financial independence retire early

Financial Independence Real Life Example – Josh

A buddy (let’s call him Josh) of Fire Fellow recently wanted some advice on his current path to financial independence.   Josh is currently single and lives in a high cost of living city. Here are some figures to start with:

Age: 36

Income (after taxes): $70,000/year

Savings:

  • Retirement investment account (tax deferred): $80,000
  • Tax free investment account: $50,000
  • Taxable investment account: $20,000

Assets:

  • $150,000 in equity of a home valued at $500,000

Debt:

  • $350,000 in mortgage for the above property

Expenses:

  • $50,000/year
    • $20,000/year in mortgage payments
    • $2,000/year for bills/insurance
    • $4,000/year in property taxes
    • $12,000/year for food
    • $5,000/year for transportation
    • $5,000/year for travel
    • $2,000/year for entertainment/shopping

Josh believes that based on his current annual expenses, he would need approximately $1.25 million to reach financial independence based on the 4% rule.  To achieve that amount, it would take about 19 years (assuming a 7% rate of return on his investments), which means when Josh is 55 years old.  Now, Freedom 55 is nothing to be unhappy about, but Josh simply cannot see himself working for another 20 years.  That’s why Josh came to the Fire Fellow for some advice.  His question is: “What changes should I make to be financially independent by 45?

The Fire Fellow looked closely at Josh’s financial situation and the first thing that stood out was Josh’s 28% savings rate of his after-tax income.  Josh is saving $20,000 per year, it’s not too shabby but could he do better?  If Josh is able to save an additional $8,000 a year, his savings rate would go up to 40%, and this cuts his years to financial independence by 5 years!  To retire by 45, all Josh has to do is reach a 55% savings rate.  I say that tongue-in-cheek since a 55% savings rate might be a challenging target for Josh.

So now let’s look at Josh’s expenses to see where he could potentially increase his savings rate. Unfortunately for Josh, his HCOL city is causing him spend $26,000/year in expenses related to his home, or 52% of his total expenses.  There might not be much he could do there. I questioned Josh’s spending on food as $12,000 seems high for a single guy.  He told me he basically eats out every single day and doesn’t cook at all.  Here is where Josh could potentially reduce his spend. The Fire Fellow continued to critique Josh’s expenses and at the end arrived at a plan for him:

Josh’s target expenses: Total: $37,500

  • $20,000/year in mortgage payments
  • $2,000/year for bills/insurance
  • $4,000/year in property taxes
  • $5,000/year for food (buy groceries and cook at home on weekdays)
  • $3,000/year for transportation (switch from BMW to a Honda)
  • $3,000/year for travel (cut down on travel)
  • $500/year for entertainment/shopping (eliminate the need to add more material goods)

If Josh adheres to this plan, his savings rate goes up to 46.5%, which means he is now 7 years closer to his financial independence target. It might not be quite the Freedom 45 that Josh wants to achieve, but increasing his savings rate just got him that much closer.  The other variable we didn’t discuss here is Josh’s income.  If he could continue to grow his career and pursue higher salary positions, his journey to FI could get even shorter.

As usual, if you have any questions, Ask the Fellow!

 

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