“I can’t retire. Not yet anyhow.”
A colleague fast approaching 65 shared that sentiment over beers about a year ago, long before COVID-19 put a happy hour on hold. The notion of being stuck in a cubicle (or, during a pandemic, one’s a home office) at that age got me to focus once again on some tips for retiring early – not so much “tips” as commandments, honestly.
The Cubert family is fortunate to live in a lovely little neighborhood within the city limits. We can take walks using an actual sidewalk, and appreciate the shade and fall colors from mature, tall trees. The grocery store is a mere four blocks away. The library and fancy booze shop were one block further. Quite useful during lockdowns, no?
On a recent walk, I began to think about what the three things are that prevent some of us from being able to retire early. Is the cause just three things: houses, automobiles, and tuition? Do we truly need bigger houses, fancy Lexuses for getting stuck in rush hour, or private schools for our kids? It doesn’t matter. We must have it!
We’re not only influenced by what we see next door, we now get to see it all on social media and gaze at everyone’s newest and latest upgrades. We’re not able to retire because we think we must spend money to be happy. It’s the FOMO phenomenon.
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Three Retirement Blockers:
- Oversized “show off” housing
- Any automobile on lease or loan, particularly one costing over $20K
- Private school tuition
Three Retirement Enablers:
- Maxed-out 401k and Roth IRA contributions
- Self-improvement focus – particularly EQ (leading to job promotions)
- Smart, diversified investing (a healthy mix of index funds and real estate)
Retirement Bogey 1: Housing
The average size of U.S. homes increased by a full 1,000 square feet over the last ten years. We’re still willing to pay top dollar for space. Is that space necessary? Again, back to the walk around the block in my neighborhood. I’ll see more than a few lots where the structures have been torn down and solid 1,200 to 1,500 square foot homes have been replaced by a 3,000 or 4,000+ square foot one.
The cost of owning a house that big in the Minneapolis metro area approaches $500,000 – $800,000 with ease. It’s hard enough to justify purchasing the 1,500-square-foot home at $250,000 plus. But if you feel you must keep up with the McMansions next door, and sink your dollars into a super-sized house, consider the costs:
1,500 square foot gem: $225,000 loan at 4% interest = $1,074 monthly payment
3,000 square foot HGTV Poverty Brothers home: $450,000 loan at 4% interest = $2,148 monthly payment
For the big house, property taxes will be about double the small house. In our neck of the woods that means you’d pay Mayor McCheese a whopping $6,000 per year to fund our public schools and infrastructure.
Utilities and insurance are much higher as well for big houses. You’ll pay about $200 a month for the small house for gas, electricity, and water. Even if you assume the same water usage, it’ll cost more to light up, heat, and cool the Poverty Barn. Tab? $300.
Homeowner’s insurance will double as well. That’s because you need to factor in the cost to rebuild the structure. A house that’s twice as big requires double the materials. So assume you’ll pay $2,000 – $3,000 vs. $600 – $1,200 per year.
The total opportunity cost per year on the big house comes out to $35,376 vs. $18,288 for the perfectly useful small house. These are the houses society got by with back in the 60s and earlier, with LARGER family sizes. I didn’t mention the higher cost to furnish and maintain a big house. I tacked on another $2,000 for that.
The penalty for choosing that big house? $815,693. This assumes a 20-year window of time, compounding savings at 7% in an index fund.
Retirement Bogey 2: Automobiles
If a big ball and chain are holding you back from financial success, it’s the automobile. Consider its purpose: to get you from point A to point B, when your feet, public transit, or bike won’t suffice.
Consider how commercials fantasize zipping around bendy country roads on a sunny day, all alone with no competing traffic. In reality, you bring that cash-sucking Audi home and realize you’re just one in a herd of over-priced luxury vehicles, stuck in bumper-to-bumper traffic. At least you have seat warmers.
Choosing instead to drive only when necessary, and in a vehicle that’s in solid shape, paid for, and easy on fuel economy? “Nah, I’d rather flush my hard-earned cash down the toilet on car payments, insurance, premium unleaded, and maintenance. But sh*t if I don’t look cool doing it!”
Let’s use my favorite target, the BMW driver. The 10-year cost to maintain that thing on average? $17,800. Compared to the mighty, economical Honda Fit? $7,200. Next, let’s assume you drive 10,000 miles per year, consuming 333 gallons of gas (assume a 30-mile-per-gallon fuel efficiency). Paying for premium gas in your BMW or Audi will cost you $1,028 per year, vs. $852 for regular octane in a Honda.
Car insurance? That’ll run you close to $2,000 per year for that luxury beast. On average, the cost to insure a used Honda Fit with no collision coverage is less than $600.
Let’s not forget the cost of the car itself. New BMWs range from 30 grand to over 100 grand. Assuming you go for a modest BMW 3 series, reasonably decked out, you’ll spend about $45,000. A used Honda Fit with less than 80,000 miles will cost you $7,000.
The penalty for choosing a fancy car over a used Honda Fit is $258,806. Again, assuming a 20-year window of compounding savings at 7% in a boring (but effective) index fund. By the way, this assumes your average couple drives just one luxury car. I’ll go easy on you and figure at least one car in that garage is a used, paid-off mini-van.
Adding up the opportunity costs so far, you’re already down $1,074,499.
Retirement Bogey 3: Tuition
The third extravagance keeping you from early retirement is tuition. Don’t get me wrong, it’s a really good thing to set aside money to help your children get a leg up on college costs.
We plan to fund at least half of their higher education with IRAs and 529 accounts. The rest will be covered with a few scholarships and some part-time work, plus summer jobs. They might wind up with some debt coming out of the deal, but nothing in the six figures.
In-state public universities still seem to offer pretty good value. A healthy number of people who boss me around and make more than $200,000 per year got their degrees from venerable state universities.
Sure, an Ivy League or private college degree can muster a big paycheck right out of the gates for many, but in most cases, degree holders will make about the same salary as compared with a public U grad.
Then there’s this idea that you need to put your kids through private grade school, to make sure they get into a prestigious (but equal value) private prep school. It’s hard to fathom paying for private primary school since we pay $4,000 a year in property taxes. Admittedly, not all school districts are created equal. We are in a solid public school district but class sizes tend to get unwieldy at around 30 pupils per teacher…
Just as some private schools have excellent teachers and average teachers, the same holds for public schools. Sometimes you get large classroom sizes. Sometimes you get bullies, cliques, and other distractions. Sadly, nearly as many of these kids wind up in trouble as those who attended public school. If they didn’t get into trouble, their jobs are no better at providing fulfillment and happiness than peers who grew up in public schooling.
The sad result of flushing all those tens of thousands down the drain is that mom and dad can’t imagine retirement until 75. Education depends on several factors. The principal factor is how deeply we as parents and guardians engage with our children and how deeply we support their curiosity on the subjects they gravitate to.
Several families struggle to contemplate retirement in their sixties because they feel overwhelmingly compelled to put their kids in private schools. In their minds, private education was the only way the kiddos could become happy and successful lawyers and doctors. It IS a growingly competitive world, but the preparation of children to compete in it should not be all-consuming.
What is the penalty for choosing private K-12 education for Johnny and Sally? $322,971. You cannot buy ambition, work ethic, and curiosity. No matter what the marketing wants us to believe.
Total Early Retirement Tax / Opportunity Cost: $1,397,470
That $1.39 million above doesn’t factor in your shopping habits, dining out habits, and extravagant vacations. Throw in those lifestyle inflators and you’re probably blowing north of $2 million. That’s money that could instead be used to power an early retirement.
Remember the value of early retirement for the individual, the spouse, and the parent: Time is infinitely more powerful than money.
Be the supplement to your kids’ public school education. What your kids learn from YOU is more important than their grade school curriculum.
Be the support to your spouse, if he or she continues to work beyond your early retirement. Be a better, less stressed version of yourself, knowing you’ve achieved what very few have, since the Industrial Revolution.
The Power of Compounding Interest
Negative ten grand. How does that net worth figure strike you? About 15 years ago, I was incredibly far from a viable early retirement. I was instead destined for Cubicle Foreverland.
The really sad part? Here I was, ten years out of college, without jack to show for it. My investment savings were $42K. AFTER TEN YEARS OF CUBICLE WORK! What did Mr. Money Mustache stash away after ten years of work? Over a million dollars. I had my work cut out for me.
I want to point out two things: 1.) Don’t beat yourself up if you weren’t able or willing to save for retirement in your 20s. 2.) Even if you don’t start saving until your 30s, with discipline and hard work, you’ll still reach your goal faster than 95% of the crowd.
Just take a look at that exhibit above. Holy buckets. The top three expense line items are credit cards, with balances.
Overall, this 2005 budget was a financial “death by a thousand cuts.” I didn’t need to be blowing $125 a month on clothing. That was nuts. And I wasn’t even a flashy dresser. But you can’t have a blue striped polo shirt, without having a red striped polo shirt, can you?
The other death-cuts included Brinks (home security), Haircuts, Quest (landline phone), Star Tribune (Sunday paper), and Netflix. As for Brinks? Well, six months after I moved into my new house, it got broken into. The worst of the physical damage was the kicked-in door. Having a security system put in after that helped me sleep at night.
Haircuts are a fact of life when you have a full head of hair. Here’s the good news for those of you gents going bald: Cheap at-home haircuts! My wife buzzes my head for me once every two weeks. I’ll cut my son’s longer locks once a month. Aging can be financially advantageous!
Trade-offs that Delay Retirement
Even if you stink at personal finance, you can always find others who stink worse than you do. The story of how we achieved financial independence is filled with epic fails and financial looney tunes.
Between 2006 and 2012, we took annual vacations to places that required passports: Switzerland, Costa Rica, Paris, Mexico, the British Virgin Islands, and Mexico again. Not cheap. And no, we did not take advantage of credit card bonus miles back then.
We also ate out a lot. How much? So much so, that we kept a journal to keep track of the dozens of restaurants tried. We thought we were aspiring food critics.
The impact of $150 in weekly restaurant tabs makes you want to scroll up for another face punch. That habit alone cost us $150,000 over 12 years. But we are here to live life and enjoy the moment, so it wasn’t an option to sit at home and count our index fund growth like Ebenezer Scrooge.
There were a few constants, going back to my first year out of college. I had always squirreled away at least 8% (often more) into a 401K. I always worked hard to quickly pay off debts.
Sure, I had periods where credit card balances incurred interest, but not too often.
I lived in a cheap apartment with a roommate for several years, relying on cheap or hand-me-down furnishings. Paying off $18K in student loans was easy back then. There was zero passport travel for me during those first few years out of school.
From 2013 to today, two dynamics converge: One, we have our wonderful twins. All of a sudden, we’re paying roughly $25K per year in childcare. Ack!! Two, we got into real estate. We took well-informed risks that turned out well thanks to a mentor who showed us the landlord’s way.
Mastery in our day jobs began to crystallize. Mrs. Cubert went from having very few patients in the beginning to turning them away today. My salary (plus bonus) has more than doubled since 2006.
One thing I should be clear about: When we combined our finances in 2006, our net worth plunged to the negative six figures. Mrs. Cubert had just finished up Chiropractic school, which is not cheap. She’s more than covered her investment in the 12 years since.
When Can I Retire?
That’s the six-thousand-dollar question. Yes, we’ve made it to the seven-figure milestone. But it took time, diligence, and a heck of a lot of education along the way.
We’ve been in the same house since 2004 with no plans to buy up to a McMansion anytime soon. I drive a used Honda Fit. Both of our cars are fully paid for. We don’t carry collision or comprehensive insurance. Our cell plans are on Ting, and we haven’t upgraded our phones since 2015.
Our $1.3M swing from 2006 to today is owed in large part to the power of compounding, alongside the power of real estate investing. Half of our net worth is in retirement savings, while the other half resides with tangible assets: our house, four long-term rental houses, and the Airbnb condo. I don’t even really know the value of Mrs. Cubert’s practice, but it’s easily well over six figures.
In fact, with much the same investments and budget three years ago as today, we’ve seen a nearly 70% increase in our net worth. You know exactly why: The stock market and real estate markets have been on a tear. Is another bubble looming?
On paper, reaching a seven-figure net worth is rewarding, but it can be misleading. Relying solely on net worth as a measuring stick can be dangerous.
I am pretty confident about the 4% rule, which says you can safely take 4% of your nest egg each year, and never exhaust your core capital. Still, markets crashed and housing bubbles burst.
The emotional, overly cautious side of me needs the stability of cash flow to hedge my bets. In YOUR quest for early retirement, my advice is to diversify. Branch out into a business, real estate, or other cash flow venture to balance your portfolio. If you take nothing else from this article, remember that the next 10 years can make a huge difference to your subsequent 20, 30, 40, 50, or even 60 years. Compounding is magic.
Do you have any tips for retiring early? Please share in the comments below.
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Fritz @ TheRetirementManifesto says
Great summary of the levers required to achieve an early retirement, Cubert. Add in the “Patience” leg, that long, long road between activating the levers and achieving FI, and you’ve got it covered. You know where you are, right? Be patient, and enjoy those wonderful kids. Your future looks bright…
Thank you for your kind words, as always. I’ve really (and selfishly) enjoyed this period of lock-down as a mini-experiment on early retirement. Work was very slow for a good four weeks, and I had time to get in walks, spend time with the kids, and work on projects. Sabbaticals are great, but of course, you then have to prepare mentally for re-engaging the hamster wheel after the sabbatical ends. Coming back to part-time? That seems more my speed… I hope your doing well and enjoying your retirement!
No wonder I retired early. I bought a small 1440 sq ft house in a LCOL area. Basically it cost less than twice my starting salary and in fact it cost about one years of my wife and my combined pay when we bought it in our second year of marriage. We did expand it over time as we eventually had three teenagers under the roof at one time, but the house never had significant mortgage or property taxes. Even now property taxes are just $1,100 a year.
I had an even better car situation, my company provided me a company car with unlimited free gas, insurance and maintenance which they replaced every few years. And I worked in an office not on the road, the car was purely a perk.
Our public schools were fine, so no tuition there and all three kids got totally free rides, including room and board and books to the state U because they were kind of smart. Plus the company gave all employees kids small scholarships. My kids had to turn money back each year because they couldn’t spend it all. There were no student loans in our family.
I never tried to add up what those things saved me but it was significant. Your post made me realize how spoiled I am and how much easier achieving FI was for me than for others because those big three items were not significant costs to my family.
That is an amazingly low P-Tax amount, Steve! I am quite envious! Yes, you made it work with some strong “blue chip” choices in where your hard-earned dollars went – not in houses or cars, but into your future. And no, I wouldn’t sneeze at a full-ride scholarship to a state U. That is incredible.
Ben Zabulis says
Good article Cubert and you’re right that house, car and kids are generally life’s biggest expenses, but, having said that, maybe the easiest to adjust. We sold up and moved into a small rented flat (still too big for the two of us!), ditched the car in favour of walking and/or cheap public transport, we are kid-free and much of life’s expected frippery is no longer entertained. Now our days are frugal and very simple. In fact the more simple it gets the ‘richer’ we seem to become …No regrets.
Ben – Thinking about you quite a bit these days as I turn the pages of my Economist weekly mag. So much unfolding in HK and I hope you remain safe and prosperous (and free!)
Nice job building your wealth over the last 16 years. Minimizing lifestyle inflation is really the key. Most of us start off with a small home and a junky car. If we can avoid upgrading too much, it’s much easier to save and invest. Childcare is very expensive, but it’s only temporary. Once they’re older, it’ll be a lot cheaper.
So how long before you can retire early? 🙂
Hey there Joe! Good to see you, friend. How long? Great question. As I noted to Fritz below, I reckon within the next two or three years I’ll have this riddle solved. This years marks the true FI level I wanted to achieve. Now it’s a matter of focusing on the day-to-day rhythm I want to establish for myself after the corporate gig. Our society has a lot of change to process and I wonder if holding my job will help me support those goals better…
So many parallels with my wife and me. I agree that crying over spilled milk like eating out a bunch is pointless. We are to enjoy life today as well and sometimes too, those experiences shape our future.
Side note; I still have not found that bridge or I keep not realizing that I have found it. On the other hand, I know about where you live which was one of a few areas that I figured that you would. Don’t worry, I won’t walk around your neighborhood looking for you… it’s just too far from my house on foot. 😛
Hey Pete! After the lock-down, let’s grab a coffee at Starbucks?
Sure, why not? We can compare notes. Mine largely revolve around as little effort as possible. 😛
Haha! Work smart, not hard, right??
Roger Fox says
Your experience is very inspiring! I often ask myself: “When can I retire?” I hope to retire earlier, as much as possible, how it will turn out I don’t know, but I try very hard)
Thank you, Roger!
Caroline at Costa Rica FIRE says
Congrats on the uptick in net worth! I’m not confident in the 4% rule, especially given inflation and the probability of higher tax brackets in the future. This is why, even though we do hold paper assets, our focus is on income-producing real estate and businesses. I think managing drawdowns from a paper portfolio through this market volatility will be very difficult so we’re looking at our paper as a backstop to the other things or as a legacy to our kids if it turns out we don’t have to touch it.
Thanks, Caroline! I think I’m more and more with you on the 4% rule. Volatility seems to be ratcheting up more and more of time. Kind of goes hand-in-hand with the accelerating rate of change over time. It would seem painful to draw down from paper accounts during a market “trough”. That’s why we’re also appreciative of our real estate assets. Diversity was important all along, but the level of diversity in investments will probably need to be even wider over time. Still, avoiding gold for now.
Dividend Power says
Most pople do not understand the power of compounding. But you explain it very well.