Category: Early Retirement

The Rule of 300

There are countless articles and calculators that will attempt to give you the best possible retirement advice and a projection of how long your money will last. But if you’re looking for the quickest and easiest way to figure out how much you’ll need to retire, then read on.

Pretty much every retirement calculator on the Internet is useless because the only two numbers that you need to look at are the amount of money that you spend during an average month — and the number 300.

After you figure out how much money you typically spend each month (You should already know this!) OR estimate the amount that you’ll need every month in retirement, multiply that number by 300. This is the amount of money you need in order to retire.

It’s that simple.

I made the table below so you could easily figure out the rough amount you’ll need in order to retire without even having to whip out your calculator. This applies equally to retirees of all ages ranging from 25 to 70+.

The Rule of 300

Monthly spending Amount needed to retire
$0 $0
$100 $30,000
$300 $90,000
$500 $150,000
$1000 $300,000
$2,500 $750,000
$5,000 $1,500,000
$7,500 $2,250,000
$10,000 $3,000,000

Where does your spending fall on this table?

Inherently, if you don’t spend ANY money in a normal month then you don’t need any money to retire. And conversely if you spend into the 5-digit range every month you’re going to need at least $3M to sustain your living habits.

This leave us with a necessary portfolio balance of $0-$3M. The amount you need in order to retire is completely up to you, and is dictated solely by your spending. The younger you are the more time you’ll have to reduce your lifestyle expenses, and optimize your current lifestyle to make 300x easier to accomplish.

How does this math work?

The formula for The Rule of 300 is very simple. It’s basically the 4% safe-withdrawal rate in reverse.

If you’re unaware of this term, The 4% Rule is a generally accepted estimation that allows you to withdraw 4% of your investment balance every year (adjusting annually for inflation). So, if you have $3M invested, you could take out $120,000 during the first year — in other words $10,000 per month.

Let’s do this equation out in long-form. First, we will start with a more modest family that spends $2,500 per month. To account for the family’s annual spending we need to multiply this number by 12 which equals $30,000. Now, to make sure they have enough to retire we need to multiply this value by 25 which brings us up to $750,000.

Now, they are able to withdraw 4% of this $750,000 portfolio in their first year which is $30,000. They can then divvy this money up by month. $2,500 per month (notice that this is the same amount we started with).

As time goes on the portfolio balance will continue to increase as the markets increase. And when utilizing the 4% Rule your portfolio balance should never bottom out. Ever.  So this means that if you had 300 times your monthly spending at age 20 it would last forever. It would work equally as well for someone retiring in their 40s, 50s or 60s.

Here is a calculation that shows the 4% rule in action:

We assume a 5% rate of return every year. Actually, we assume an 8% rate of return, but we remove 3% to adjust for inflation. This means that we can look at the cost of things in 20, 50 or 100 years in terms of today’s money. The graph above shows that the 4% rule will allow you to withdraw money comfortably for at least 100 years.

The 4% Rule could fail in turbulent economic conditions. But also take into account that as the economy grinds to a halt prices on goods will stagnate or drop. This allows you to effectively live on less while maintaining a withdrawal rate equal to your spending.

This simple math should give you a pretty good idea about how easy it can be to retire early. Generally, people are going to tell you they need millions of dollars to retire. But, you don’t need over $1M until you hit $3,333 per month in spending.

These calculations aren’t going to allow you to upgrade your lifestyle financially after you retire. They assume that you’re going to continue living a modest (or at least an equivalent) lifestyle for the rest of your life. These calculations also don’t take into account that you still have YEARS that you could earn more money (and probably will). A part-time job can offset the necessity of saving 300 times your monthly spending by a lot.

 

I’m not going to reinvent the wheel, so if you’d like more information about the 4% Rule, otherwise known as the “Safe-withdrawal rate”. Visit these fine sites:

jlcollinsnh – Stocks — Part XIII: Withdrawal rates, how much can I spend anyway???

MMM – The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”

Investopedia – Four Percent Rule Definiton

Withdrawal calculator via BankRate: Savings Withdrawal Calculator

Everything You Need to Know About Leaving the Middle Class

Since January of this year I’ve been sitting down at my computer a couple times a week and jamming my thoughts into my WordPress dashboard. For reasons I won’t claim to understand, more and more people find their way onto the blog every month to read what I have published.

Recently, the site has seen a huge uptick in traffic from Lifehacker and the AARP blog (due to a nice article by personal finance legend Jean Chatzky). These articles led to an overnight doubling of subscriptions, and brought many of you here.

Since there are a bunch of new readers trying to figure out what’s going on here, I think it’s a good idea to welcome everyone and reintroduce myself and the purpose of this site.

Should you be reading this site?

There are over 500 personal finance blogs on the Internet. I know this, because there were at least 500 blogs represented this year at FinCon (the conference for finance bloggers). Is Johnny Moneyseed the right blog for you? Are you better suited for one of the other 499+ blogs that aren’t this one?

I’m not going to claim to appeal to everyone. My goal is to encourage, and help individuals or families fund an early self-retirement through saving, investing and creating passive income streams. If you’re looking for a coupon site, or for a place to find “10 ways to save money at the grocery store” this is not that place.

However, if you’re looking for a way to figure out exactly how many years you’ll have to rot inside a cubicle, while learning how to reduce your overall working career, then this IS the place to be.

If you’re interested in leaving the Middle Class behind, with all of their Starbucks-fueled weekend shopping binges, and are interested in becoming a self-declared member of the First Class, this IS the blog for you.

“But what if I have debt?”

When I was younger I was pretty terrible with my finances. I was living paycheck-to-paycheck, and carried an enormous debt-load. After reading pretty much every finance book on Earth, my wife and I created a Debt-Attack Plan that helped us eliminate $60k of debt in 18 months.

We haven’t had any consumer debt in years, which is why I hardly ever write about it.

This site is dedicated to the pursuit of Financial Independence. With that, I will assume that most readers are either debt-free, or are preparing themselves for when they become debt-free.

What is this blog all about?

The primary goal of this site is to teach you to think differently about your finances. Forget EVERYTHING you’ve ever been told about money, unless one of these bloggers happened to say it.

You may think that eating gourmet food is expensive. You may feel like it’s necessary to be in constant competition with your neighbors. You may think that it’s important to get larger, more extravagent houses, as you make more and more money.  You may even think that you have the ability to save money when you’re buying stuff. This is all silly Middle Class thinking.

Over the past year I’ve made a lot of changes to my financial lifestyle. I saved myself almost $600/year by cancelling cable TV. I started selling stuff around our house that we had no use for. I reduced the cost of my daily commute by moving within a few miles of work. I decided that my children would be paying for their own college. And I started experimenting with new investment options. I even switched to a $10/month no contract cell phone plan.

You can start making changes in your own life by treating everyday like a recession is right around the corner. You can realign your values, and understand that there are alternatives to  40-hour workweeks. Eventually you’ll be able to save over half of your take home pay — especially if you can entertain the crazy idea of trying to earn more money.

Keep in mind that there are literally thousands of people who are interested in Early Retirement. This is one of the places that they come together, and provide an amazing, empowering support system to help people do things that most people wouldn’t believe is possible.

I can honestly say that even though my wife and I save around 70% of our post-tax income, we don’t ever feel like we’re suffering, or living a lower quality of life than anyone else. If anything, we are living a higher quality lifestyle by avoiding unnecessary expenses. We’ll be able to leave standard employment in less than 7 years. We’ll be in our mid-30s and living so efficiently there will never be a need to work ever again.

Welcome to the site. If you still think we can be friends then make yourself a nice cup of coffee, get comfortable, and enjoy!

Where is it all going?

When you start to feel your pants get a little tighter you may realize that it’s time to go on a diet. The same can be said about your financial situation; when times get tough you might start using a “money diet” (more commonly known as a budget).

But what is a budget? A magic money saving technique that will provide you with the extra cash you were unable to hold onto in previous months? No! Budgets, like diets, are fixes for temporary issues, but they don’t get to the root of the problem. Reduce caloric intake, lose unwanted fat. Limit the coffee shop trips, have more in the bank.

A standard budget spreadsheet will show all of the income received in a given month. Then bills are subtracted out, leaving you with your disposable income. That’s it.

More advanced budgets will break down disposable income into categories (ie. Groceries, Restaurants, Gas, Clothes). Let’s say you gave yourself $300 for the month to eat at restaurants. More than likely you will think to yourself “this money has already been allotted toward dining out so I might as well spend it all”.

The Moneyseeds were notorious with this, even until recently. We were just putting $600 into an account labeled “Want”, allowing us to spend that money freely throughout the month. It was great! We went to coffee shops, restaurants, department stores and bought whatever we wanted. As great as it was, we found ourselves spending just to spend. Were we failing our budget? Or was our budget failing us?

You’ve already been tracking all of your expenses to the penny. After about a month of doing this, you’ll have a decent idea of where you normally spend money. But, why do you purchase the things you do? Tracking your expenses doesn’t really answer that question.

Next to every transaction you should begin to write down the category that it would represent. An example would be:

Chipotle, $10.50, “Fast-food”

Notice that this is more specific that labeling it as “food”, because “food” could mean groceries, restaurants, or non-food grocery items like beer. The same idea would hold true with clothing:

Kohl’s, $20.43, “Clothes for work”

A separation may be necessary in heavy spending categories. Now you can see what part of your budget goes towards clothes for work, specialized apparel (golf shoes, dress for an event), or clothes to make you feel like the hotness in public.

Personally, I accomplish all of this by using Mint.com. I don’t write out a budget of what I can and can’t spend money on, but I do closely follow our transaction history. Since Mint is able to logically display all of your credit and bank accounts in one place, you can easily see what your big spending categories are, or in other words, where your problem areas are. Obviously Mint can’t help you log any physical cash transactions, but if you are one of those people that never carry cash, like me, then it shouldn’t be an issue.

The final step is to divide the total spent in each category by the value of one hour of life energy.

To pay my mortgage alone I have to spend 251 hours of life energy. Child care runs me about 126 hours of life energy. These are two inflexible categories, because their rates don’t change from month-to-month. But you can see how much life I have to give up to be able to pay for my house and our daughters’ day care.The mortgage for our home is about $2200 a month. We had calculated that my life energy is worth $8.75 (by subtracting the cost of working from take home pay). Just for this post we won’t take into account our other streams of income (Mrs. Moneyseed’s income, blog income, etc).

It’s eye-opening to see how hard you might work and how little it actually gets you. Next time you’re about to buy something, do the math out. How many hours of life energy are you willing to spend?

Your Money or Your Life: Part 2

This is a continuation from: Your Money or Your Life – Part 1

In Step 1 the authors asked us to think about all of the money we have ever received throughout our lifetime, whether it be from work, babysitting, tips, or even by illegal means. They encourage us to be as specific and thorough as possible through this process so we can truly come to terms with our past and our present financial situations. This is accomplished by calculating our current net worth (Assets minus Liabilities). So now we know how much money we’ve come in contact with, and how much of it we still have (if any). It is necessary to look at the past when planning for our futures, so we can have a clear understanding of what our relationship has been, up to this point, with money.

Being in the Present – Tracking Your Life Energy – What is money? Is it the paper in our wallets or the change in our pockets? Is it just a physical representation of something we can exchange for good or services?

In essence, money is worthless. True, you can buy things with money, but you can’t eat money, you can’t wear it, and in certain regions of the world it has no value whatsoever. When we sit down and truly think about what money is, we think about currency, about what we would spend it on if we had it, or what mistakes we’ve made with it throughout our lives. We don’t contemplate what money truly is.

In order to answer the question “what is money?” we need to take a look at it from multiple perspectives, since the concept of what it is seems to change at every angle.

  1. The Practical, Physical Realm – Here we have a ground level view of money where we learn about its physical form. What it looks like. What you can purchase with it. This is where monetary transactions occur. Shopping, opening bank accounts, buying a house, investing. All we really know about money from this perspective is that if we have problems, more than likely a personal void can be filled by making another purchase.
  2. The Emotional/Psychological Realm – This perspective has us look at how money makes us feel. Secure? Powerful? Grateful? Do you feel like money is evil? Or do you need it to be accepted among your peers? The truth about money brings us back to the original point that money itself is worthless. You may feel secure or powerful with tons of money, but would your money make you feel secure if you were being attacked? If money = power then how would you explain the power of Harriet Tubman, Ghandi or Mother Teresa? Surely they didn’t derive their “power” from money.
  3. The Cultural Realm – The concepts of “more is better” and “growth is good” sharpen into focus at this realm. We start to see how the economy as a whole functions. Inflation, recession, cost of living, and the laws associated with money are all apparent here. It is here that we decide what social class we belong in from the things we buy to the houses we live in.
  4. Personal Responsibility and Transformation – In the final perspective we discover what money truly is. We’ve already determine what it isn’t. It isn’t security or power. It has no intrinsic value, as in your can’t wear it or eat it. Without a society to assign a monetary value on it, it is as worthless as a common pebble. So what is it?

“Money is something we choose to trade our life energy for.”

In the developed world, money is what keeps us alive. We work jobs to bring in more money to sustain our lifestyle. If we don’t have jobs we beg, borrow or steal to “get by” however we can. In this sense, even most homeless people “make a living”. Depending on how old you are and what physical condition you are in will have an impact on your longevity. It can be estimated in hours, how much time you might have left to live. I, for example, am (for approximation’s sake) about 30 years old. Judging by the handy chart in the book, I have about 49.3 years left to live, or 432,164 hours.

About 430,000 hours to live, and you can assume that, like any normal person, I’m going to spend 1/3 of those hours asleep. Leaving me with about 290,000 hours of living, awake time. If I chose to work a 9-5 job through retirement (age 65) I’d be out another 73,000 hours.. Now I’m left with just over 217,000 hours of me time from age 30-death.

But, even though we only clock 8 hours of the job at a 9-5, we’re putting a lot more time and life energy into working. Think about all of the external factors that take away from your time and money when you go to work. Work starts at 9? Better get up at 7 so you can shower, get dressed, shave, eat breakfast, warm up the car, commute, sit in traffic, and arrive a few minutes before the clock hits 9. At noon you walk or drive to the nearest restaurant to have lunch with your co-workers. Back to the grind, you look up and the clock hits 5. Back into the car, back into traffic, burn that gas, get home and sit on the couch. Decompress. Beer? After an hour, you’re ready to deal with the house, the kids, the wife, the husband, your real life.

All of these factors take away from your actual hourly wage. You may be told you’re going to make $20 an hour, but when you factor in all of your job-related expenses (including your most precious expense: your time) then you aren’t making exactly as much as you were promised.

The following equation should make more sense:

(You weekly paycheck) – (Cost of appropriate work clothing, including makeup, razors, etc) – (Commuting costs, gas, wear and tear, time in traffic) – (Cost of child care or babysitter) – (De-stressing time) – (Time complaining or worrying about work outside of work) – (Cost of things to take your mind off work, dinners, movies, vacations) – (Sick time that was caused by office stress) – (Any other amount you may have to pay!) = Your Real Take Home Pay

Hours/Week $/Week $/Hour
Before Adjustment 40 $920 $23
Adjustments
Commuting 6 -$100
Child Care (Dropping kids off and picking them up) 4 -$255
Going out/Vacations 6 -$75
Total 56 hour work week! $490 after paying work related costs! $8.75 my real hourly wage!!

What the hell! I hadn’t actually done the math out until I made that table. I’m working “40 hours” every week for less than $9 an hour? If you were to calculate what one hour my life energy were to equal it would be the same amount as my hourly wage: $8.75.

15 minutes of my time is worth about $2.20. So, I thought I only had 73,000 working hours left until retirement, and I just realized that the number is closer to 98,000! What’s worse is that my 217,000 hours of me time left on Earth is really only 192,000. That’s a HUGE difference! 2.85 full YEARS worth!

The authors then tell us to track every expense in our lives, every purchase to the penny. To the penny. The reasoning behind this is that:

  1. If money = life energy, then you should be conscious of when you are utilizing it.
  2. If money = life energy, then you should treat it with the utmost respect. It’s the one thing you can never buy more of.
  3. You will realize how much you spend on certain things, such as convenience.
  4. It provides perspective when making purchases. If I buy a $2 cup of coffee, I am really spending 1/4 of an hour of life energy.
  5. Cheating here and there, or using round numbers, can lead to carelessness, the same way that cheating on a diet can.

Do the math to see how much your life energy is actually worth. Is it worth as much as the real energy that you spend to earn it?

Continue reading : Your Money or Your Life – Part 3

Your Money or Your Life: Part 1

I recently picked up a copy of “Your Money or Your Life” by Vicki Robin & Joe Dominguez at my local library. It came highly recommended from the financial independence/personal finance blogosphere. And for good reason!

The book describes the “9 steps to transforming your relationship with money and achieving financial independence“.

Making Peace with the Past – Have you ever sat down to think about how much money you’ve already earned over the course of your life? Probably a lot more than you realize. Think back as far as you can remember. Birthday money, part-time jobs, salary income, selling things on Craigslist. I haven’t officially calculated my to-date life-earnings yet, but I would ballpark them to be around $350k-$400k easily. Couple this with my wife’s lifetime income and we’re looking at three-quarters of a million bucks!

Keep a balance sheet going of all of your income, and total it (to the nearest penny, if possible) to start the process of making peace with the past.

Next, find out your true net worth. This can be accomplished by adding up all of your current real assets and subtracting your liabilities.

Assets include (but are not limited to)

  • Checking/Savings accounts
  • Brokerage/Investment/Money Market accounts
  • Houses/Property
  • Cars/Motorcycles/Other vehicles (KBB values)
  • The value of every item you own (how much you could get by selling an item on Craigslist or at auction)
  • Savings bonds, jewelry, furniture, etc.
  • Life insurance

Liabilities include (but are not limited to)

  • Mortgage
  • Vehicle loans
  • Personal loans
  • Gambling debts/IOUs
  • Student loans
  • Et cetera

Hopefully after all of your careful addition and subtraction you end up with a positive number. Whether it is positive or not, this number represents your current real net worth. If you were to drop dead today (and hopefully you don’t), your net worth represents the amount of money that will either be divided between your estate, or the amount of money that your relatives may have to pick up the bill for.

Now that you’ve been able to identify the amount of money that has come into your life and your current net worth, you can let go of any negative feelings you may have accumulated over the years about your financial life. It should become apparent to you that much much more money will find it’s way into your life. Probably more than you could have previously imagined.

You now have a choice to: continue down the path you’re on now, or start building your net worth.

How does your relationship with money affect your future plans?

Continue reading : Your Money or Your Life – Part 2

The Moneyseed 7 year plan

The current situation

My wife and I currently work in an industry foreign to most: the military. It’s a completely different type of work environment than most people would expect. The military, in essence, is just a business, just one that doesn’t produce anything for retail purposes. But other than that, it’s just like a normal job. We have bosses, meetings, coffee breaks, drama, and everything else that normal jobs have. Through our employer we have a few awesome benefits including:

  • Tuition Assistance (to help pay for college)
  • Healthcare (medical/dental)
  • Housing allowance (adjusted for physical location)
  • Job security (renewable contracts every 4ish years)
  • Retirement (for those willing to stay in for at least 20 years)

The 7 year plan

Mrs. Moneyseed’s contract runs out at the end of 2015. Mine is up almost exactly one year later. From that point, we either decide to renew our contracts, or seek employment elsewhere. We’ve planned our life to include both paths, but we’re on the optimistic side and planning to separate from the military after this tour. I will run through a year-by-year future-casting of our “7 years till retirement” plan. I’ll use round numbers, and a lot of estimations. So hopefully I’m as confident after I write this as I am right now. The plan has already begun. It started when this site started, January 2013. We aren’t starting from scratch, though, as we’ve spent a few years paying off debts and starting to save vigorously. We will assume a 3% growth in both income and expenses, 7% growth in savings annually, and starting with $70,000 already in savings/investments.

Year 1

  • Income: $125,000 (Joint, post-tax)
  • Expenses: $46,000 (Mortgage, child care, utilities)
  • Consumables: $16,500 (Food, gas, misc. spending)
  • Savings: $62,500
  • Total Saved: $139,000

Year 2

  • Income: $128,500 (Joint, post-tax)
  • Expenses: $47,500 (Mortgage, child care, utilities)
  • Consumables: $17,000 (Food, gas, misc. spending)
  • Savings: $64,000
  • Total Saved: $217,000

Year 3

  • Income: $132,500 (Joint, post-tax)
  • Expenses: $49,000 (Mortgage, child care, utilities)
  • Consumables: $17,500 (Food, gas, misc. spending)
  • Savings: $66,000
  • Total Saved: $303,000

Year 4

  • Income: $136,500 (Joint, post-tax)
  • Expenses: $52,000 (Mortgage, child care, utilities)
  • Consumables: $18,000 (Food, gas, misc. spending)
  • Savings: $66,500
  • Total Saved: $392,000

Year 5

  • Income: $140,500 (Joint, post-tax)
  • Expenses: $52,000 (Mortgage, child care, utilities)
  • Consumables: $18,500 (Food, gas, misc. spending)
  • Savings: $70,000
  • Total Saved: $494,000

Year 6

  • Income: $145,000 (Joint, post-tax)
  • Expenses: $40,000 (Mortgage, utilities)
  • Consumables: $19,000 (Food, gas, misc. spending)
  • Savings: $86,000
  • Total Saved: $620,000

Year 7

  • Income: $149,000 (Joint, post-tax)
  • Expenses: $41,500 (Mortgage, utilities)
  • Consumables: $19,500 (Food, gas, misc. spending)
  • Savings: $88,000
  • Sell house and downsize: $0
  • Total Saved: $758,000

Conclusion

$750,000 may not seem like enough money to retire on, especially when you’re only 35. Shenanigans I say! Without a mortgage, and having the children all in elementary school, our monthly expenditures will drop significantly. Plus, we now have the next 7 years to learn how to live on less. The next 7 years will also give me a better idea about what I want to do when I grow up. Maybe I will stick to writing, or maybe we will just become professional travelers. Maybe both. The good thing about this public forum is that it is not only a place for me to talk about my family and our finances, it’s a place for me to challenge myself. Every January from now on I will create a post to show our progress (and hopefully achievements).