Everybody can retire early when their investment income is enough to cover their basic living expenses. But when it comes to retiring early (before 60), there are different levels of difficulty.
The easiest way to retire early is to have a working spouse. If you’ve got no kids to care for, you’re truly free to do whatever you want. All you’ve got to do is keep encouraging your spouse to keep on providing.
Another easy way to retire early is to be willing to live in or near poverty in retirement. Ironically, being willing to live like a monk is also one of the hardest ways to stay retired. You might start asking what’s the point of retiring early if you can’t live it up with your free time.
A much harder early retirement to achieve is one that maintains the same standard of living in retirement which you had while working. Without some budget sacrifices, this route to early retirement is difficult.
Nowadays, simple math suggest that it’s hard to accumulate enough capital to sustain a middle-class lifestyle. Yet, just like proponents of the Roth IRA, there are plenty of misguided people who think their investment income will be higher than their average working income.
Finally, there’s the hardest early retirement of all – retiring early while raising adolescent children. Once you have children, you suddenly realize that retiring early without children is like going for a walk in the park. It seems so easy, you wonder why more people don’t get on board!
Let’s take a look at the subjective and objective reasons why retiring early with children is nearly impossible. Then we can discuss some potential solutions.
Why It’s So Hard To Retire Early With Kids
Besides the extra costs for raising children, the main reason why it’s so hard to retire early with children is due to them sucking up all your remaining time and energy outside of work.
Every early retiree I know spent hours outside of their day jobs finding ways to make more money to save and invest more. Examples of what they’ve done include:
- Starting a blog
- Creating online products
- Driving for Uber and Lyft
- Coaching youth sports
- Pet sitting
- Consulting / freelancing
- Buying rental properties and managing them
- Actively managing an investment portfolio
- Going to business school part-time
I used to spend ~25 hours a week outside of full-time work writing on Financial Samurai. If I’d had adolescent children then, there is no way I’d have spent more than 5 hours a week writing. Being away from my kid for 50 – 60 hours a week would have made me feel even more guilty to work any longer at home.
Therefore, I would probably have devoted 70% of my time outside full-time work to my kids and wife, 20% with friends and playing sports, and the remaining 10% to Financial Samurai or personal nap time!
Even though not having children while I was working is one of my top retirement regrets, having children while working would have probably delayed my retirement by at least 10 years, if not 20 years.
Working becomes more bearable or motivating once you have children due to having increased purpose at work. One of the best work goals to have is to work until your kids graduate from college.
It’s Also Hard To Stay Retired Once Children Come
After we had a kid, our already onerous $1,620/month healthcare premiums jumped to $1,800/month after our son was born. For 2020, our healthcare premiums will rise to $1,920/month. We’re talking $23,040 a year in healthcare premiums alone. This does not include our deductibles and co-pays.
We could try and limit our household income to less than 400% of the Federal Poverty Limit ($83,000) to get healthcare subsidies, but then we wouldn’t have enough to comfortably live on. Besides, we would feel bad getting subsidies from the government when the purpose of the affordable care act is to help those who are financially struggling.
In addition to higher healthcare premiums, we now have extra expenses for diapers, clothes, toys, occasional babysitting help to keep our sanity, preschool tuition at $2,000/month (no universal pre-school in SF), and potentially private grade school tuition down the road.
We are hoping to send our son to public grade school because we find paying $30,000 – $45,000 a year in private grade school tuition to be ridiculous. But the problem with the SF public school system is that it is based on a lottery system for social engineering purposes.
Even if you pay $30,000 a year in SF property taxes, your child has no guarantee of getting into your neighborhood public school. You could end up with your 15th choice and have to drive 25 minutes across town.
Sure, to save money, we could take him out of preschool, say goodbye to our friends and network, move to a lower-cost area of the country, and start a new life in the heartland of America. But to move just to save on costs seems simplistic. We are also extremely invested in the SF Bay Area due to our property portfolio.
Retiring Early With A Family On $200,000 A Year
Now let me share with you a realistic budget on how quickly $200,000 a year in investment income goes for a family of three. Please note that investment income is mostly taxed lower than earned income. In other words, you would need to earn 5 – 10% more in W2 wage income to match investment income.
As you can see from the budget, this family of three is only left with about $1,432 a year in cash flow. Although I’ve budgeted $3,000 a year for miscellaneous costs, emergencies happen all the time. I have no doubt this family will regularly have to dip into their principal if they have no other income sources.
A $650,000 mortgage sounds like a lot of debt to still carry as early retirees. However, their home is valued at $1.5 million for a loan-to-value ratio of only 43%. They have a 3.5% 30-year fixed mortgage which they are paying down extra principal each month.
If they hadn’t bought a home back in 2005 for $930,000, they probably would still be renting and not building any home equity either. Owning your primary residence to eventually pay it off is generally a good idea.
Some may say the food budget of $1,800 a month for three is unreasonable. But we’re talking spending $60 a day for three on breakfast, lunch, and dinner. That’s $20 a day per person. It’s hard to get a lunch for under $10 nowadays. Therefore, this family regularly eats in.
Sure, they could reduce their $9,600 annual vacation budget. But flying to Hawaii during nonpeak season will cost $1,650. Then lodging at $300/night will cost another $2,100 for a week. Then, of course, there is food and entertainment. A week in Hawaii for three could easily cost $5,000 – $6,000.
Although this early retirement couple could cut expenses by $5,000 – $10,000 a year and still be OK, there’s one expected cost they can’t cut. The cost of another child!
Having a second child will ruin this $200,000 a year retirement income-earning couple’s budget. For one, they might need to buy a bigger house. They also might need to buy a newer, bigger, and safer car given even more is at stake when driving. Then, of course, there are all the monthly costs that go into raising a child, including childcare and preschool.
The only practical solutions to this financial quandary are to either not have a second child or not retire early.
The Amount Of Money Needed To Retire Early With Kids
OK, despite the detailed budget, some of you still don’t think $200,000 in investment income is necessary to raise one or two children in early retirement. Let’s cut the investment income down to $100,000.
Based on various returns or withdrawal rates, here’s how much capital you would need to generate $200,000 / $100,000 a year in investment income:
At 1.5%: $13,333,333 / $6,666,666
At 2%: $10,000,000 / $5,000,000
At 3%: $6,666,666 / $3,333,333
At 4%: $5,000,000 / $2,500,000
At 5%: $4,000,000 / $2,000,000
At 6%: $3,333,333 / $1,666,666
At 7%: $2,857,142 / $1,428,571
At 8%: $2,500,000 / $1,250,000
With the median net worth for Americans under $100,000, coming up with 25X – 100X the median net worth in order to retire early is not very realistic. Even coming up with just $1,250,000 – $5,000,000 for the typical American is unlikely. Be realistic folks.
If you are retired, you likely have a much more conservative portfolio. Therefore, you’ve probably constructed a more conservative portfolio that might only generate closer to 4% or 5% a year, if you’re lucky. Therefore, you would probably need closer to $2,000,000 – $5,000,000 in order to retire early with kids in America.
During bull markets, people tend to forget that stocks, bonds, and other risk-assets sometimes decline in value.
How To Retire Early With Kids
Now that I’ve deflated your spirits, here are the only solutions I can think of if you still want to have your cake and eat it too:
- Make sure you pay yourself first, no matter what. Don’t let your desire to provide the best of everything for your kids blow up your path to early retirement.
- Relocate to a lower cost of living area. Instead of living in a city where the median-priced home is over $1,000,000, relocate to one of the hundreds of great cities where the median home price is closer to the national median of $250,000. Before you relocate, it’s best to take a visit first to see if you will feel comfortable and included.
- Consider joining the military, foreign service, law enforcement, or any organization that provides a pension. If you join between 18 – 22, you can retire as early as 38 – 42 with a pension. Even if you work for 10 more years to get a bigger pension, you can still retire much earlier than 60.
- Send your kids to public grade school only. Unless your kid has a scholarship or you are rich (income at least 10X the annual cost of annual tuition), private school tuition is a huge financial drag. The amount you could spend on your kid once they’re in private school is endless. You will forever be pressured by other parents and the school to spend and donate more.
- Make yourself feel better about not sending your kids to private school by selectively reading perspectives from parents who sent their kids to private school and regretted their decisions. Then read up about all the great Americans who went to public school and did just fine.
- Encourage your kids to help around the house more to not only save money but to also build their character as well. Making kids consistently work for what they think they deserve is one of the greatest life lessons.
- Swallow your pride and start accepting healthcare subsidies intended for the financially struggling. To do so, you may have to rejigger your portfolio to produce less income and focus more on capital appreciation. To make yourself feel better about taking, look into all the ways other Americans have succeeded by taking advantage of the system. Also, tell yourself that you’ve already paid into the system while working.
- Negotiate a severance. Given pensions are rare for early retirees, it’s only logical to try and negotiate your own pension through a severance. There is no downside to trying given you plan on leaving anyway. Without my severance, I probably would have worked for at least five more years.
- If you’re feeling the financial strains of early retirement, make your spouse go back to work. Even though having one working spouse and one stay at home parent is not considered being early retired, sometimes it’s worth being selfish and delusional for your own sanity. Having a working spouse will solve the healthcare expense. A working spouse can also greatly reduce the amount of capital needed to produce early retirement income.
- If you don’t wish to fool yourself into thinking you’re retired while your spouse works, then take on some part-time work to supplement your income. I’ve found that working 20 hours a week is the optimal amount of time for intellectual stimulation. Earning an active income is rewarding if you can do so in moderation and with autonomy.
Although life is short, life is also very long. Don’t feel like you have to retire ASAP just because you saw someone else retire early. You’re suffering from the classic “new car in your neighbor’s driveway” envy syndrome.
Each year you delay retirement is one less year you have to pay for retirement and one more year you get to save for retirement.
Before negotiating a severance, consider taking it easier at your job for one year to see how things go. Take all your vacation days. Utilize the full hour for lunch. Get back to your boss a little later than normal. Leave right at 5 pm.
By grinding less hard, you just might start enjoying work more! Further, each additional year you work will add to your potential severance check when you finally walk away.
Having kids is worthwhile. But they will put a tremendous strain on your finances. Make sure you put your oxygen mask on first.