This is a guest post from firefighter, whom you may have seen in the comments. This is the last in the queue that I have lined up (if you have sent me your story and I have not posted it yet, write me a mail to complain). However, a few people said they would write up their story/plan, so more posts should be forthcoming.
My journey to early retirement actually began quite unintentionally in the late 1990’s. I work for a large municipal fire department. My father has always been a financial guru of sorts, so when I came home after my second day of rookie school loaded down with benefit booklets filled with health/dental/disability/life/retirement options to peruse I went in to see my dad for recommendations. After looking at a health insurance book for a minute, he grabbed my 457 (like a 401k) deferred compensation enrollment form, wrote “25%” in the salary deferral line and said, “Fill the rest of this out, turn the form in, and don’t look back.”
The department I work for automatically enrolls employees in a pension plan which takes an additional 7% out of my paycheck for funding (this is separate from SS). Together, these two deferrals took away almost 1/3 of my paycheck without me even seeing it. I was saving 32% of my pay almost unconsciously.
I should say a little bit more about my dad and the eccentricities of my family. I think my father’s three great loves in life are my mother, golf, and the Roth IRA. We have an unusual family tradition of getting together New Year’s Day and writing out checks to make our new tax year Roth IRA contribution. “Too good of a deal not to.” and “This won’t last long…eventually Congress will realize the mistake it made” are frequent rants of the old man. So, not putting aside a few hundred dollars a month for the yearly Roth check really wasn’t an option for me. There’s another 5-10% of my pay out of my hands. 40% of my pay…gone.
Well, until I got married five years ago, I never had a credit card. Debit card, yes, credit card, no. It was a hassle once or twice while trying to establish utility connections (they wanted a credit history), but I worked it out. No credit card necessitated my keeping some cash in a readily accessible account for emergencies. Yes, the old boring emergency fund. So I had 10% of my pay set aside for that. After the cash balance accumulated to a level I felt okay with, I kept the 10%+ going into a savings account at a brokerage firm (with a 3-day delay on transferring money out) and bought some blue chips. This left me with ~50% of my pay being saved with very little willpower or budgeting necessary. All I had to do was look at my checking account balance before I bought anything. There really was no way for me to go into the red.
As Jacob has pointed out in a more extreme way, one neat facet about saving 50%+ of your income is that for every year you work, you have at least one full year of living expenses saved up. This has held up for me. I started working full time at 21. 12 years later, now married, my wife and I have a little more than 12 years living expenses saved up. My wife and I plan to have 20 years living expenses saved up for retirement at age 40 (age 38 for her). Assuming my wife and I will be able to continue to save 50% of our pay for the next 7 or so years, we’ll be ready. Here’s how saving 50%+ has been the past 12 years:
- The first seven years were easy. As a single guy, saving 50%+ did not crimp my lifestyle at all and my paycheck was by no means large. I lived with my parents some of that time and frankly, I’m embarrassed that I didn’t save 75-80% at that time. It would have been easy. Age 20-25ish can be incredibly important for retirement savings. Quite frequently at work, we see young people who, upon getting a nice, “stable” job with the fire department, go out and finance a new car. This purchase is so common, it’s known in the firehouse as “the rookie mistake.” They fail to realize that the 25k they just spent on a new vehicle will likely cost them 100k+ down the road in retirement savings. Well, I didn’t make that rookie mistake, but I certainly could have saved more without sacrificing much.
- The next three years were even easier! I got married and it was even easier to save! My wife is reasonably frugally minded like myself. She made a decent salary as an elementary school teacher. We continued to save 50% of my salary, lived on the other half and saved almost 90% of hers. In her job, she was eligible for both a 403b and a 457, so we maxed both out, and really never even saw her paycheck. We got an awesome dog, life was good and saving was easy, until…
- The last two years have been a savings challenge with the arrival of our son. My wife decided to stay home to referee between our action-oriented son and the sheep/child herding dog. No more 90% saving there. Good friends, family, and a baby shower took care of most of the “start-up” costs of child rearing, but left us with plenty of additional costs including diapers and doctor’s visits. (As far as health insurance goes, the birth of my son was a double whammy, because we had to make the additional payments for him and my wife, since her coverage through her work ended.) After a little scrambling, we were able to get the savings rate back above 50% with the help of a small promotion at my work and a part time job I got working a couple days a month.
So we’re on track and just a teeny bit ahead of schedule. We have saved almost 13 years of living expenses for 3 people (and one dog). Our percentages are different, and so is our timeframe, but just like Jacob we will stick with the high savings plan. Our goal is to have 20 years living expenses saved up by 2016 and retire with enough passive income to generate $3k/mo- 1k/mo for the Mrs., 1k/mo for our son, and 1k/mo for me. Astute readers of Jacob’s may notice that 20 years of living expenses would have to be withdrawn at 5% to generate 1 year of living expenses. Most financial pros recommend a sustainable withdrawal rate of only 4% or less.
Several personal caveats to that, though. Chances are good that either my wife and I will do some type of paying work in retirement to regenerate the additional 1% and put it back in some type of retirement account. This would take about 4 hrs a week at my current part time job to generate this income (Sound familiar, Jacob?). Hey, Roth contributions can only come from earned income, and woe upon the Mrs. and I if we miss one tax year’s contributions even if we’re “retired.” Our son will (hopefully) not require that 1k/mo forever. By planning for him to be an equal share we have built some “fat” into the equation, so when he leaves the nest, we’ll be able to drop the withdrawal rate down to 3.3% or so. We currently live in a very high cost area. If necessary, we could reduce our living expenses by about 20% by moving one hour away after retirement with virtually no change to our standard of living.
So, despite a fairly rough twelve years in the stock market, (our largest retirement account has a 12 year annualized return of only 3.8%) we are indeed on course to retire in 2016 with right around 20 years of work under our belts and 20 years of living expenses saved up. We’re not quite yet at Jacob’s stage, but we’re over halfway there and things look good! Saving works, take heart!
We do have a glitch in the otherwise seemingly perfect matrix in that the Mrs. has a pre-existing health condition which necessitates high cost health insurance, but we also have an ace in the hole with my previously mentioned pension. If readers are interested and Jacob has space available I can write more on the merits of pensions or the perils of group health insurance at a later date. I’m well above the 600 word mark and have probably worn out my welcome as a guest poster.
Thanks for reading.