A reader asks:
I hate my job. Can you help me retire in 10 years? I’m already 45 years old and only have $1 million saved. I am the only income earner in a family of 4, my wife + 2 primary school children. I make about over $300k a year. I plan to max out all my tax advantage contributions to a total of about $80,000 + $50,000 more into a taxable account each year. I spend an average of $12,000 a month on my family, including mortgage, car, expenses, and vacations. How should I invest to retire at 55? How much do I need to retire at age 55 while supporting my family? I’m thinking $3.5 million, but even that is worrying. Also, how much growth rate do you estimate year on year? I use 4 percent or 5 percent, which gives very different numbers. I have about 30 thousand dollars in cash savings, but I plan to save it for about 3 years’ worth of expenses. Did I mention I hate my job?
This is like the Voltron of financial planning questions.
It all comes together – retirement planning, financial market return expectations, portfolio management, saving money, liquidity provisions, and the intersection of your career with your investment plan.
I’m not sure what it is about round numbers that makes us feel more comfortable. No one dreams of retiring early at 54 or 57. It’s always 55 or 60. But I digress…
Becoming a millionaire in your mid-40s is a good thing. Saving more than 40% of your pre-tax income is also commendable. I’m guessing your savings rate is so high because I’m pretty sure you hate your job.
Guess where the $3.5 million goal comes from 4% rule. Spending 12 thousand dollars a month means 144 thousand dollars a year. If you divide $144k by 4% you get $3.6 million.
Based on the assumptions given here ($1 million starting point plus $130K annual savings), you’re on the right track considering a range of potential returns:
Financial freedom is at the door.
The only question is will it reach 55? Or is it 60? Maybe 65?
It depends.
When you retire early, your money should last longer (duh).
Setting return expectations is never easy. No one can predict these. Experts have been predicting a new normal of lower stock market returns since 2010, but we continue to see double-digit annual returns for years.
Will it continue? I don’t know. I like that you’re conservative. This adds a margin of safety to your plan.
I like the idea of building a building cash reserve He is also heading towards retirement. That pillow is important.
The only quibble here is the ratio of deferred tax to taxable brokerage savings. A taxable account offers more flexibility in early retirement; because these tax-deferred accounts have rules about when you can start reducing them.
There are other issues that could disrupt your plans.
You spend 12 thousand dollars a month Today. With a 3% inflation rate over 10 years, that would mean spending more like $16k per month or $192k per year. How questionable is your lifestyle?
In 10 years, you also expect to have two children who will potentially go to college. Are you paying for this?
What is your plan for healthcare in early retirement?
I’m not trying to pour cold water on your plan here, but doing this exercise is helpful because it forces you to look at all the different variables involved in the retirement planning process.
You have three legitimate options here:
Option 1. Roll the dice and hope everything goes well. Financial markets may continue this and provide you with a much higher balance than you currently plan for.
Maybe your kids can go to college for free or start their own AI business.
But what if this doesn’t happen?
Option 2. Find a new job that won’t make you so unhappy.
Would you be willing to take a pay cut to increase your happiness and maybe work a little longer?
The stress and fear of working in a job you hate will grow even faster than your portfolio over the next decade.
Do you have any other options?
Option 3. Hire a financial advisor.
All the variables involved in the early retirement planning process can be overwhelming. A good financial advisor can help you understand how close you are to making your dreams a reality.
You already have a goal in mind, which is half the battle for many people. You can create your plan with a clear goal in mind, update it as time goes, and have an independent third party offer guidance along the way.
A good advisor can also guide you through options such as retiring at 55, taking a lower salary, working longer, changing your spending habits, or many other options.
This process is highly uncertain because of all the variables involved. Working with a planner can often reveal parts of the planning process you may not have considered.
I addressed this question in a brand new episode of Ask Compound:
Jonathan New We’re on this week’s show to address questions about life insurance, variable universal life insurance policies, how to get your adult children to save money, and how to spend your college savings.
Further Reading:
4-Year Rule for Retirement Expenditures
