Unfortunately, $5 million is barely enough to retire early with a family in a large city. It might sound ridiculous to you. But I assure you that thanks to inflation, retiring early is now tougher than ever before. Not only do you need to accumulate more wealth, you also need to lower your safe withdrawal rate in retirement.
Half the United States population living in expensive coastal cities and other high-cost areas of the country. Yet, there is somehow disbelief and even outrage a family might need multiple millions, let alone $5 million dollars, in order to retire early comfortably.
I recognize the attractiveness of lower cost areas, hence why I’ve aggressively invested in the heartland of America. Migration to the heartland is a multi-decade trend I want to be a part of. The global pandemic has really accelerated the work from home trend as well. There is clearly a “fanning out” of America.
However, I hope more folks can also recognize some of the reasons why half the United States population lives in higher cost areas as well. Some of the reasons include: higher pay, more job opportunities, greater diversity, sometimes better weather, amazing food selection, and family to name a few.
An Average Retirement Life With $5 Million
In my after-tax investment amounts by age for a comfortable retirement, I included a more aggressive after-tax investment chart for those who want to retire in an expensive city like San Francisco, New York, Los Angeles, Washington DC, Boston, San Diego, Seattle, Miami, or now Denver.
Again, not everybody wants to or can relocate to Des Moines and leave their friends and family behind. As a refresher, let’s review the high cost of living retirement chart.
If you retire at 40 with $2,500,000 in after-tax investments, you’ll only be able to generate $100,000 a year in gross income or $75,000 in after-tax income based on a 4% rate of return.
Is this enough? Notaccording to the Department of Housing and Urban Development, which considers $100,000 a year “low income” for a family of three living in San Francisco, for example.
Yes, you could potentially earn a higher rate of return than 4%, but when you’re counting on only your investments to support a family, it’s better to have a more conservative portfolio.
Private grade schools and private universitiesgive financial aid to families who make $100,000 a year or less per child. Why is that? Because they agree with the Department of Housing and Urban Development.
Living Off $5 Million In Retirement
Based on simple math, $5,000,000 in after-tax investments at a 4% annual return will generate $200,000 a year in gross income. A more conservative yield or appropriate withdrawal rate is 3%. But let’s go with 4% anyway.
To give you an idea of what $200,000 a year in passive income can cover, let’s profile Jerry, a Financial Samurai reader’s budget. Jerry is 45 years old, has a 8-month-old daughter and a non-working spouse named Linda, 38. They’ve lived in Los Angeles for the past 20 years. Ironically, Los Angeles is considered one of the happiest cities in America.
Both have decided to retire early in order to spend as much time as possible with their daughter. After both negotiated severance packages equal to $100,000 for Jerry and $60,000 for Linda, they have a combined net worth of roughly $6,300,000 if you include the $600,000 in equity they have in their primary residence, and $700,000 in their combined pre-tax retirement accounts.
Their goal is to never go back to full-time work again and perhaps do some part-time consulting once their daughter goes to kindergarten in five years. Neither parent is doing any sort of side hustling at the moment,contrary to most early retirees I know, including myself.
I’ve cross-referenced all the numbers based on my family’s own household expenses over the past year since we have a 18-month-old toddler and also live in California. All the expense line-items are realistic, if not a little conservative.
Please review J&L’s expenses below.
Retirement Income Analysis
One of the biggest benefits of earning passive investment income versus job income is a lower federal marginal income tax rate.
J&L’s $200,000 in investment income is taxed at a 10% effective federal long term capital gains rate (15% marginal) versus 21% effective (25% marginal) if it had been earned through employment.
After paying an effective 7% (9.3% marginal) in California state income tax, Jerry and Linda’s effective federal + state effective tax rate is only ~17% versus ~27% if they were W2 employees. Further, they don’t have to pay the 6.2% FICA tax on the first $128,700 in income per person either.
Due to the State And Local Tax (SALT) deduction being capped at $10,000, they’re losing out on at least $3,000 in tax refunds they would have received before Trump’s Tax Reform Act was passed. It is unclear how much the $25,900 standard deduction (2022) will offset HCOL homeowners until taxes are done.
Because Jerry and Linda want to be completely present parents, they’ve promised not to do any activity to generate money at least before their daughter goes to pre-school. They’re burnt out anyway. As a result, they must be disciplined and stick to their budget if they want to remain retired.
Related: Surviving Off $400,000 A Year President Biden Deems Rich Enough To Raise Taxes
Retirement Budget Analysis
Kids Are Expensive (~$36,000/year)
Retiring early without kids is a walk in the park compared to trying to retire early with kids. Not only do kids cost a lot of money, they also require a lot of your time and energy.
The 10 hours a week of childcare assistance is extremely important so J&L can keep their sanity. Sometimes they use that time to go on dates, other times they use those hours to have “me time” to get away from each other. Being stay at home parents 24/7 is no joke. But it’s getting a little easier every month as their daughter sleeps a little better through the night.
J&L take their daughter to swim class twice a week and gym class once a week. Drowning is one of the leading causes of accidental deaths for children under 5.
On the other days, they go to the local science museum, where they have an annual family membership for $150. They also go to the zoo, where have a $150 annual family membership.
Despite being able to each contribute $15,000 a year to their daughter’s 529 plan, they can really only afford to contribute $11,000 each if they want to maintain their lifestyle.
They don’t believe making their daughter a 529 millionaire is a particularly wise move given the possible lack of motivation so much money might cause. Although, sending their daughter to public school in order to have the option to make her a millionaire sounds brilliant.
J&L will start their daughter off in public school to save money and see how she does. If they find she needs a smaller environment with a different style to thrive, then they will consider paying for private grade school.
Their #1 goal is give their daughter a wonderful foundation so she can be a strong and independent woman.
Property ($4,794/month)
Having a gross monthly property cost of around $4,794 for a single family home in West LA is reasonable believe it or not. J&L live in a modest 1,600 sqft, 3 bedroom, 2 bathroom home at the edge of Santa Monica.
Their house is assessed at around $1.3M, or $400,000 below the median priced home in the area since they are further inland.
J&L have been thinking about upgrading to a remodeled house closer to 2,500 sqft. But such a house in their neighborhood would cost around $2M. They read my Buy Utility, Rent Luxury strategy for real estate investors.
As a result, they have decided to keep costs low and earn a higher rental yield in other parts of the country through real estate crowdfundingand aristocrat dividend stocks instead.
Healthcare Premiums ($1,650/month for a platinum plan)
According to the Kaiser Family Foundation, the average annual premium for employer-based family coverage is $19,616 or $1,635 a month. You can see the breakdown of what the average employer and worker pay in the chart below.
Given J&L no longer have jobs, they bear the entire cost of health insurance. With an 8-month-old daughter, they’ve decided not to mess around and maintain a gold health insurance plan.
Their daughter not only sees a pediatrician every three months, but also an ophthalmologist every three months. She has ocular albinism and strabismus (intermittent exotropia like Da Vinci).
They need to make sure their daughter’s prescription is correct to help her eyes align properly during development. After about age five, the neural pathways that go from the brain to the eyes tend to hardwire.
Health insurance is clearly one of the largest and most necessary expenses early retirees must consider. You could get Affordable Care Act subsidies if your household income is below a certain threshold. However, J&L need the income to live and don’t want to draw down principal so early.
For reference, my family of four is paying $2,250/month for a Gold Plan in 2021. I expect our health insurance rate to go up at least 5% a year, forever.
Food ($1,800/month)
J&L value their time more than anything. As a result, they are happy to pay $5 for food delivery and save 1-2 hours cooking in order to spend more time with their daughter. Los Angeles does have some of the best food variety in the country. They also want to eat healthy, which costs more.
Finally, J&L supplement their grocery shopping with Amazon Prime about once a month as well. They still prefer doing their own grocery shopping because they’re better at picking out fruit than the delivery guys.
If there’s one thing we’ve learned during the global pandemic, it’s that overweight/obese people are more susceptible to the virus. Therefore, spending more money on quality food is worthwhile.
Another thing worthwhile is getting affordable term-life insurance to protect your loved ones and dependents. Check out PolicyGenius for the best life insurance rates. There is no obligation and it is free to check.
If there’s one thing we’ve all learned during the pandemic, it’s the importance and appreciation of life.
With PolicyGenius, my wife was able to double her life insurance coverage and pay less. All these years, she thought she was getting best rate with USAA. However, life insurance rates are so opaque. PolicyGenius helps shine a light on the best rates.
Non-essential Expenses
J&L hardly ever buy new clothing for themselves. They have no need since they don’t have to look good in front of anybody for work. If they need to look fancy, they’ll wear their old work clothes that still fit 10+ years later because they have maintained their same sizes.
J&L feel their $330 sports club expense is well worth it. Los Angeles has a huge fitness culture. The club provides a physical and social outlet three times a week. They’ve made many friends from the club. Without their health, their wealth is meaningless.
Finally, they’ve decided to stay local for the first two to three years of their daughter’s life. They have so much of Los Angeles, Newport Beach, Big Bear, and San Diego left to explore as a family. Besides, they agree with me that extensive travel before the age of three is a waste of time since their daughter won’t remember a thing when she’s older.
Budget Adjustments If Necessary
J&L could cut their expenses by contributing less to their daughter’s 529 plan. They could order less food delivery. If they spend less money on childcare, they’d free up an extra $5,000 – $10,000 a year. But they’re not sure the additional savings would outweigh the decline in their lifestyle.
They could move to a lower cost area of the country, but they’d rather stay warm all year round, rather than face brutal Midwest winters.
Further, as a Latino (Jerry) and Asian (Linda) family with a mixed-race daughter, they prefer the diversity of LA that can only be matched by even more expensive places like New York City or San Francisco.
This feeling of comfort is underestimated by the majority. Diversity is one of the reasons why people are migrating to California from the heartland.
See: Main Financial Blindspots On The Road To Financial Independence
Instead, it seems better to just continue sticking to their budget. Thenearn supplemental income if they need more money or want to spend more money.
Jerry worked in management consulting for 23 years and Linda worked in digital marketing for 15 years.Prior to retiring, Jerry was earning a base salary of $300,000 + $100,000 – $200,000 in bonus. Linda was earning a $180,000 base salary + $50,000 in stock compensation.
Every $10,000 of supplemental income earned equates to $250,000 in after-tax capital earning a 4% rate of return. J&L could easily consult part-time for a combined 10 hours a week at $100/hour. He would earn $52,000 a year if one of the following concerns come true.
J&L’s financial concerns in early retirement include:
1) What if they want and have another child? They will need to reallocate or earn at least another $20,000 a year for basic expenses, college savings, and childcare help.
2) What if the stock market and real estate market roll over? Their $5 million after-tax portfolio could easily shrink by 10% – 20%. This would leav them with passive income of only $160,000 – $180,000. That’s not enough to fund their existing lifestyle with one daughter.
3) What if their daughter has future unknown medical issues? Nobody really tells new parents this, but it may take years before you know all the issues that need addressing. For example, autism usually only starts showing signs between 18 – 36 months old.
4) What if one or all of their parents get sick and need to move in with them? All parents are still alive, but not all have long-term care insurance. Housing one or two parents will require extra funds.
Related: How About Retiring On $2 Million In An Expensive City?
Can Always Go Back To Work
Worst case, either Jerry or Linda can go back to work full-time, or they can start eating into their after-tax retirement principal until their daughter goes to kindergarten. This is what some people who fear retiring early forget. You can always return to your old occupation!
Again, please be aware the vast majority of people who espouse FIRE are working hard to make extra income or have a working spouse.
Even though my wife and I are also stay-at-home parents, I continue to publish 2-3X a week on Financial Samurai partly because I enjoy writing, partly out of habit for the past 10 years, but also because this site makes a healthy amount of revenue.
While J&L have settled on $5 million in after-tax investments to raise their family, we’re shooting for more just in case our boy doesn’t win the SF public school lottery. My fingers and mind still work, so I might as well keep going until they don’t.
Different Strokes For Different Folks
Despite detailing the numbers and providing context around J&L’s financial situation, I’m sure there will continue to be disbelievers that $5 million or more in after-tax investments is what’s required to live a comfortable, but not extravagant lifestyle in a high cost location.
It’s also become a national pastime to hate the rich, no matter how hard or long they studied in school, no matter how many hours they’ve worked a day, no matter how many risks they’ve taken to provide a better life for their family, and no matter how much in taxes they pay.
Like how more international travel and the mastery of a second language can help to create more harmony, hopefully, this article can help lead to more understanding by those who do not.
$5 million is a lot of money. But the composition of a $5 million net worth matters as well. If the $5 million is all tied up in your primary residence, then you certainly won’t have enough capital to generate enough passive income for retirement.
If you want to retire early with a couple kids, please shoot to have at least $5 million in invested capital. This is excludes your primary residence. Interest rates are at rock bottom levels. Returns might not be as good as they have been.
If you can’t get to $5 million before retiring with kids, then at last find ways to generate supplemental retirement income. Find something you will enjoy doing that makes some extra money. This way, you can cover the gap and do something meaningful in retirement.
Recommendations For Retiring Early And Boosting Wealth
1) Stay on top of your finances like a hawk.
Track your finances for free with Empower. Run your numbers through their Retirement Planner. Check your investments for excessive fees. Make sure your net worth is properly allocated.
You can do all this for free with Empower. Don’t be one of the millions of Americans winging it on their road to financial freedom. If you have $5 million or more, all the reason why you should track your finances closely.
2) Refinance your home before retiring.
If you have a mortgage, definitely refinance before retiring. Once you lose your steady W2 paycheck, you become dead to banks. You will need at least two years of 1099 income to be considered for a refinance.
Take advantage of low interest rates by refinancing with Credible. Credible is an online mortgage marketplace where qualified lenders compete for your business. You will receive free, no-obligation mortgage quotes in minutes. I refinanced to a 2.25% 7/1 ARM with no fees and couldn’t be happier!
3) Invest in real estate to benefit from inflation.
It’s hard to become a millionaire simply by saving your income. Income growth has simply not caught up to housing costs, college education costs, and health care costs. See the inflation chart above again as evidence. Therefore, in order to benefit from such rising costs, you should invest in real estate.
My favorite way to invest in real estate isthrough real estate crowdfunding. I’ve invested $810,000 in real estate across the heartland of America. It’s great to take advantage of faster growth, lower valuations, and potentially higher returns. Once I became a dad in 2017, I wanted to dramatically simplify my life.
Today, real estate generates roughly $200,000 of our $310,000 annual passive investment income. It is our key asset class to remain retired / stay-at-home-parents to two young children.
Two favorite real estate investing platforms:
My favorite real estate crowdfunding platform isFundrise. They are one of the largest and oldest platforms having bee found in 2012. Fundrise smartly created private real estate funds to earn income 100% passively. For most people, investing in a diversified eREIT from Fundrise is the smart way to go. Fundrise is free to sign up and explore.
If you are an accredited investor, take a look atCrowdStreet. CrowdStreet enables you to invest in individual commercial real estate deals mostly in 18-hour cities. 18-hour cities are faster growing cities with lower valuations. If you have a lot of capital, you can build your own select real estate fund with CrowdStreet.
Due to the rise of the work from home trend thanks to technology and the pandemic, there will likely be a multi-decade trend to lower cost areas of the country. Real estate is the ultimate inflation hedge as rents and property prices go up.
Everybody I know with $5 million or more in net worth invest in real estate. Inflation is elevated post pandemic at around 7%. Therefore, investing in real estate to capture rising rents and properties prices is a wise idea. With negative real mortgage rates, demand for real estate should continue.
4) Read The Best Selling Personal Finance Book
If you want to retire earlier with a family, purchase a hard copy of my new Wall Street Journal bestseller,Buy This, Not That: How To Spend Your Way To Wealth And Freedom. The book is jam packed with unique strategies to help you build your fortune while living your best life.
Buy This, Not Thatis a #1 best seller onAmazon. By the time you finish BTNT you will gain at least 100X more value than its cost. After spending 30 years working in finance, writing about finance, and studying finance, I’m certain you will loveBuy This, Not That.
Why $5 Million Is barely Enough To Retire Early With A Family is a Financial Samurai original post. I’ve been writing about achieving financial independence since 2009. Here’s how one man retired early with $4 million and two kids. It can be done! But he also has a working spouse.
Comments
Henry saysI don’t understand. Don’t they retire to spend more time with their daughter? Why do they need to send their daughter to day care? To social with other kids? If that’s the case, one of them should keep the job.
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- Mike says
Also weird that they don’t pay off the mortgage
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- Financial Samurai says
In a negative real interest rate environment, it’s best to hold onto your debt. Inflation is eating away at the cost of the mortgage.
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- pete dowap says
If I had $5 million, I would buy QYLD and get 12% dividend . With income of $600,000, I will move to Texas or Florida with 0 percent tax and much more lower cost of living. If I want mild weather , I will move to North East TN, or Ajijic , Mex and Live like a King. Please let me know if this doesn’t make sense.
See AlsoHow Much Interest Can I Earn Safely on $5 Million?Can You Retire With 5 Million Dollars? - Retire by 405 Million DollarsReply
- David says
Okay, I’ll finally bite and add a comment. You can count me among those arguing that this is an extravagant lifestyle. I read almost the entire page without realizing we were talking about an early retired couple, and my jaw hit the floor when I finally did. I just assumed they were working.
I’m sorry, but anything more than a babysitter for a couple of hours per month for the occasional parent date night is pretty much by definition extravagant. Being able to have children, not work, and still afford to have someone take care of them while parents run errands throughout the week is practically royalty. Many working families would kill for that level of paid child care, and often have to rely on friends on family or coordinate work schedules to raise kids. That anyone can think this is just barely comfortable blows my mind.
Then we get to the staycations, entertainment, toys, classes, gym memberships, etc. Any one of these line items by itself is no big deal, but such a collection of recurring expenses is what upper-class families spend for the convenience of being able to enjoy these things while working. A $600 staycation per month is way more than what most high-income working families take, and this retire family almost certainly has the option to take advantage of off-peak pricing for hotels and such. As for the kids’ activities, I would have assumed the presence of the parents would have offset some of the potential spending, as parents often use various clubs and sports to act as a sort of pseudo-daycare, but I guess not. Obviously, I wouldn’t want to deny the kids good activities for their enrichment, but with both parents retired early, I feel like a certain amount of lessons, going to movies, etc. could be offset by going to the park, working out at home, watching Netflix, etc.
Speaking of Netflix, their subscription budgets are well beyond comfortable. I just got done renewing an Internet-only package with Comcast for $30 per month, which was actually reduced from our previous $35 per month despite getting an upgrade in speed, and it includes Peaco*ck Premium. We also subscribe to Netflix. We have access to more content than we could possibly consume in a lifetime. Our Mint Mobile phone plan also costs $15 per month per line.
Also, what kind of early retirees contract out landscaping? But okay, whatever, they have the passive income to justify such expenses. I just challenge the notion that anyone who has tons of free time on their hands yet can easily afford to hire landscapers on a recurring basis is barely comfortable. That’s very comfortable. Likewise, there are certain expenses like life insurance and $200 per month for clothes that they could almost certainly cut given that they’re not working. The point of life insurance is to make sure their kids would be taken care of in the event of their death. With such a large nest egg, that’s no longer risk, so they’re essentially just paying the insurance the actuarily disadvantageous premiums just so their kids can be filthy stinking rich in the off chance they die early, which they should be doing everything in their power to prevent given their abundant time and resources to care for their own health. I probably spend less than $200 per year on clothes as a working adult, let alone per month. Granted, I’m a slob engineer, so that’s low for a manager type, but come on, what are these people, fashion icons of the FIRE community?
Lastly, I wouldn’t really bundle 529 savings or mortgage payments into the same category of living expenses. The mortgage is easy; not only does a big chunk of their payments go to equity, but it will eventually be paid off, and quite frankly, they had the means to pay it off with a couple more years of work, but they have such a large nest egg that they could comfortably (again, there’s that key word) retire early and just keep making payments without worrying about getting foreclosed on. In other words, the recurring spending isn’t really a necessary living expense, they could just pay it off today and eliminate the debt while continuing to enjoy all the other things they spend on. The 529 is a bit trickier to dismiss because technically, those funds are earmarked for upcoming expenses, but ultimately, that’s really a finite expense per child, not a permanently recurring expense, and they’re just front-loading the savings for it. I don’t think you can honestly argue that they need to keep saving that amount in perpetuity just to be comfortable, especially when you consider that not all parents completely pay for their children’s educations, and there are always loans and scholarships.
Please don’t get me wrong, my intention is not to criticize this family at all. They did all the right things and are spending money they can comfortably afford. They deserve everything they have. I just don’t think this is anywhere remotely in the realm of middle class. These people are firmly in the wealthy category. They are spending more in early retirement off of purely passive income with no side hustles than most working families. There’s an inherent difference between having to work to afford something and not having to work. I don’t know that there really is an apples-to-apples comparison to be made between a comfortable retired lifestyle and a comfortable working one; all else being equal, the retired one is significantly more luxurious. I think there’s this myth that all these things are needed just to be comfortable, and that they are just standard parts of the American middle class lifestyle, but I remember growing up seeing how hard my parents in particular had to work to concurrently provide about half the vacations and luxuries this family enjoys on an annual basis. It has never been the case that these things were abundant and free and people could just expect them as part of normal life. Most families have to work long hours at reasonably high paying jobs to spend this kind of money while working. This family spends as much as they do without working. I just don’t think there’s any comparison. They are not scraping by. If they picked up even a minimum wage part-time job just to supplement their income, they would be rolling in extra cash and looking for ways to spend it (heck, they’d probably spend less on staycations as a result, saving more in the process). I’m not going to cry for their financial struggles any time soon.
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- Financial Samurai says
All good points. And sorry if I didn’t make it clear from this post’s title that this was about an early retirement couple.
They are not scraping by. Nor do they want anybody’s pity. I’m just highlighting what things cost in a big city with kids. And with inflation going up and interest rates so low, costs are going higher while it’s harder to generate more passive income.
One recent post I did write was about Investment Returns surpassing Active Income in this bull market. As a result, the need to work is becoming less and less. Check it out.
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- justin says
I think the expenses are on target. One thing under-estimated was child activities as they get older, “club sports” run $100-$300 per month when they are teens and the medical plans have high deductibles with HSA which forces an extra emergency fund.
I just started with Fundrise but am very happy so far, IRA and cash accounts.
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- Bob Barker says
I hardly claim to be an expert at any of this, but my financial advisor is one of the top american express financial advisors in San Diego, and my best friend. So lots of casual conversations where honesty is assumed. He is aware that i invested early in Cryptocurrency and am currently sitting on about 6.5 million. At the peak of the bull market I was sitting on $20 million.
I opted to ride that and wait for the next market cycle, so for the past 4 years we’ve had this same discussion over and over and over: what percent is reasonable for me to assume I’ll be able to live off of, as far as passive income. The number has always been 6% after tax. I believe he bases this on the narrative that the S&P 500 has averaged 10% a year for the last 100 years or so. That means sometimes its higher (up to 15%) and sometimes lower (down to 5% perhaps).
So if we assume 10%, and then assume taxes, you land at 6% to be conservative. At that point, anything LOWER than 6% becomes optional, if I wish to add more to my invested amount each month by NOT taking it out as a distribution. In other words, I keep seeing this 4% number being thrown around, but it does not seem to match anything he’s told me. He says he tends to take 5% for himself, but that is only to offset inflation over decades.
TLDR: 4% seems abnormally low, at least if you’re banking on 100 years of S&P 500 performance history. I should also note – everyone laughs at me when I tell them I’d just throw it into the S&P because they’re consistently doing higher returns on other types of relatively safe investments.
Lastly, if I manage to get back to $20m and cash out, that’s roughly $100,000 a month in income at 6%. I can’t imagine I would NEED that much money every month and would see myself likely not withdrawing even huge chunks of it each month anyway. So id probably be hovering around 2-3% at the end of the day without even thinking about it. But it would really REALLY bum me out to hear that I should be redoing all my caclulations based on a measly 4% passive income…. Please say it aint so!
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- Financial Samurai says
Sounds great. You’ve got to do what you feel comfortable doing. If you’re happy putting all your net worth or most of it into cryptocurrency, then more power to you.
Depending on your age and your family situation and your desire to provide, I would think $20 million should be enough.
The first rule of financial independence is to never lose money, especially if you have a pretty large net worth.
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- Sloane says
I’d like to know if you ended up cashing out or riding further. Would have done well since sept to now.
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- Ronald Lawrence says
My wife and I live in Oxnard California, a couple miles from the Ocean. We purchased our home in 2010 when the market in our area was substantially lower than today. We live in a 1963 era 1,630 square foot 4 bedroom 2 and a half bath home with a 2 car garage, on a 6,000 square feet lot. We paid just over $300,000 for our home and now homes in our neighborhood are in the $560,000 range. Both my wife and I work for a hospital. We have a household income of $147,000. I have been at the hospital for over 22 years and during that time have contributed at least 6% of my income into our 403B retirement account. I am now contributing 15% of my income with an additional 5% employer match. My wife contributes 8% of her income with a 5% employer match. We have 6 children, with three of them out of the house, one completing his last year of college, and two in High School. As we started late in life with our retirement planning and did not buy the house until I was already 45 years old, we feel we are behind with our goals. Our fault really. I take responsibility for that.
Our goal is to work until age 75. At that time our home will be paid off. Student loans will be paid off. Our financial planner tells me that we are on track to meet our goals of having a retirement income that will allow us to survive. I am concerned about that. I don’t want to survive, I want to thrive. I also see a realistic need for a minimum of $5 million to live here in Ventura County on the Coast. Even in Oxnard is is not cheap to live. My thought is that I may have to continue to work longer. I have no problem with that as I love what I do. My work gives me great enjoyment. I could continue doing what I do for the next 30 years and would be fine with that. My parents are in their 80’s now and living an amazing life.
Additionally I have the skill set to run a part time business. I started as a locksmith at the hospital and moved into Project Management. I have over the years worked as a locksmith on the side on my own. It is still an option to me. Additionally I have thought of starting a side business and growing that as a retirement business, having employees run it while I work occasionally. I have options.
My main idea for commenting is that we on the coast do need more money to maintain a lifestyle that will keep us in a location that we love. And no Florida is not like California. We have few bugs or animals that will kill you in my part of California. Arizona is too hot for us. We want to stay right where we are.
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- Donald Mountford says
While I accept expenses vary by location, we live in Connecticut, some of the budget assumptions seem strange. Childcare? Why retire early to spend time with family if you’re not with them? We raised our children while working and except for paying for preschool or the occasional babysitter for a night out never wanted or needed to pay for daycare? and 20k for groceries? Go to a farmers coop. Healthy, giving back to local community. I honestly don’t think I could spend that much on groceries if I wanted to? Our family of 4 spends 1/2 that including take out and eating out. Other costs seem in line but I made sure to pay off mortgage before retirement to eliminate that bill and sleep better knowing that even in a recession, our home would be covered..
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- Jeremy B says
If any of the bad things you mentioned happened to decrease their passive income, all they would have to do is move to a lower cost big city like Atlanta or Orlando. Still plenty to do there, but would need to make much less in passive income.
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- Ken says
I ended up at this post after seeing the headline on CNBC “42-year-old millionaire: I tried to retire early at 34—but failed. Here’s what went wrong”. I didn’t think the reasons would be financial.
I retired at 45 five years ago and started reading MMM for a while. Had heard of Financial Samurai there and elsewhere, but never checked it out. Based on above, almost seems to be the antithesis of MMM. I am not an MMM devotee and could not go to the extremes suggested there, but a decent bit of info and how to think about things.
The only way I would live in SF, LA, or NYC is if I moved there when single shortly after grad school. As I told summer interns, if you want to live in NYC, do it right away or you will never think it is worth it ….the higher pay will very rarely make you whole vs. other areas.
That said, I think the main issue with the sample budget is needs vs. wants and necessity vs. luxury. I’ll take living in SF or LA as non-negotiable, but being able to move (Honolulu as Sam mentions) can alter your view a lot.
1) Healthcare – young, healthy and lots of wealth – why pay for a Platinum plan? Get a silver and cover the extra costs out of pocket when you do need to go.
2) Childcare – two non-working parents spend $10k? Wow. This is a luxury. Perhaps spend 4k and 4 hours per week and take turns watching with friends .watching their kids.
3) College savings – California has one of the best public university systems and cheap, too, compared to many states’ public programs. I’d plan to invest the equivalent of the most expensive in-state school. Say it is currently 120k, save $6.7k per year and let growth cover inflation. Also, people rarely pay sticker price at private schools. You may think that is ridiculous, but even if you want to pay highest, $16k per year is enough.
4) Food budget and entertainment budget is high.
5) people can and most do spend down their assets at some point. My goal is not to leave a ton of money to “heirs”.
Others made comments that echo my thoughts.
1) agree with poster from Vietnam – kids used to just play without much adult attention after age 8-10 or so. May not be possible in SF.
2) agree with poster from Maryland – the big coastal cities are not the only ones that offer diversity.
3) agree with thoughts on Florida – several areas with culture and diversity. Zero income tax, sunny skies, low prop tax, great healthcare (due to all the elderly).
I think the title should be adjusted to “living a very comfy life”. And, those not in HCOL areas will never be able to understand the thinking in this article and many of the comments. These are all choices. Lastly, someone with 2.5M who generates 100k shouldn’t pay anywhere near 25k in taxes. After 24k deduction, they don’t even get out of the 12% bracket and some should be in un-taxed accounts, e.g. Roth, and some taxed at zero, i.e. dividends and LT cap gains.
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- Renee says
Spot on…particularly your comment regarding taxes.
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- Derek says
I just don’t want to end up like MMM, living on scraps or pretending to live on barely anything while getting divorced with a young son still at home.
You only have one life to live. You might as well Live your life to the fullest.
Why not live in a great area with great area, culture, and food? Half the country is submerged under snow during winter.
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- Iceman says
This post focus on people who don’t want to compromise or make good financial decision. $49k of the budget you show is for a mortgage and childcare due to young children. I don’t think if you are carrying a mortgage and your kids are not in public schools you should be “retiring”.
Without those expenses this family would have a affluent lifestyle with $49k extra a year.
If you want to be a FIRE your assumptions on budget should be different.
Unfortunately there are too many ways to get to this outcome – so it’s tough to provide an analysis that is helpful. In the end, if your goal is FIRE then it’s not the normal path so you need to be creative and flexible – most of all it’s a state of mind… If you want the rat race then keep working or get crazy rich…
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- Todd E says
I am 53, with $4MM in investments and $2.3 MM in equity in my house in the San Jose area which I bought for $650K in 1998 but because I live less than a mile from the new Apple headquarters, the value ballooned. Proof that sometimes it is better to be lucky than smart. My last child graduates college this year and while she will need a little support in grad school, it won’t be the $65K/year I was spending on her private university – more like $10K to help her with living expenses so she doesn’t have to go into debt.
I thought that I could retire early with little risk given I pay $1800/mth ( at 3.5% ) with only $280K left on my mortgage and $700 property taxes, which is cheap by the standards here, especially given the example you used above. The other important point is that many people here are “house poor”. It is expensive to buy a house but the equity you build up in your house has value in retirement IF you are willing to move to a less expensive location, or in my case, move from a 2800 square foot house to a town home or condo in the area and take $1MM or so of equity out of the house or even more if I were to move back to Colorado ( which is where I used to live).
So if I just use your example, but take out the college savings plan and the $2K less per month I pay for my house than your example, I am looking at roughly $120K per year in expenses vs the $166K in your example or ~25% less per year. Does that mean I could retire on $3.75 million which is 75% of $5MM ( note I am not taking taxes into account here which should help my argument)
However, when I read posts like this one, I feel like I can never retire. It feels as if a $6.3MM net worth, which would certainly put me in the top 1-2% of net worth in the country, is still not enough.
Perhaps the keys to this post are “WITH A FAMILY” , “RETIRE EARLY” and “COMFORTABLY”. Or perhaps I am missing something? But I read your post and the replies and get the feeling that I still haven’t put enough away.
I would love to hear other peoples thoughts on this. When is enough enough?
Thanks,
Todd
P.S. I am not planning on retiring because I like the intellectual challenge of my job. But I work in Silicon Valley and there are a lot of a-hole bosses around so just knowing that I could retire would make me feel and sleep better.
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- Financial Samurai says
I think once your last child graduates, you can retire no problem and live a comfortable life, unless, they become adult kids who ask for continuous handouts. Then that might be a problem.
$4M at 3% produces $120K/year in passive income pre-tax. You probably won’t need to spend as much as you think. But if you need to spend more, you would eat into principal.
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- Brett says
if you spend down some
principal in the later years you’ll be fineReply
- William says
Looking at this (the high cost city analysis) I have a couple observations:
1) Are they not saving anything for the kid’s college education? I don’t see a 529 plan contribution.
2) I thought the 4%/3% rule allowed you to withdraw without touching principal – presumably they could draw down on this a little more aggressively and have less in their estate when they pass on.
3) The assumptions are that they are only drawing from their taxable account. At some point after 59 they are going to be able to take $ out of their taxfree accounts. This analysis seems to ignore that – can’t they take out 4% from the total invested cash rather than just the total of the taxable account?
4) The “total net worth” doesn’t account for home which presumably could be converted to stock or cash at some point. In these cities housing is easily north of 1m. Really closer to 2-3m.
Assuming that you can look at the “total pool” of invested assets (which I don’t know why you can’t) my conservative calculation is that we would need 25k a month to live comfortably. That’s 4% of 7.5m or 3% of 10m. With a 2m w/ 1m mortgage You’re looking at a 11-13m net worth.
I would love feedback on my questions/observations in case there are some holes in the logic.
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- Christopher Forsyth says
William, I see Sam didn’t reply so I thought I’d address a couple of your points.
#2, the original research that led to the “4% rule” was based on a withdrawal strategy that took account of spending down principal over time; it was more focussed on identifying the probability of running out of money given the uncertainty of investment returns over time. Off the top of my head I want to say in today’s investment climate with low interest rates, the actual “safe withdrawal rate” is lower than 4%, maybe even less than 3%. Lots of other personal finance blogs have addressed this topic, Google is your friend if you want to dig into the latest thinking. Sam uses a much more straightforward idea of basing the spending rate on the tax-free yield so that you don’t touch principal and can never run out — until or unless rates fall even further, which he addresses in his writings.
#4, Sam has addressed this in the past, the short answer is “you need a roof over your head” so if you aren’t planning to move to a smaller house or a cheaper city, you can’t cash in the equity in your house. Asterisk on this point would be found in Sam’s own necessity rent luxury, meaning in the context of your question, you could sell your house, capture some equity and use the additional income to rent a similar house, but be prepared to drop back to a lesser house if the financial tides turned.
Lastly, not sure what expenses other than housing are higher in the “high cost city” but in Phoenix with paid off mortgage (which washes out the housing issue mostly, except for property tax), we are retired and living very comfortably on $15k a month, I would think you could live very nicely on $25k. But everybody does have different tastes and expectations. Sam addressed this recently with his post about retiring early and living at or near the Federal Poverty Level.
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- Financial Independence says
I agree. $5 mln is barely enough once the kids are out of the house and mortgage is paid.
Current SP500 dividend is 2% or $100K a year, which will dwindle fast (actual inflation rate is way higher than officially reported by the goverment).
The trouble is that with the risks, it is never enough. You will keep working as long as paying you money. It is a vicious circle.
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- Rob says
Few comments:
1) LA is one the most expensive places in the country and CA has about the highest tax rate in the country. This same person living in Florida would have 0 mortgage ($600k in equity would be 2x+ the cost of the entire same sq ft home in nearly all of Florida) saving $39k, cut their tax bill by $14k, cut their property tax by $12k. So you are basically paying $65,000 a year POST tax for the “joy” of living in LA vs another sunshine state (38% of your post tax income). Personally I think that insane (and You could move to fly-over country for even cheaper than FL example)
2) If you are retired, why would you need $10k in childcare assistance? That should be 0. Especially if you have ANY relatives around
3) 21k/year for food for a retired couple with one kid is nuts. That’s $57/day for food for 3 people! It should be most half of that and you could easily cut that to $10/day.
4) 10k/year is a lot for vacations and “clubs” on $170k post-tax or 6% of your income. This could easily be less than half this.
In short, a more realistic budget even in a place like Florida would be half of what’s listed here even with $24k/year for kids schools (which I think college is over-valued now anyway and getting worse). In flyover country, you could probably cut this budget by 75%.
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- John says
The one area I believe is very underestimated is the fuel and maintenance of the vehicle. If they’re going to retire early I see them driving considerably more than 5,000 miles per year.
Can anyone elaborate on this with any personal experience? My estimation would be closer to between 15-20K.
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- Leanne says
We are a family of 4 living in the Bay Area. Sam’s budget seems about right. $5M is the number we’ll need to hit to retire early comfortably with 2 kids. Without kids, $2 M might be enough. It seems really hard for some people from LCOL area to grasp the cost of living a middle class life style in a HCOL area and ask why don’t they just move.
My husband is from Michigan so we’ve talked about moving there at times. Then the question of diversity, weather, job opportunities, friends, and family always come up. Living in the Bay means I am close to my family, the weather is nice almost all year round, his can switch jobs easily in his field (tech), there are world class restaurants, entertainment, nature everywhere. How do you put a dollar sign on those things. It’s a question we struggle with…so we are staying put for now.
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- Guy Faux says
Few people participate in the world class restaurants, entertainment, and nature more than a few times a year. I lived in NYC for 15 years and went to the opera and theaters less than four times a year. I found that most of the people who visited me went to these things more than I could, mostly due to time. You give up lots of time to pay for the privilege’s of living in these places with the thought that all of this stuff is around and why you live there, but few people actually participate in these things as its mostly tourists and unless your doing staycations and playing tourist, you are probably not really doing these things much to justify the increased cost of living.
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- Financial Samurai says
You make a good point. And it’s true. It’s fun to be a tourist in your own city when friends visit. But harder during a pandemic.
I’ve tried to use our no-flying since early 2020 to appreciate San Francisco, Sonoma, and surrounding areas in the SF Bay Area more.
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- Nigel says
If you need $5M to FIRE we’re doomed as a family of 5.
However, this reminds me of a passage in Crazy Rich Asians – no matter how much you make you always need more:
“You can’t afford to fall in love with Simon. Let me break it down for you. Let’s be generous and assume that Simon is making a measly eight hundred thousand a year. After taxes and CPF,* his take-home is only about half a million. Where are you going to live on that kind of money? Think about it—you have to factor a million dollars per bedroom, and you need at least three bedrooms, so you are talking three mil for an apartment in Bukit Timah. That’s a hundred and fifty thousand a year in mortgage and property taxes. Then say you have two kids, and you want to send them to proper schools. At thirty thousand a year each for school fees that’s sixty thousand, plus twenty thousand a year each on tutors. That’s one hundred thousand a year on schooling alone. Servants and nannies—two Indonesian or Sri Lankan maids will cost you another thirty thousand, unless you want one of them to be a Swedish or French au pair, then you’re talking eighty thousand a year spent on the help. Now, what are we going to do about your own upkeep? At the very least, you’ll need ten new outfits per season, so you won’t be ashamed to be seen in public. Thank God Singapore only has two seasons—hot and hotter—so let’s just say, to be practical, you’ll only spend four thousand per look. That’s eighty thousand a year for wardrobe. I’ll throw in another twenty thousand for one good handbag and a few pairs of new shoes every season. And then there is your basic maintenance—hair, facials, mani, pedi, brazilian wax, eyebrow wax, massage, chiro, acupuncture, Pilates, yoga, core fusion, personal trainer. That’s another forty thousand a year. We’ve already spent four hundred and seventy thousand of Simon’s salary, which leaves just thirty thousand for everything else. How are you going to put food on the table and clothe your babies with that? How will you ever get away to an Aman resort twice a year? And we haven’t even taken into account your membership dues at Churchill Club and Pulau Club! Don’t you see? It’s impossible for you to marry Simon.
Kwan, Kevin. Crazy Rich Asians (Crazy Rich Asians Trilogy) (p. 264). Knopf Doubleday Publishing Group. Kindle Edition.
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- Paul says
Please direct this family to move to my town: Gaithersburg, Maryland. We have been described as “the most diverse town in the U.S.” with a large Hispanic, Asian & African-American community (as well as white folks like me) ;-). The $600k equity they have will buy them a first-rate single family home in a fine neighborhood with outstanding public schools. I put my two kids through them (as well as being a grad myself back in the day). Ok, ok, ok: we’re not as warm as So Cal but our winters are pretty mild. The money they save on housing can get them a couple of nice trips when it’s cold.
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- Brad says
This is actually a bit silly. I’m pretty sure $5mil puts you in the top 1 or 2% of the nation for net worth. If you take that one step further then you are basically saying only maybe .05% of people can retire “comfortably”.
Yes I get living in a top 5 most expensive city in the country is difficult but not impossible.
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- Financial Samurai says
Sorry to not make the post not clear.
This couple retired early.
This is a post about retiring early with $5 million, not retiring at 65 with $5 million.
Thanks
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- Brad says
Sam – I get that it’s retiring “young”, but I’m sorry $5mil is pretty much elite in the United States at any age.
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- Nicholas Carter says
The difference between HCOL and LCOL is day and night. This family’s food budget is more than I will spend on all non-debt, non-investment expenses for the whole month. They live “modestly” in 1600 square feet for two adults and a baby: I spent last year up to August living with four other adults in 1400 square feet fairly comfortably. They will spend more on just gym membership and vacations than me and my wife spend on rent at our new apartment.
I cannot imagine living like this. Like I literally cannot. My anxiety disorder at prices like these would paralyze me every time I tried to buy anything.Reply
- Wealthy Doc says
Doctors (and my blog readers) are continually asking me about how much they need to retire. What should my number be? I tell them it depends on multiple factors including their age, longevity, willingness to return to work, investment risk tolerance, social security income, health costs, and monthly expenses. I offer a spreadsheet and Monte Carlo analysis which they promptly decline or ignore.
Blah, blah, blah just tell me a number, they demand.
Finally, I started telling them $5M. At the risk of going “all Suze” on your readers, I will just say the longer I live the more I think we spend a lot and can’t predict many of life’s changes. Often the doctors (and other high-earners) are used to having or spending 150K – 200K per year and that corresponds to 3% or 4% SWR of $5M.
For those who have the patience to hear more than one sentence or one number but who don’t want a detailed analysis, I tell them this:
$1M sounds great. Not enough.
$2-3M ok with planning & frugality
$4-5M in good shape
$6-7M you are set
$8-10M you are rich. Stop reading this.Reply
- Givemeadvicetoo says
Why $10 Million is Barely Enough To Retire Early With A Family…And A Business.
We’re at $10M NW mid 40’s, with monthly expenses approaching $100K (business and personal). Not sure I’ll be retiring before full retirement age. Beware retirement early crowd not to underestimate expenses. I agree that $5M (invested correctly) is a minimum for those with children, especially those considering retirement in their 30’s. $1M is nowhere near workable.
Of course most in the RE crowd are just changing careers for flexibility and more passive income, not actually RE. I can appreciate that. As a business owner, I am shifting more of the daily work to employees. As a commercial property owner, I am generating passive revenue this way as well. As an investor, I have a lot of aggressively invested money (shifting out) but also a lot of cautiously invested money (shifting in), such as CD’s as interest rates rise and the markets correct. After a major correction/bear one can always shift back. Yes, it’s market timing and risk mitigation.
Even if I one day quit working actively and just manage the business/real estate/investments, I don’t consider it RE. Life takes hard work, whether physically or mentally.
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- Bruce says
Pure bull. Don’t lump the lifestyle you’ve created and then want to sustain in retirement with everyone else in the US. If you can’t live of dividend and interest from $10 million, you have some serious financial issues that need to be addressed or basically don’t ever retire. I could have a killer retirement on 1.5m. Your basically saying homes in San Francisco start at 1 million therefore all us homes start at 1 million.
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- cuong says
The budget aside, I want to ask you guys opinions on raising kids in the US.
I grew up in Vietnam and my parents were working all the times. I had a lot of freedom as a kid when cellphone was non-existent so they can’t reach me most of the day! I had many friendships that still in touch since primary schools (even though I live in the US now) because we spent so much time without parents around. I don’t know what a crazy world we have nowadays that both parents Retire to take care of One child, not counting all the extra classes they want the child to take growing up (I read some comments mentioning it as “mandatory”). Even though college cost is out of control and what they teach there is getting obsolete plus a political correctness culture, most people still want to send their kids there at all cost.
I don’t think a child would have any fire to be independent at all if the parents helicopter around him/her like that.
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- Jacob says
Don’t worry, most people can’t afford to retire to raise their kids. I also don’t think that would be detrimental to a child necessarily. Most of us have to shill out the $1,500 per month in childcare : o – Lets hope our kids get full-ride scholarships.
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- Joleran says
It sounds like you’re calculating things for living in the lap of luxury, which can certainly be pricey! Just cutting some of the more extravagent expenses will cut an easy million off of the requirements, and moving will cut investment requirements down to $2mil or so while still living a life more extravagant than the vast majority of Americans.
-10000: $24k a year for a 529 plan for a single kid is really high to keep up from birth to college. Even a “modest” 14k/year will set them up wherever they want to go after 529 returns over 18 years, even assuming they have to pay for the full ride without assistance.
-10296: Childcare assistance can be axed entirely – they are two parents with complete and total flexibility if they so chose, this is a complete luxury.
-2000: Landscaping/Maintenance can be drastically reduced by only paying for dangerous activities like tree trimming on a ladder and such. Bonus of free light exercise.
-1560: Life insurance for what? Do they need to maintain the same residence with one fewer person?
-10000: Food for Three at $1800/month is just lazy. They need to learn to cook, it can be fun!So, just trimming some of the more egregious fat a little bit takes them down $34k to $132k/year expenses.
If they could countenance moving to a LCOL area, they can eliminate the mortgage entirely by buying a nice $400k mansion. Property taxes could drop another $12k or more depending on location. This takes expenses down to a still cozy $80k/year in spending and down to $2mil needed at 4% rule.
In short, they have more than enough to retire if they want to “only” live an extremely comfortable upper middle class lifestyle.
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- Jacob says
You didn’t mention the $1000 in staycations, sports clubs and shopping (entertainment) per month… Which I really can’t imagine needing such a high budget allocation for.
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- Todd E says
I agree. A 24 hour fitness membership for 2 years, purchased from the Costco website is about $750 for the two years if you pay in advance and it works for every 24 hour fitness club. Are they crowded at time? yes. But that is 10x cheaper than joining the Bay Club ( in the San Fran area) if what you are actually looking for is exercise.
And oh yeah, this is California, you can bicycle and hike almost all year long, even during the rainy season. There are many ways to make this cheaper.
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- Wealthgames says
What is missing here is their investments, assets, that make them $200k passive income reliably from $5M. Can you edit this post to show that?
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- Financial Samurai says
Sure, here you go: Financial Samurai 2018-2019 Passive Income Update
Want to share anything about your situation?
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- Nathalie says
Sure! We live in Miami! We are a family of 4. You can profile us, though I think my husband may not like it! Lol!
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- M&N says
living in Houston, no child, regular reader of your blog. feel free to reach out.
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- FinancialEsquire says
A terrible underestimate. I retired 4 years ago and I would say that 10 Million is a requirement for a family of 3-4. Education, food, clothing, taxes. There is no limit. Just the annual maintenance fees alone for our seven vehicles run close to 1 Mil, not counting the gifted personnel paid to service them. Maid service alone is half a Mil per year, what with the mandatory standard minimum of 5 bathrooms, 3 rec rooms (billiards, arcade, shooting range), and 3 patios (including pool and tennis courts). Lawn service is at least cheap at 3.2 thousand a month thanks to migrant losers who work dirt cheap. Nannies, home schooling, security personnel. None of this is accounted for here. We live in a modest apartment with a skyline view of NYC. Being good Christians the Church also requires us to donate 10% of our income. That’s not down there. Neither is bottled water nor air purification fees. There is also the cost of owing a smart home, and a small friendly arsenal.
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- Lol says
I reallllly hope this is a troll comment
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- Nicholas says
$1800 a month for food, since we value our time with our daughter. How about you turn off the cell phones, cook together and cut that bill in half. We eat steak a few times a week go out to eat and spend less than half of that. BTW I feed 6,,4 adults and 2 kids. This just seemed head scratchinly odd.
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- Jester says
Hi Nicholas, I don’t believe I mentioned how much we spent on food. That being said it certainly is more than “necessary” if we were trying to cut back! But I think what is often missed in these conversations is that not everybody is as tuned in to budgeting/saving as the community is here. I think Sam is merely trying to highlight that for most folks food expenses can creep up without going out to fancy dinners etc, especially if you are not actively monitoring and making an effort. Also, food costs can vary significantly based on where you live. As for your suggestion to turn off the cell phones, it is a good one, and one we already adhere to. All cell phones are off limits between 5-8:30.
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