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15

What Financially Free Means to Me (My “Retirement” Plan)

I am nearly done with paying off my debt! This is an incredibly liberating and exciting month because, for the first time, I can finally see and feel the end of this debt, and that is amazing (sometimes downright unfathomable). As I think toward my future, however, I know that I am nowhere near my ultimate goal.

My final money goal is to be financially free. I define complete financial freedom as having enough money in savings invested so as to be able to live off of the investments in perpetuity and theoretically never need to work again in my life. I would like to reach this goal by the time I’m 35, or sooner, which I think will be very possible.

But how to get there? There is a lot of talk in the financial community about how much one needs to retire on - the general number posited by most is a million dollars. It seems to me that this dollar amount is honestly excessive and should be more carefully considered. Besides suggesting a million dollars - as in, “Yeah, that should cover it…” - I think we should do the math and decide what’s right for us individually.

Rather than throwing out a number, I will show you how I got to mine with simple math. Picking a amount for retirement is completely personal and when calculating your own retirement amount, be sure to consider all of your own needs and plans before doing the calculations.

Before I go into numbers, I’d like to explain why I’d like to “retire” so early on.

My Reasons For Early Retirement

Surprisingly, the reason is not because I’m lazy. And it’s not because I want to be super rich when I “grow up” and live a life of “luxury” (I actually consider luxury to be time). The honest and simple reason why I want to retire early is because I have too much I want to do! I have dozens of extremely exciting interests that I excel at but can’t “find time” for.

My mother told me once when I was little, “You can’t do everything in life - pick one thing you love and are good at an capitalize on that.” While her words had a very practical message - don’t just chase after random dreams and be a starving artist forever - it had me severely disturbed as a child. I loved opera! I wanted to sing! But I also LOVED design - interior design, graphic design, web design, clothing design - and I loved photography and dance and painting and sketching. How was I to pick? I went in circles around this for a long time. I also really wanted to be a surgeon and an air traffic controller (yes, I was a nerd). I wanted to study linguistics and etymology and write! I could NOT pick just one and it drove me crazy.

Finally, I decided that I would study singing because it was my passion above all passions. After couple years of amazing experiences, I left the opera conservatory (long story involving father having a heart attack and having no money for school) and went into business. I have been working since and using my good business skills (I admit it’s a talent, really) to run small businesses. I find time for web design and writing and Italian on the side, but I honestly feel like I shouldn’t be at my job so much, though it is a job that I absolutely LOVE (running a business is overwhelmingly exciting, but also irritating and full of frustration). Isn’t that strange? But that’s how I feel - it isn’t my main passion.

After saying that, you may see why I want to retire early. I want to have time to do all the things I love to do, full time and with complete abandon. This is my dream. Unlike most people, I don’t dream of a new car or a big house or a life filled with fine dining and fancy clothes. While I do intend to have these things at some point, they aren’t my dreams.

My real dreams are to be studying French all day, or spending a semester learning more about linguistics. I’d love to take an anatomy class, or study dance or biology. Honestly? I want to explore. I want to feed my brain and grow and laugh all the time and completely love what I do all day, every day. I suppose you could argue that I could do all this now, and I try to, but I would rather allow these to be the concentration of my life, not an aside I manage to get to now and then.

And this all comes from a person who manages her time very well! I DO do all these things to a point. I read a lot of books, I run three businesses and design clothes, write, draw, and photograph on the side. But as I said, I’d like these to take a more full-time place in my life.

What about retirement? What about making money later?

I intend to keep working well past my retirement. I am in love with working and would feel very deflated and defeated if I weren’t working. This is a major reason why I don’t like the idea of having children. While my mind may change on this in the future (I am leaving myself open to changes), I see kids as something I’m not interested in. For the most part, I’ve never liked children to begin with. That, coupled with my desire to completely concentrate on myself and my career for all my life, has led me to the decision that I just don’t want to have children. And so, in “retirement,” I will still work.

The joy about all of this, really, is that once I’m completely financially supported by my investments, I can do whatever I’d like. I can decide to put a toe in the water and try out new things without worrying about my my financial sability. I can design a clothing line and sell it online, or study architecture, or go to med school. I could arguably do all these things in my “free time” now, but not to the full extent that I’d like to. The options are endless after retirement, and open to me - especially the more I invest.

The Money

So, how do I get to this ideal lifestyle? Can I really retire at 35? How on earth could I do that sooner than 35?

Right now I make $31,800/year after taxes (I actually make around $40k with web design and Italian, but that fluctuates too much to count on). I know that my salary will continue to raise over the years, but for simplicity we are going to assume that I will never get a raise in my life. I like this model because it also means that my goals are attainable in very conservative numbers
I live on about $17k/year, leaving me with a remaining $15-20k to do whatever I want with. Up until last year, I was frittering away this extra money on mochas, vacations, clothing, and other crap (I don’t know where the money went, honestly) and saving nothing and paying the credit cards the “left overs.” While paying off debt, however, I have learned to cut out these mindless expenses, pay myself first, and pay the rest over to the credit cards in order to eliminate my debt once and for all time
After I pay off my last debt (April or May, 2008), that remaining $15k/year will go into savings. I will put close to $9,000 into emergency savings (six months of expenses) and then from there get creative with my investing and saving.

The money above and beyond my living expenses will be my retirement savings. But rather than save 15% of my income like is recommended in all popular finance books directed at our consumer culture, I will be saving close to 50% of my income. Hopefully I will continue to raise my salary as well, so that in a few years I can throw 70% to 80% of my income into savings (my living expenses will not increase because my salary does - I will not let this happen).

Using a standard investment calculator, I assumed 10% annual rate of return on my investment. Some would consider this wishful thinking, others will think I’m being too conservative. I’m using a realistic middle ground for me.

Looking at the short term isn’t that exciting - in four years (at $15k/year) I will have invested only $60k and earned a measly $14k in interest. However, TEN years down the road (again, assuming no more than $15k/year invested) I will have invested $150k and earned roughly $100k in interest! At my goal age of 35 I will have contributed close to $200k and earned over $200k in interest.

This means that at the time I’m 35 I will have $400k in investments. Even if my math is off and I have only $350k, or have $450k, it makes no difference. If I maintain my lifestyle as it is (and I live very well), I will only have to draw, at the most, 5% off of this investment every year to live on. I could draw up to 10%/year and still my investment would continue to grow as I lived on it.

Why This Plan Works

The plan works because it is based on unreasonably conservative numbers. I have left the numbers simple and extremely unimaginative, and not allowed any positive “maybes” into the equation. My assumptions:

First, this is all assuming that I put absolutely no more than $15k into savings each year, which I think is unrealistic. I assume that by the time I’m 25 I’ll be making more like $50k/year, dramatically increasing the amount of money I can save each year.

In addition, this is assuming that I will never work for money after I retire, which is also completely unrealistic. I plan to work for the rest of my life! I just would like to be able to work at my leasure, doing whatever I please, and not have to worry about where the money to live on is going to come from.

Finally, this is assuming I never get married and never share expenses with anyone else, ever, another unrealistic assumption for the simplicity of math. I assume I WILL get married, and share a house with my husband, and share other expenses and share life.

Fortunately, all these assumptions keep my projected financial reality at the minimum, only leaving room for improvement. If any of my assumptions are wrong, I will only make more money and save more, make money off of my hobbies later on, or cut my expenses because of a relationship. These are all good things! And these future possibilities are ones that will help me prosper more and reach my goal earlier, not later.

All in all, I’d say it’s a good retirement plan. I know that I am incredibly fortunate to have learned and studied all this finance stuff so young in my life. At 22, I have a plan, and I will accomplish my goals because I have a plan - and the plan is realistic and based in math. Now that’s something I can trust
What are your financial goals? When do you intend to retire? Is there something wrong with my math? (I’d love your imput on this, Jacob ;))

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You should go to anyone apart from your current mortgage broker to figure out your way about insurance quotes. Only then you should decide about your dental insurance or even a pet insurance that had you worried.

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Filed Under Just My Life - Stories, Etc., money and finance, simple living

Comments

11 Responses to “What Financially Free Means to Me (My “Retirement” Plan)”

Steve Austin on March 15th, 2008 5:11 pm

Sounds good to me. Only tweak I’d suggest (in the vein of being conservative) is to plan on drawing no more than 3% of your taxable kitty starting at age 35. A 5% drawdown should be reserved for a special year.

If, after 10 or so years, i.e. by age 45, you find that your taxable kitty is growing faster than you want or need, then give yourself a “raise”, up to no more than 4% of the kitty.
Lynnae @ Being Frugal.net on March 15th, 2008 6:59 pm

I cannot believe you have it so together at age 22! At 22 I was just starting down the long road of debt. So good for you!
Jacob @ Early Retirement Extreme on March 17th, 2008 7:20 am

Like Steve said … 3-4%, no more.

You can’t trust math - economics only uses math to pretend to be a science.

I also note that you make enough from your side shows to live on, well, if you dropped from 17k to 8k anyway. Incidentally, getting married might not automatically save you money depending on how you arrange your finances. With all respect to DW I think I would be better off economically single (mostly because I earn a lot more).

You might want to look up “renaissance soul”
Shana on March 17th, 2008 8:30 am

Um, could you clarify what you mean by “work” in your “retirement”? This is confusing, as most people do not work in retirement (hence, the name). It sounds like what you’re talking about is having financial freedom, and including in that the ability to work wherever you’d like because of financial resources.

Also, and I hate to sound like a damp rag, but have you taken into consideration things like home ownership or rising standard of living costs? I live pretty frugally now, though it is in no way close to how I lived frugally (when I simply had very, very little money) at 22. The older I become, the higher my desired standard of living becomes.

All that said, I really do think this is a great goal. Good luck!
Zach @ pennywise on March 17th, 2008 10:45 am

Wow. This is like reading my own financial plan! I, too, rely on conservative numbers.

One thing that I’ve learned is upselling- it happens everywhere that you wouldn’t think it. In a restaurant with buying drinks, for instance. You wouldn’t believe how much two drinks can change a bill! Since cutting out the extraneous “upselling”, I’ve eaten at good restaurants for less than $30! While still far above DIY-dinners, that’s a significant improvement over the alternative $50 bill!

Outstanding!
zach
pennywise-poundfoolish.typepad.com
Emily on March 17th, 2008 11:51 am

I am 23 and am married (3 years!). We are saving a lot too and although do not expect to retire at 35 (kids are in our plans which means working until 65). One think I believe you forgot to consider is inflation. According to my calculations, assuming 3-4 percent inflation a year, by age 65 we will need $163,913.35 (tax free) to equal our 40K a year we live off now. You also have to consider health care costs when you are not employed. They will eat up a big chunk of your retirement money, especially if SS and Medicare are not there (which I wouldn’t plan on). Also, I think 10 percent in the next 13 years is very agressive. The market will be going through a lot of correcting and I do not anticipate those kind of consistant returns. I would estimate 7-8 to be safe. But good luck witheverything, you are on the right track!
Mark on March 17th, 2008 1:31 pm

Sounds great…

Withdrawal of 5% is ok, if you can work in the years market is down

10% is a fine number and if it is off a little, so what work till 37

Even when I do the math on inflating your living expenses at 3% a year, this works. Just make sure your new investment money grows at 3% a year.

I agree on the home ownership and kids being big expenses. Not sure on your marriage plans, but make sure they are on a similar page on these things.

Cool with the Italian, and I live over in Naples, Italy right now. Fun, but challenging with the trash issues. All the best!
Future Millionaire on March 17th, 2008 6:04 pm

Congrats on having the plan to retire early - I’m planning to retire early too but I don’t think I’ll make it by 35, this is in part because I want to live on more money than you’re willing to.

I do have to agree that 5% - 10% might be too aggressive of draw down but like you said even if its miscalculated you’ll have more money.
shanti on March 17th, 2008 9:58 pm

Hi everyone! Thank you for the comments Rahter than address each comment one-by-one, I’ve made a video response to the lot over here: http://www.antishay.com/?p=91

The video covers everything from mortgage and inflation to social security and medicare. Thanks for your comments and for stopping by!
Richy on September 1st, 2008 8:06 am

You are spot on , stick to those goals ! . I AM actualy 35 and retired , using pretty much the rules you have planned to use above.
GL. cheers.
Adam Shrugged » Devil’s Advocate – Antishay on August 9th, 2009 5:37 pm

[...] I wholeheartedly agree with Shanti’s goals, I feel the need to counter her post and subsequent counter arguments (in video form!) about her retirement. Primarily, I am concerned [...]