# A Quick & Dirty Plan To Reach Financial Freedom

Despite the current financial funk, I still desire financial freedom. The general idea is simple; I need to generate enough income from my assets to pay for my expenses. Here is how I’ve been framing the problem in my mind recently. I’m 30 now, let’s say I want to be “retired” by age 50.

## Part 1: Accumulate 30 times annual (non-housing) expenses

There are numerous studies about the “safe withdrawal rate” from a portfolio, and they usually end up at around 3% to 4%. This usually means that with \$1,000,000 dollars, you have a high (say 99%) chance of being able to produce \$30,000 to \$40,000 of income each year plus inflation adjustments for a long period of time (30+ years).

This is the same as saying you need to save 25 to 33 times your annual expenses.. If you’re conservative (or young), I’d go with a higher number, so I picked 30. Multiply your annual expenses by 30. You need that much money to retire. All of these are based on historical numbers, so this is only an estimate.

Right now I’d estimate our annual non-housing expenses at about \$24,000 per year (\$2,000 per month). Previously I’ve found that we spend about \$18,000 per year, but that neglects a few things like health insurance and car deprecation. (Again, health insurance for those that retirement very early and are not healthy might be a bogey.)

\$24,000 x 30 = \$720,000.

At about \$200,000 in non-housing assets right now, that leave me \$520k left. Divided by 20 years and assuming no investment return, that would require \$25k per year (not inflation-adjusted). At a 3% annual real return, I’d still need to save nearly \$20k per year.

Remarks
With this part, you can see the power of frugal living, or the damage done by lifestyle inflation. \$500 a month is \$6k per year. \$6k x 30 = \$180,000.

So if I could cut \$500 a month in my expenses, I’d need to save \$180,000 less. On the other hand, if I grow some bad habits and start spending \$500 more a month, I’d need to save \$180,000 more. Either way, that’s a big number! This is why I still need to complete my line-by-line examination of expenses.

## Part 2: Own my house / Pay off mortgage

I currently have 29 years left on a 30-year fixed mortgage. For us, that would mean another ~\$470,000 in mortgage principal, but more when you count in all that interest.

According to this mortgage calculator, if we make one extra monthly payment per year (simulating a bi-weekly acceleration plan), that’d give us about 24 years before we’re done. If I made two extra monthly payments per year, it’d be shaved down to 20 years, which has the house paid off at age 50. Lots of other considerations, but I’m strongly leaning towards it.

Remarks
I know that you could easily roll up “housing” costs into Part 1 above, but I didn’t for a few reasons. For one, housing is one of the few expense areas where you can essentially “buy” all future costs. For example, you can’t pay a lump sum in exchange for all the electricity you’ll consume in your lifetime. Same thing for your grocery bill, or even a car since you’ll have to replace it. But if you own your house, you’ve basically cut out rent forever (just left with maintenance and property taxes). It also reduces the danger of inflation eating up your spending power.

The second reason is lower taxes. Owning your own house not only saves you from have to pay a housing payment, but also keeps you from having to earn the gross income needed to generate that after-tax amount. Ignoring house, I saw above that I only need to generate \$24,000 of income per year total. The income taxes on that amount is very, very small. Using current numbers it might be less than 5% overall, with my marginal tax bracket at a mere 10% after taking out the personal exemptions and standard deductions.

But if I need to generate another \$24,000 of income to cover housing (\$2k per month in rent), then that additional \$24k would be taxed at much higher rate of 15%. With state tax, the difference might be another 5%.

Try out this method with your own numbers, and see what happens. When I run the numbers like this, I know that I could retire much earlier if I moved to a cheaper place upon retirement. But is it worth it? It’s all about priorities…

1. I liked running through the math with you on this post. These things are always fun to play with. I never take it very far though because I have no desire to retire early. If I retired at 40 what would I do for the next 40+ years?

This math also won’t work for anyone who has kids. The expenses would just get too high unless you’re a hedge fund manager. I don’t have kids, but at some point I will.

2. Like the weakonomist, I love running these numbers.

I also enjoyed your comparison that raising your monthly expenses even an extra \$500 per month ends up making your save an additional \$180k. That’s a great way to look at things when you need motivation to stay the course!

3. Pat says:

If you plan on having kids, throw out your numbers. They’re meaningless. I’d add about 150K per kid. Then add another 150K per kid if you plan on paying for college. I almost have one kid through college (out of 3) and have spent \$72,871.43 and that’s for a public cheap college and some minor scholarships. With college expenses going up 10% per year around here, I project my youngest will cost around 150K in 10 years for a cheap college.

Good luck maintaining that 24K expenses. You’re just starting out with your house. Soon, the AC/Heater will need replacing, new roof, car. I’ve kept track of every penny I’ve spent for years and some years I can live cheaply (for me) and some years every major expense known to man comes up.

4. YML says:

Kids definitely throw everything off. Your house will also be a money pit. Finally, you should also project health care costs to increase as you age.

5. ChrisMR says:

my financial advisor has a 5-year old. she is planning over \$250K for college for her kid.
its mind boggling. i dont know how you save \$10K a year for your kid to go to college.

6. Gretchen says:

I think college expenses will be coming down anywhere from 10-20 years from now. Think about it. We all thought gas prices would continue rising forever a few years ago but guess what? They started to fall just when everyone at my neighborhood bbq were criticizing our school board for budgeting too little for school bus gas. My neighbors thought that what was going up in price would continue to rise indefinitely, apparently.

I think there’s a case for school prices to go down. Entreprenurialism has become more profitable lately which means school isn’t as attractice for some young people. There are a ton of schools that have opened up and expanded in the last 20 years (online and otherwise), these will have a hard time remaining open without students to fill them. Compound that with the fact that people just simply can’t continue to pay for school if it goes up so much so fast there will eventually be a ceiling at which the schools cannot attract enough students due to exhorbitant costs. If that doesn’t happen I would guess that government will start taking on a larger burden of the costs.

7. Methuselah says:

If he plans to go to college, little Johnny better get a job. I worked to pay for school, he must be ready to do the same. I’m not sure when this “parents are responsible for college” thing started. It doesn’t matter. The freedom to party and do as I pleased came along with the responsibility for my own destiny. It’s something ALL parents should give their kids, instead of \$.
Then again, I’m just an immigrant. What do I know? 😉

8. Rae says:

Like many pointed out already, if you want to have kids, then you need to redo your calculation. With kids, your living expenses will go up significantly (if you have more than one, in 20 years at least one kid probably will still be living at home), and of course paying for college is also a huge cost.

9. Josh says:

For those talking about having kids they are only as expensive as you let them be.

For example, some people buy designer clothes for their babies, some are more frugal. I’m not saying one way is right or wrong, just that there is more than one way, and many of the expensive expenses can be controlled or have much cheaper alternatives that are still reasonable.

I went to a good public college and between working part-time during school and full-time during the summer, I paid for my own college with only minimal school loans — not my parents, and I turned out just fine, and expect to raise my kids the same way.

Also Rae, if I were still living at home my parents would be charging me rent. And I think that’s a good thing.

10. Eric says:

I agree with Josh. My parents didn’t make much, but they still raised 4 kids. Growing up, we hardly went out to eat, or go on family vacation. I left to college after high school and never moved back home. I paid my own way to college, working part time as a waiter. I knew from a young age, nothing was going to be handed to me and I had to work for everything. That’s my attitude towards life. I think I turned out just fine.

11. Actually, I picked 50 precisely due to kids. Let’s say I have a kid at 32, they’ll be out of the house by 50. The goal remains the same, it just makes it harder to actually reach it.

I’m sure I’ll pitch in for college – heck I started a 529 and I don’t even have any kids yet – but I don’t plan on covering all of it. They can work every summer just like I did, and during the school year to cover incidentals.

12. I also agree that the numbers get easier as long as one of us doesn’t want to fully retire. I’m sure we’ll do *something*, and knowing me one of those somethings will make some money. Like I said, this gives you a quick and dirty way of seeing how you’re doing.

Social Security is also completely ignored.

13. alle says:

@Jonathan “Social Security is also completely ignored.”

..as well it should be. I’m not optimistic about SS at all.

14. ChrisMR says:

My parents made sure I got out of college debt free. In return I had to maintain a good GPA (3.0 in undergrad) and have a job (worked about 32 hrs a week my final semester). I paid for grad school myself while working full time.
Basically, if I was smart with my money (ie not blow it all on beer), they would help me out. In return, if I have kids who want to go to college, I have to do the same. Mind you, I attended a state school, so covering all of Harvard isn’t in the cards.
Its about giving the next generation of your genes a foot up in the game – I realize not everyone is in a place to do it, but it makes a lot of sense, in a Darwinian sort of way.
My parents may have given me \$, but with it came a sense of family accomplishment and a responsibility to keep up my end of the deal, then, now, and in the future.
I view decisions I make now as a reflection on the financial sacrifice they made to help me through school. They didn’t cut scrimp so I could be in a position to blow it all once I got out of school… perhaps its a guilt thing if I go overboard on a given expense.

15. Over the Cubicle Wall says:

The expense of kids goes away (hopefully) after they are grown, so retirement income needed doesn’t have anything to do with having kids or not. The expense associated with raising kids has a lot to do with one’s saving rate however.

Anyway, I run these kind of numbers all the time for myself with all kinds of different expense variables and scenarios. It’s fun to dream big, and this post presented a nice way to break it down with a couple of different assumptions regarding lifestyle inflation. I found that particularly relevant to my own calculations. The lifestyle I want to live come retirement is the single biggest variable.

16. kerry says:

I would like to point out that if you plan to send your kids to any private colleges, in most cases, having large equity in your home can affect adversely how much your kids will get in their financial aid packages, because it is treated as part of family assets…

17. auntie_green says:

the college thing recently came up at a party i attended with similar age friends, between 40 – 55. The vast majority said that after this much time, they were just as satisfied and felt their careers wouldn’t have been any different if they had attended say USC versus UC Riverside. So consensus was more expensive “name-brand” school didn’t necessarily translate into higher wages, at least 20 + years out of school. Maybe the first few years after graduation but not now.

Does anyone feel differently? That a high-cost private college is really “worth” the extra money?

18. Gretchen says:

auntie_green: I think that is a great question. Is a high-cost private college worth the money? I am guessing that a lot of people don’t think so. And it probably doesn’t matter, in the end, whether or not it is true: it matters what people think. If you think it isn’t worth the money, you won’t go there and prices will be driven lower at the pricier universities.

If it is true, then what are you buying at those places? That would be terrible to spend that much money and not get a commensurate increase in the quality of education.

However, I am one who thinks that you do get what you pay for in education. I’ve gone to a state school and an ivy league and my classes at the ivy league were far and away better than the ones at the state. I also got my very first (and very good) job out of college solely due to the ivy stamp on the resume. If you can market yourself enough to get into a superb college you can market yourself enough to get a great job after. Once you are over age 50 you might forget how much of a difference that college name and superior education made in your life. Now that’s just one take on it but I feel it is very valid. There are others who say it is just as good at a community college but I just taught a class at one and I don’t agree. For one thing, my laptop was faster than the studen’ts lab computers!!!

19. ChrisMR says:

@auntie-green: i listen to sports radio a bit, and sometimes they get things right. a conversation today got onto the topic of what makes someone great in their field. the argument was that a great doctor may get sued more than a doctor with great charisma – b/c the great doctor may be a bit cocky and have a terrible personality – thus you are more likely to sue for a mistake than with a doctor who helps you cope well with a less than ideal outcome… think about it. they applied the logic to the economy and getting a job, and the show and callers agreed it is about personality and who you know, not your fancy degree – which only really matters the first couple of years.
and you cant compare community college with ivy league. there are certain schools that are worth the cost, but small private vs a solid state school isnt worth the cost most places. i transferred from costly private to cheap public and i think it is just as much about the individual student as it is about the school – we had plenty of screw-ups at the private school.

20. BOB says:

why did you ignore compound interest?

21. Anecdotally, people who had their parents pay for their college tend to want to do the same for their children.

People who went to private school tend to value it more. People who went to public school tend to think that it worked out fine for them. I know very successful people either way. It’s very hard to separate the results from the inputs.

Where did I ignore compound interest? One example assumed no return after-inflation, and one assumed a 3% after-inflation return.

22. Alan says:

Let’s say I have a kid at 32, they’ll be out of the house by 50.

/\

This quote made me giggle. All my siblings are still at home despite the eldest being 24. I feel sorry for my parents, but my siblings can’t afford to buy and so are living at home to save on rent and amass a deposit. Meaning my parents are left with the financial implications of them doing so! Not easy considering there’s three of them.

P.s Love this blog, I’ve been a lurker for a long time but never commented before. I’m 25 so a little younger than you but all the same I appreciate the advice/knowledge/experiences you’re sharing!

23. Strick says:

“Social Security is also completely ignored”.

Ha, too bad that’s not true or we’d all have another 13% a year to save….

24. dal2 says:

My daughter is 40. She has a premarital asset and though normally well heeled from selling real estate–she’s made no sales the past 11/2. Who do you think is propping up her premarital real estate? Her mother, of course. The investment property was purchased 7 years ago to pay for student loans. Later, off shore wedding etc. The only good thing is….she’ll have a half million dollar retirement despite her choice of careers.

I encourage investment for students– ones in which they have to refurbish and put their sweat and \$\$\$ into renovations. Kids need to learn how to deal with something concrete and they will learn so much if they have to manage where they live.

Hopefully I’ll be “released” one day as property manager extraordinaire. Kids are for life.

25. Pat says:

I worked full-time through college and it took me 7 1/2 years of night school just to get my BA. I remember telling everybody back then that I wouldn’t pay for my kids school – they could do it just the way I did it.

Fast-forward 20+ years and I’m trying to do whatever it takes for my kids to get a 4 year degree without loans. Truth is, I hated every minute of my college experience. I’d get off work at 6:00 from a stressful job and drive to school. Wouldn’t get home until after 10:00 at which time I’d start studying for the exam for the next nights class. Not a fun time, but my company paid 50% of a very expensive private university, so that was basically the only way I could get it done. When my daughter complains about not having enough time for this or that class (she works 15 hrs a week), I just can’t relate.

There are a lot of people that do college the hard way, hopefully my kids won’t have to do it that way though.

26. This is essentially what I have done, and it’s clear you have your thinking in the right order. Accumulate cash reserves first, then focus on paying off the mortgage. I suggest first you make certain that where you’re living is where you want to be over the long haul. It doesn’t make sense to me to pay off the mortgage if the place doesn’t feel like the best place to take root.

If you get focused on the mortgage too soon, you’ll have too much money tied up in something that isn’t liquid. This isn’t a good position to be in if you lose your employment. My approach centered on paying off the mortgage in a single year after several years of savings. That allowed me to see clearly that it was comfortable to do so and still have plenty of cash reserves.

Also, I only held the mortgage for 3 years. If you start looking at the extra cost of financing for even another 10 years, it’s clear that getting out of the mortgage early is a big money saver.

Clair

27. mimi says:

I would like to cover my kids college fully, provided they go to a state school. I have to be realistic — I can’t afford to pay for Ivy league colleges and retire, unless I start making really big bucks (which hopefully, in either case, I will).

My parents would have paid for me, if they had had the money. They helped — but they had four kids, and not enough to go around. I have a little more (not by much I’m noticing lately, though, even with 2 incomes), and most likely will only have 2 kids. So I’ll be able to swing it a little better.

When I look at how cheap my state education was, it truly was a bargain. If you live at home and go to a state school, that is the easiest way to afford college. But most people seem to want to leave home and experience the whole thing. That at the least doubles the cost of school. 4 years of school without board, in my state, runs about \$28K, which would be no problem at all to provide — with dorm room, about \$50K, a little harder, but still no problem. 2 kids, about \$100K.

I’ve put a little bit into a 529, but I’ve been hearing that the less the child has in their name, the better for scholarships, etc.., so most likely I will just take the money out of my own savings at the time.

28. Stefan says:

For those talking about having kids they are only as expensive as you let them be.

Not if they get sick.

29. MoneyEnergy says:

One thing that interests me is how so many American parents plan to pay for all their kids’ education… is there a cultural difference or expectation here? I’m Canadian and while my own and parents of friends have “helped out” where they could, it’s definitely not common practice to have the college years paid for in advance. Our tuition is considerably lower across the board, this might be why. But Canadian students still struggle to pay it on their own.

So, I’m just saying I guess, that kids’ education won’t necessarily cost you 150K – I think it’s crazy to expect that you would save up all that X your #of children. It can be a good thing for the “kids” to start learning how to pay their own costs, too.

30. Ben says:

You actually could prepay for electricity if you invested in geothermal heating/cooling, solar power, and/or wind power. In fact, you could even get a little back depending on the size of your initial investment (minus the tax incentives). Costly upfront, perhaps, but if you’re going to stay put for a few decades, you could come out way ahead.

31. Free says:

I agree, kids throw things off. But how about letting your kids pay for college themselves. Let them take responsibility for their education. I will suggest to my kid that he goes to a college in Europe (almost free).

32. Tom says:

Saving 30x your annual expenses by 50 is still a very tough prospect. It can be done, but you have to live well under (way, way, way under) and/or get a great ROI on your money in order to hit that.

And if you’re really a frugal person, it would be difficult to walk away from a well-paying job to just sit at home and live frugally. You would know that working that extra year or so more will keep drastically increasing your savings. And then you end up working until you’re 60 or 65.

the real goal is the ability to retire when you want but that doesn’t necessarily mean that you would walk away. You might even enjoy working at that time. The older you get, your leisure time changes. You wouldn’t be 50; retire and then hang with your buddies each night at the bar. you may want to participate in something like golf everyday, but that would blow your frugal living aspect.

But all in all, I like the idea of trying to save for 30x your annual expenses.

33. Also, if you think outside of the norm, you could have a roommate help defray expenses. For example, you have the paid-off home, you take care of the taxes and insurance, and they cover the utilities and groceries. That reduces your need for financial reserves by a large amount, and still makes good financial sense for your roommate who perhaps can’t afford a place of their own.

If we add a little self-sufficiency to the equation, it trims back the cost of early retirement even more.

And, I would suggest that retirement isn’t necessarily the classic example of golfing and sea cruises. I think retirement is doing what you want, when you want, where you want, for whom you want and for how much. There is no reason retirement can’t be defined as leaving the rat race behind and getting involved with a new start-up operation of your own that pays less at first but has great potential for future revenue.

Clair

34. Megan says:

I agree with most posters about the kids- I have 3 and we make ends meet each month- but barely- let alone try and think about financial freedom at this point! But obviously financial fitness is one thing we CAN work on now- even with kids. I am following an expert in her tip a day in April- I have found it really helpful. http://www.slechter.com/30-tips-to-ensure-your-financial-fitness

35. Dave says:

Don’t forget that if you save that amount in a regular ira or 401k you have to pay taxes on it.

36. DCexpat says:

To Free
If you are not a European citizen, college in Europe is not almost free, it is upwards of 15,000 euros a a year

37. Jason says:

I wonder as we each calculate the \$ amount we’ll need at retirement, we have to take into account additional health-related costs, beyond simple health insurance. Some additional considerations: (1) Medicare may not be around for those currently in their 20s and 30s, or it may require higher copayments, (2) early retirement would necessitate health insurance coverage until Medicare kicks in, (3) people may need long-term care, which is not covered by typical health insurance, (4) people often want the choice to choose a doctor or do a procedure that may not be covered/paid for by their insurance (happens more than one would think, and I’d think people who spend time reading these types of savings websites would want that type of flexibility)

38. Billzini says:

How about being a landlord? 4 years ago I bought 2 buildings with 8 total rental condos in them that all rent for \$650/month Annually that produces over \$60k per year in rent payments. Lets assume 70% occupancy (low in my experience) and the revenue would be around \$40K, set aside 10k for RE taxes and insurance, and \$5k for repairs. That brings us down to about 25k/year, pretty close to your 24k/year estimate. I don’t own these outright right now, but in 4 years Ive been able to raise the rents over 10% in each unit, and I have fixed mortgages. If we fast forward 15-20 years into the future, the rents should continue to climb (most likely double) and only my taxes/insurance will increase as the mortgage payments are fixed. Over time I will need to spend money remodeling the units and replacing and repairing items if I expect to get good tenants, but right now with them all rented (this bad economy has been a good economy for landlords) Ive been making about \$1k a month in profit that I set aside for these items. Just pointing out there is more then 1 way to crack a nut, instead of saving 720K via investments to get 24k/year in income, you could buy some rental property now, let tenants pay down the mortgage for you over the years and eventually live off of the rental income. For me its just part of the total equation as I also have investment accounts but one thing I definitely learned in this current downturn is that even if the stock market gets cut in half, people still need a place to live.

39. Festus Mswati says:

I wish to know how I can save on a salary of \$ 1,500.00 per month with a rental income of \$ 550.00 for my 2 houses. My monthly expenses are \$ 1,300.00.