DayDreaming Again About Early Retirement

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There’s nothing like going back to work on a Monday after a nice long holiday weekend to make you daydream about leaving the rat race behind. I would like to think that I am already on the path to early retirement, but I often like to hash out “The Plan”.

Ages 30-45: Live simply. Buy a home you can afford with a 15-year mortgage. Yes, you can get approved for a larger loan with a 30-year amortization. Homes are a huge expense, and just because someone will let you doesn’t mean you should take on that much debt. If you artificially restrict yourself to what you can afford with a 15-year amortization, you’ll end up with something that can easily be paid off early.

Yes, taking advantage of low fixed interest rate for 30-year mortgage can be argued to be advantageous on a mathematical level. But I am still enamored with the simplified cashflow situation once this huge monthly expense is taken away. Right now, a full 2/3rds of my monthly expenses go towards housing costs.*

Live frugally, try to save regularly for retirement, advance in career and get pay hikes, raise kids, still enjoy life, yada yada.

Ages 45-65: Find consulting or part-time work which will cover remaining expenses. Now, after 15 years, I will only have to pay for everything else – property taxes, car, utilities, food, etc. This should only run about $35,000 a year. Lower required expenses means lower required income, which means I pay a lot less in income taxes. Split between my wife and I, we’d only need to find jobs that pay about $25,000 gross each per year. (Numbers will need to be adjusted for inflation.)

This opens up so much flexibility. Despite my beach bum aspirations, I already know that you can’t spend all day at the beach. There are so many alternative business and job ideas that we would enjoy doing, but currently wouldn’t dream of doing because we make so much more money doing what we do now. Jobs with less hours, less commuting, less dealing with stupid people. The money that we have saved up in tax-deferred accounts should remain untouched, and we will still add as possible.

Ages 65+: Work as possible based on health, start taking Social Security, withdrawing from retirement accounts I know that most young people are skeptical of Social Security, but in reality I doubt it is going to go away for people with moderate incomes. It will simply be too critical a safety net in the age of self-funded retirements. I can see there being a phase-out for high income earners (it’d be very difficult to phase out based on net worth) – but again, without a mortgage, we won’t need a high income. The current average Social Security check is $1,000 per month, or $12,000 per year. If both of us received that, that would already cover 50% of our expenses.

These are all rough numbers and you never know what life will throw at you, but it’s nice to have goals. 😀

* No, you don’t necessarily need to buy a house to retire early. But it fits into my Plan nicely.

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  1. Doctored says

    As someone in th emiddle phase of this plan, I didn’t see anything about children. Are they part of it? Because they will greatly increase your consumption as well as reduce a couple’s income, especially when you get to college. What are your thoughts on that?

    Also, at your age you may have unrealistic ideas of what you want in retirement. I’m working because I like what I’m doing, not because I need to work. You should think about what you really enjoy doing, whether it’s work, volunteer, non-profit groups, etc. And I don’t see how you’re going to cover your health costs if you’re retired but not 65.

  2. dan isaacs says

    Yeah, I’ve noticed that most of the PF successes that involved paying off tens of thousands of dollars in CC debt are DINKs, for whom it is fairly easy to reduce expenses.

    Child care, including the extra clothes and food and T-ball and Soccer, is a huge expense. I will have spent 100K in childcare over 7 years once my younger daughter starts school. I’d have a paid for boat AND be debt free outside of my mortgage with no problem. Even now, I could be out of debt in a year were it not for the costs of the kids. Rarely do you PF DINKs even consider this. 🙂

  3. Mark Nelson says

    Nice day dream. I do it all the time too. I too have children and they have been expensive but that hasn’t stopped my financial goals. You need to set up a budget, put together your personal net worth statement, and then continually monitor and adjust what you need to do to reach your goals.

  4. "Mo" Money says

    I think running through the numbers is the smart thing to do. If you don’t have any idea what you might need, you don’t know what to shoot for. It is definitely better to have a plan. As Harvey Mackay says “We don’t plan to fail, we fail to plan”.

  5. Dave Diller says

    “Live frugally, try to save regularly for retirement, advance in career and get pay hikes, raise kids, still enjoy life, yada yada.”

    I’m assuming that he’s taking kids into account and figures they’ll be on their own at Ages 45 – 65

  6. Great post, but what about before 30? I am a few years from reaching there and I would like a little advice for the late part of the 20s. I have some friends who have already have bought houses (they are my age), do you think that was a bad decision on their part? I would like to wait a couple years until I have some more financial security before buying, but it seems that everyone is saying buy now.

  7. Did you take the 15 year mortgage? Somehow I thought you took the 30 year — or are you just making extra payments on the 30 year? That seems like the most flexible arrangement, because then you can adjust your payments to your income, especially in the next 15 years, when you are most likely to have children.

    Yes, I often think how nice it would be to have the mortgage paid off too. It would be so cool to live for free completely (I mean no taxes, or utilities either). If you had no mortgage, a complete solar panel system (or your own windmill), that could provide heat and electric, that would be really great. Of course, you’d still have the taxes. That reminds me of a short story about this formerly wealthy daughter who lived in the south. She was from a prominent family and fell on hard times, so the mayor let her live in her house without paying taxes (but, she also had a corpse living in the house with her, so it didn’t last too long!). I always think of her when I wish I didn’t have to pay taxes 🙂

  8. Your plan is much like mine (I have said so much before) and I have children.

    On my income alone we will pay off the mortgage by 45. So it’s kind of like the long range plan – I know I can cut to part-time work when the mortgage is paid at 45. We bought our first home at 23 though, so the kids have slowed us down a tad, but will still easily make 45.

    Maybe sooner if my spouse returns to work. Which he probably will at some point. The kids are getting past the age where him staying home saves us more than working costs. (They are 3/5). I almost salivate to think of a second income again. IT would be pure gravy.

    Anyway, I have probably said before too, but what helped us was we never lived up to a second income. So we saved his entire income for a few years before we had kids. Put us well on track. We are only 30 now and much where you are, even with young kids.

    Likewise, you are on a good path. It is helpful to have a large measure of financial security before kids. You are WELL on the way to achieving those goals.

    We live in California and I was making $50k when we had our first child. So this is not some “I make six figures and it is so easy” things. I had to qualify that. It really is purely a “save as much as you can before kids and never live up to that second income” thing. Which you certainly have gotten down.

  9. I always say keep your income as high as possible and keep your debts as low as possible!! the only way you can get ahead in this world

  10. Nerdy Jen says

    One thing that could throw a monkey wrench into your plans is the increasing cost of health insurance. Between ages 45-65, if you work part-time, you might not qualify for a company’s group plan. You may or may not qualify for individual health insurance, depending on preexisting conditions.

    Even if you did qualify for individual health insurance, it costs more as you get older. In 2004 met a lady in her late 40’s who paid $25,000/year to cover herself, her husband and her two college-aged children. I know a guy in his mid-40’s who pays $12,000/year right now to cover himself, his wife and his two kids.

    If $35,000/year could handle your health insurance costs along with your other expenses, though, that’s great.

  11. Why on earth would you ever pay off a home in 15 years? All the cash flow being tied up into a non-performing asset could be put to work in a diversified portfolio. Not to mention the tax ramification, what deductions would you possibly have after paying off a mortgage?

    I truly don’t understand this philosophy.

  12. Jerry Dill says

    I am a young investor looking into saving for retirement. Do you really have to work past 65? I was hoping to retire before then. I’m also unsure about unexpected expenses that may arise.

  13. There have actually been studies that once you have kids your personal consumption decreases (vacations, eating out, entertainment) and is shifted to the kids. I’m sure my personal energies will be focused on children, but I’m not going to buy them everything under the sun. Frugality will still rule, not Baby Gap 😉 Of course, I don’t know exactly how much kids will cost financially, but will have to absorb it as best I can.

    How much does T-ball cost?!

    As for college, I’m sure I will partially subsidize as my parents did, but I don’t know about paying for the whole thing.

  14. auntie_green says

    Kelcey, for me, a 15 year mortgage was a no-brainer. I bought my house in 1995. At the time, I got a 30 year mortgage, fixed for first 7 years at 7.625% interest rate. That was a competitive rate at the time. I live in SoCal, so mortgage was a jumbo at the time. 7 years later, when my mortgage is getting ready to go adjustable, I refi (partly cause I like fixed rate ) but mainly because interest rates were so much incredibly lower. So in late 2001, I got a fixed 15 year mortgage at 5.75%. Then in mid 2003, interest rates had gone down even more, and I refi’d again to a 15 year fixed at 5%. And at by that time, my mortgage was “conventional’ – under the jumbo amount. So my 15 year mortgage payment is actually 40 bucks a month LESS than my 30 year mortgage was, and I’ll have the house paid off in 2018, rather than the original 2025.

    True, if I had refi’d in 2003 into a 30 year fixed, my payment would be like $500/month less. But I’m totally comfortable with the payment as is, my spouse and I are both maxing out our 401(ks) – $15,500 each and saving each month in a taxable account as well. Plus, since we both work for Fortune 500 companies, if we can stay long enough (just another 14 months for my husband, little bit longer for me), we will have enough years of service to qualify to buy medical coverage at the employee rates after we leave their employ. So we are 100% loving our 15 year mortgage, and glad we got it.

    I realize this isn’t the case for everyone…but works for us

  15. Jonathan: You require $35k to live w/o the mortgage payment, yet the mortgage payment is 2/3 of your living expenses? That means your living expenses are $105k per year ($35k x 3). I thought I read a post a few months ago about your yearly expenses only being around $40k per year.

  16. btw, it would’ve been impossible for us to buy a house w/only a 15 year mortgage where I live unless I was willing to commute 50 min to work. I value my 5 minute commute and the extra 1.5 hours of free time I have to spend with my daughter each day more than I value a 15 year mortgage. You probably don’t know that feeling yet, but hopefully you will one day. (I’m not saying that in a negative way … it’s just that you don’t have kids yet).

  17. auntie_green says

    Mike, true for me as well when I first bought. Only advice I can give from first hand experience, don’t take equity out because you’re stupid with credit cards and can’t pay them off unless you take it out of your house. Or don’t take it out of your house because you “need” to take a vacation to Hawaii or because all of a sudden, your 2000 sq ft house isn’t big enough and you “need” a 3000 sq ft house. When I first bought my house, I was like all my friends, could barely afford the 20-pack of Kraft Mac-N-Cheese at Costco, with such a big mortgage. Now, I’m feeling very comfortable, and friends my age are still eating Mac-N-Cheese because they used their house as an ATM

  18. The $35k number includes a big estimate for health insurance, which currently is paid for by employer. Throw in a car every decade or so and other various cushions, and you get a very rough estimate of $30-$35k. I was just going over the expenses today, and monthly expenditures are estimated at $5k per month, with mortgage + prop tax + insurance (PITI) being around $3,500 per month.

    I have a 30-year fixed mortgage, but could have qualified for a 15-year mortgage. I would like to pay it off in 15 years, but depending on inflation I might put it off since my rate is less than 6%. If inflation keeps running 4%+, then debt at 5.5% starts to look really good…

  19. Added a link to original post about paying off mortgages early.

  20. I enjoyed your early retirement posting because what you proposed has pretty much worked for my wife and me.

    I spent 26 years as an active duty member of the military. We tended to be fairly frugal from the beginning and enjoyed the simpler things in life – camping, visiting and site seeing while bringing our own picnic meals. The military allowed us the ability to visit much of the US and Europe.

    I also take great pride in never, ever paying a single penny of interest on a credit card. Every month we pay off our credit card 100 percent in full.

    We also have one son who we sent through college via savings that we started when he was one year old. He is grown and on his own.

    Towards the end of my military career I began to take college very seriously and knocked out the first couple of years by my retirement date. I then went to college full time under the GI Bill, earning first an undergraduate degree and then an MBA.

    I then found employment with a local company that paid very well. While others were using pay raises to buy bigger houses and fancier cars we paid off our mortgage in just under eight years. I also fully funded my 401(k) each year and have fully funded a Roth IRA for both my wife and every year since its inception.

    I later earned a Certified Financial Planner designation and started my own totally independent, fee only financial planning firm. After about five years of that we decided that I should retire. That was in 2005 when I was 55 years old.

    My wife continues to work because she enjoys her job and will retire when she reaches 62 (she is 59). I have become a full time triathlete and absolutely love it. I just completed my first Ironman this year and am looking forward to the rest of this race season, while planning next year.

    Life is good, we are happy, healthy and comfortable, and we have a nest egg that we have yet to tap. It is totally invested in a number of diversified, low cost mutual funds – both index and actively managed funds (through Vanguard and a couple with American Century). We also keep some emergency funds in short term CDs of local banks and shop around each time one matures.

    We continue to pay our bills, fund our Roth IRAs, and live comfortably.

    My recommendation for anyone is basic; live below your means, invest for the long term, stop reading and listening to the daily financial talking heads, and enjoy life.

    And remember what the late Carl Sandburg once said:

    “Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you.”

  21. Dan Isaacs says

    T-Ball through our Church league is $55. They get a shirt, a hat, and a neat medal. 🙂

    Daycare, at least here in suburban Raleigh-Durham, runs from ~300/wk for an infant to about 240/wk for my now 3 yo. When my 5yo tracks out (year round schools) that’s another $500 for 3 weeks. That’s not why I’m in a hole, but it’s a fixed expense that impedes my effort to climb out.

    Had I the wisdom gleamed from you and JD 6 years ago before we stopped the birth control, I’d be doing very well, even with the kids. My only point is that they make it much more difficult to climb out of debt. And that’s not something I see many PF bloggers take into account. As i said, many of them are DINKS, and you can do a LOT with two incomes and no kids. 🙂

  22. Kids, like anything, are only as expensive as we let them be. Generalizing that kids are expensive is like saying that cars are expensive. I drive a beater car that isn’t expensive. Others choose to drive BMWs. Raising kids is the same way. I chose to buy affordable used baby stuff (buying new baby clothes is the biggest waste of money on the planet), while others don’t. If you are frugal, you can easily raise kids in an affordable manner.

  23. – I completely agree with Mike about the value of his quality time for and with his child and family.

    – Also I agree with Auntie-Green: don’t take equity out because you’re stupid with credit cards and can’t pay them off unless you take it out of your house. Or don’t take it out of your house because you “need” to take a vacation to Hawaii, etc.

    – Talking about kids and the expense of raising a child: it is priceless and your pride when you attended his/her gradutation day at High School, 4 yr college, you would cry with joy, happiness and price, esp. when you kid graduated with Honor and his/her name was mentioned or called on different scholaship and rewards.
    It is priceless.

    Brian is absolutely right about raising kids.
    Generally, they are expensive, just like cars.
    Wise parents would choose preferablely affordable stuff and more investment, such as spending quality time with them (instead of keep burying themselves into work), etc …. to give them a good start.
    If you can set yourself as a good example of a good parent to them, you had given them the best of the best role model how to be a good kid with good manner and morality.

    Just my thoughts. 😉

    I am living by this simple rule:

    “Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you.”

  24. It is possible, I am doing it now. I have expenses down and travel on the cheap. My biggest is health ins. I took a high deductible plan, $3000 deduct and save the 2850 in a HSA savings plan, heathly and use the FREE preventive stuff.
    Have saved Over 9000 in the HSA savings already, premium is low, but great non cancellalbe coverage. Premium is 140/mo. I work part time. 10 hours a week, flexible. living off interest now. payroll covers health, utilities, property tax. i own my house and car outright. however, recently took a couple credit card loans for 1.9% life and making 6.01% safe and guaranteed till 2011. liquid funds.
    Have fun dreaming or DO ing it. Life is short. i am 45 and no kids.

  25. auntie_green –

    So what you are saying is that you keep buying 15 year mortgages but keep taking longer than 15 years to pay off your home?

    Also, why on earth don’t you have any money in a Roth account? You two are obviously good savers. You are headed for a tax disaster when the RMDs kick in on your 401(k) distributions.

  26. 1) real estate is a highl performing asset, not a non-performing one
    2) if you gave birth to kids oyu have an absolute responsibility to pay for 100% of their college, sans scholarships. why – becasue if you don’t you are FORCING debt on your children in the name of being debt free – you are giving them the crumbs frmo under your table istead of the banquet. how can anyone preach ‘no debt’ and then force it on thier kids to get asomehting as very basic as a college degree – shameful
    3) you have absolutely no idea how much kids cost until you have them – it an’t just day care and baby gap clothes and soccer – it’s unexpected surgery, car wrecks, sports injuries, life insurance, health insurance (that triples from DINK to DIWK) – you are totally clueless DINKs.
    4) if you have one cent of debt, even for a month on a credit card, your book is total trash.
    5) and to the GI guy – glad you are so rich and egotistical about it – btw, you may want to say thanks to all those people whose taxes paid for your education, pension, housing, medical care, etc.
    6) and I say thanks for you bravery and courage to serve this great country, we love our soldiers

  27. tony,

    buying a home that you plan to live in forever is a non-performing asset in that it will not provide you with any income/cash flow without taking some sort of equity-based loan against it.

    a personal residence is an investment in your future in that your living expenses will be lower in years to come once the mortgage is paid off. however, until that point, it eats up the majority of the average household’s income.

    why pay it down early unless your main goal is to have less expenses and not raise your income? you cannot find loans too often that have lower interest rates than mortgages. use that to your advantage and invest your free cashflow into assets that will provide higher returns.

    cashflowing investment properties, high dividend yielding stocks, etc.

  28. @ Tony-on paying for kid’s college- I agree with Jonathan, paying for half of college is more than fair, you can’t expect to do everything for them and then expect them to stand on their own feet, or you should factor having them live with you into retirement. They need to be responsible for earning their education.
    On you comment 5) directed at Spokane Al-after 26 years he EARNED the education, pension, housing, medical care, etc. Conditions in the military were not like they are today and most “housing” would have been considered “condemned” by civilian standards. He never said he was RICH, he lived within his means, and went to camp sites instead of 4-5 star hotels, and brought along picnics. Maybe if you understood the word SACRIFICE, you’d be RICH too. BTW service members do pay taxes on their base pay, except when they are in a combat zone. Feel free to join and you too can enjoy tax free benefits… if you live.

  29. Dan Isaacs says

    Hey Tony, I thought us paying his way through college was our way of saying thanks to him. A “you’re welcome” would be nice, but he earned whatever benefit he got.

  30. My intentions were not to throw my personal circumstances up for debate. I merely wanted to show that what the author originally discussed was possible if one sets and keeps long term goals, lives below his/her means, treats debt as something to avoid, and enjoys life through simpler joys.

    Each of us makes our own decisions in life and succeeds or fails via those decisions. My hope is that most will understand that they are responsible for their own choices and decisions and rather than take shots at others and/or maintain a woe is me attitude, they will strike out with a plan and a purpose.

    “‘Cheshire Puss,’ she began, rather timidly, as she did not at all know whether it would like the name: however, it only grinned a little wider. `Come, it’s pleased so far,’ thought Alice, and she went on. `Would you tell me, please, which way I ought to go from here?’

    ‘That depends a good deal on where you want to get to,’ said the Cat.

    `I don’t much care where–‘ said Alice.

    `Then it doesn’t matter which way you go,’ said the Cat.

    `–so long as I get SOMEWHERE,’ Alice added as an explanation.

    `Oh, you’re sure to do that,’ said the Cat, `if you only walk long enough.'”
    –Lewis Carroll in Alice’s Adventures in Wonderland

  31. For the last two years I have been planning to do the same. And then slowly, very slowly nasty thoughts started to eat at me. Keep me awake every now and then. And they got stronger and stronger…

    Who am I, that I, who has the ability to generate so much wealth in such a short time that, if I want to, I am able to stop working at 50 (I can, I did the math), who am I to take so much advantage of the world?

    When I know that the ability to do that is funded by raw materials and cheap labor from third world countries. Countries that lack good health and sanitation.

    How could I be so selfish? The thoughts have gotten stronger and stronger lately. And you know what? I can’t do it. I switched my goal from retiring young to doing good in the world.

    Now I can sleep again at night.

  32. auntie_green says

    kelcey, we’re done with refi’ing, haven’t done it in 5 years and have no intention of doing it again, wont be able to get another 5% fixed I’m sure

  33. I have to agree with Jonathan too regarding paying for college for my kids. While I would love to afford to pay for my daughter to go to any school she desires, that is not really very practical.

    If she attends a state university (and onto a state medical school, that would be my dream), I will gladly pay for the whole thing. But if she goes to a private school where tuition goes into the stratosphere, I’m going to have to pull back a bit. I mean, I need to retire too — and I doubt very much that me living in poverty in my old age would help my daughter in any way.

    So, I believe, we must weigh what’s possible before promising the moon.

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