comfortable lifestyle. Apparently even if you had a paid off residence, you may spend 1/3 to 1/2 your budget on property taxes or other high taxes.

 

[FUEGO]

Agree on the bold! Way too much waffling today!

But maybe I don't understand how median household income is determined. I have never looked into it.

If a family has low enough income to qualify for goodies, do they not get counted as a household? "Hey you, stand over there, you're no household!"

Always fund to butt heads with you, Ha.

My point, not well illustrated I suppose, was that if the bottom quartile hid $5000-10000 per household in income, as long as it didn't push them into the 50th percentile, hence the median, then the median household income remains unchanged. The 25th percentile could earn $20000 or $30000 or $40000 and the median would still be $50000.

I don't think they exclude anyone from the calcs. Maybe inmates in custody? That does add up to a few million people, but probably not a big impact on median. A bigger question might be how do they account for governmental transfers in the household income totals. If I get $10,000 in welfare benefits does that count in my income?

 

[truenorth418]

We don't plan on needing a lot more than that (unless we are just running up the score). No HOA does help, and property taxes of only $1400/yr (yet great municipal services are provided).

I totally get that $35000 net a year in, say SF or NYC or Boston would not provide a comfortable lifestyle. Apparently even if you had a paid off residence, you may spend 1/3 to 1/2 your budget on property taxes or other high taxes.

Actually, one can live reasonably well in NYC on $35k per year. I live in Manhattan and that's about what I will spend this year. And that includes some fun vacations and a car (which I park on the street but rarely drive). The key is that I own my apartment free and clear and pay a very modest monthly maintenance fee. Property taxes are less than $4k for me. Plus I have a great girlfriend who shares my frugal habits.

 

[NW-Bound]

...a car (which I park on the street but rarely drive).

My nephew had to leave his baby behind, an Audi with a V-8 and a 6-spd transmission. He said it cost too much to park. Maybe he did not know where to leave it on the street.

 

[haha]

Plus I have a great girlfriend who shares my frugal habits.

If she looks like your avatar, you hit the jackpot.

Ha

 

[Nords]

Inflation average above 7% has happened twice in the last 100 years (1920's and 1970's)... and above 5.5% has happened four times (1920's, 1940's, 1970's and 1980's).
In fact, over the last 100 years we've never had 3 straight decades with inflation averaging less than 5.5%... some people like to think that our government can control it today, but historically speaking I wouldn't count on anything less than 5% on average for the next 10-20 years; we've been hovering extremely low on the inflation scale for the last 22 years. We're due for a correction.

You're saying that there's a 20% chance (20/100) or perhaps only a 2.2% chance (two rolling 10-year periods out of 90 of them) that inflation will exceed 7%/year for 10 years. Based on this, he's supposed to invest in the stock market? What if inflation doesn't revert to the mean?

The last few decades of growing computing power and better data collection may have changed our ability to cope with inflation more significantly than anything we've done since getting off the gold standard. One of those 7%+ periods was during a World War, the other during Vietnam. We've been at war for over a decade yet inflation seems to have dropped during that decade.

I wonder if three straight decades of lower inflation implies that we're getting a handle on its causes and collecting the right kinds of data to track it.

But I don't waste my time trying to forecast inflation when I can just diversify to live with it. Stocks are one way, but they're not the only way. And if someone doesn't have the desire to own stocks (especially based on negative experiences) then they're highly unlikely to follow that advice anyway.

Back to OP's example. All of his expenses are met from rental income. He has a big cash stash left over and he's been burned by the stock market before. Which scenario is he more likely to pursue?
1. Invest his cash in the stock markets and learn how to "stay the course" through whatever volatility or inflation or other economic impacts come our way.
2. Hold his cash in CDs and pray for high inflation and a big recession to crater the local real estate market. Then he can scoop up more foreclosed properties for huge cash discounts, raising his rental income even further and giving himself more of a cushion against that inflation.

He seems to be doing pretty well for himself with real estate and cash. Why invest in asset classes that he doesn't like and is unlikely to hold on to?

 

[Fermion]

$35,000 to $40,000 taken partially from already taxed money in your investments will let you grab a lot of those government benefits (subsidized healthcare, tax credits, etc.).

It may be that $40,000, of which at least $20,000 is taken from already taxed money, is equivalent to a job income of $55,000 to $65,000. Remember, you don't pay SS, medicare, or even much state or federal tax with dividend and capital gains of only $20,000/yr for a married couple.

 

[FUEGO]

Actually, one can live reasonably well in NYC on $35k per year. I live in Manhattan and that's about what I will spend this year. And that includes some fun vacations and a car (which I park on the street but rarely drive). The key is that I own my apartment free and clear and pay a very modest monthly maintenance fee. Property taxes are less than $4k for me. Plus I have a great girlfriend who shares my frugal habits.

There you go, you prove the case! Middle class (or just comfortable?) lifestyle in Manhattan at $35k/yr. Probably easier with you by yourself (my assumption?) than with a family of 5 like we have here in the southeast (where we have a 4 BR house). We could easily move to a studio or 1-2 BR apartment here in the SE and cut the housing costs more obviously. But housing is relatively cheap here so a larger house is something we choose to spend up on. I wonder what a lakefront 4 BR house on 1/3 acre would run in Manhattan?

 

[marko]

$35,000 to $40,000 taken partially from already taxed money in your investments will let you grab a lot of those government benefits (subsidized healthcare, tax credits, etc.).

Now you're talking my language!!

I suspect a lot of folks will be doing same to snag those O'care subsidies.

 

[Mulligan]

$35,000 to $40,000 taken partially from already taxed money in your investments will let you grab a lot of those government benefits (subsidized healthcare, tax credits, etc.).

It may be that $40,000, of which at least $20,000 is taken from already taxed money, is equivalent to a job income of $55,000 to $65,000. Remember, you don't pay SS, medicare, or even much state or federal tax with dividend and capital gains of only $20,000/yr for a married couple.

Your second paragraph is spot on for me. My part time job and pension income currently equal almost the same gross income as my final year working full time. But due to no pension contribution withholding, no SS or Medicare taken from pension, and a pension tax credit, my net take home monthly income is almost 30% higher than when I was working full time with the same income.

 

[FUEGO]

Now you're talking my language!!

I suspect a lot of folks will be doing same to snag those O'care subsidies.

We certainly plan on taking advantage of the obamacare subsidies (assuming the continue to exist in substantially unchanged form). But the bigger benefit of the obamacare subsidies for our household is that we don't have to budget a huge outsized reserve fund to pay potentially steep future increases in health insurance premiums. Prior to obamacare, I had budgeted about 25% of our spending for health insurance premiums.

 

[growing_older]

But the bigger benefit of the obamacare subsidies for our household is that we don't have to budget a huge outsized reserve fund to pay potentially steep future increases in health insurance premiums.

I'm not sure I understand this reasoning. If you are getting subsidized insurance, then perhaps you can be insulated from future increases, but if your income in above the subsidy cutoff, wouldn't you be just as vulnerable to future premium increases?

 

[FUEGO]

I'm not sure I understand this reasoning. If you are getting subsidized insurance, then perhaps you can be insulated from future increases, but if your income in above the subsidy cutoff, wouldn't you be just as vulnerable to future premium increases?

Let me explain my reasoning using 2 scenarios. The first scenario is with obamacare in place, and with our income sufficiently low that we qualify for substantial subsidies, thereby making our cost of health insurance premiums $2000 per year. We can budget $2000 per year, maybe with a larger than inflation multiplier on that expense projected into the future.

The second scenario is with no obamacare in place and our health insurance needs being left completely to the vagaries of the individual health insurance market with no guarantee issue and no subsidies. We might be able to get a bare bones family High Deductible plan for $4000 per year (based on ehealthinsurance.com quick quote for our family of 5 with both adults in their 30's).

Assuming we meet all their underwriting requirements, we can't just budget $4000 per year. We would be hit with steep annual increases if things continue like they have historically, and as we move up the age brackets, that premium would increase even more (although eventually the kids would drop off the plan, so rates might drop a little in our 50's or at least partially offset the age bracket increases). So we would have to budget significantly more than $4000 per year to account for very steep premium increases over the years. And budget even more to cover part of the deductible we would have to pay on a High Deductible plan (obamacare insurance pool plans won't have steep deductibles like HDHPs, and there are max payment criteria based on income under obamacare as well).

Under obamacare, we might budget $2000 per year with a 5% inflation factor, whereas without obamacare we might budget $8000-10000 per year with a 5+% inflation factor.