Today we’re taking a look at how to start at 30 with $0 and retire by the time you’re 40, by following a few financial guidelines. I’m going to preface all of this by saying I don’t really like the term “retire”, because it a loaded word with a lot of history behind it, but it just made for a better title. But I think most people can get behind the concept of being financial independence, or basically not being dependant on job and living paycheck to paycheck out of necessity as early as possible. Not all of us are trust fund babies so most of us have to work our way there.
I chose these ages because this aligns with my reality and anyone that is either just a late personal finance bloomer or maybe just got zeroed out after this multi-year pandemic… there are literally dozens of us!
I got serious about saving in my early thirties after getting married and starting to plan a family so I can speak this topic from personal experience. Let’s look at what we’d need to do in order to be able to achieve financial freedom early, potentially before 40.
First, investing 101: The first step is to pay for the essentials, where the priority is taking care of your physiological needs and paying for things that allow us to exist. First we start with rent and/or the mortgage, followed by groceries. Depending on where you live you should prioritize learning how to cook and potentially using local ingredients. Aim for meals that cost less than $2 / portion to save as much of our incomes as possible. Then we pay for essential utilities such as water, electric, and gas, and that if followed by paying for essential hygiene items. The following step is paying for income earning expenses such as internet, phone, and anything that is required to help earn an income. Health Care is the next one. Make sure you have your healthcare that is adequate for where you are based. This could be as little as $0 but could cost thousands $$ every year if you’re living in the USA or have private medical insurance in places like Hong Kong.
Phase 1 – This is an optional step that will vary for everyone and it’s not necessary but build an emergency fund of 2-6 months of salary. If the pandemic has taught us anything it’s that anything can happen and you need to have some cash or cash equivalent assets to tie you over in case of unforeseen circumstances. Preferably this is not cash, but cash equivalent assets, like highly liquid stocks or high interest savings so that you will at least earn something on this instead of just letting the banks make money of you for free.
Phase 2 – Make payments on mid to high interest rate debts of 10% or higher with either the “avalanche” or “snowball” methods, whichever one fits you best. The debt avalanche method involves making minimum payments on all debt, then using any extra funds to pay off the debt with the highest interest rate. The debt snowball method involves making minimum payments on all debt, then paying off the smallest debts first before moving on to bigger ones.
Phase 3 – Contribute to your company’s 401K if you’re in the USA and make sure to get the full company match but do not exceed it at this point. Contribute to your TFSA If you’re in Canada you can invest in the maximum yearly amount to enjoy that tax free growth.
Phase 4 – Optional but if you have other advantageous retirement vehicles in your country or optional contributions then make those here. If they are required like OAS then this doesn’t enter into the planning here since it’s not a choice anyway.
Phase 5 – Aim to save at least 50% of your income for retirement. Proponents of the FIRE movement try to save much more, some save over 70%, but this will depend on your own personal ability. Frankly I’m not a fan of extremely frugal living that compromises on everything because then you are just sacrificing your best years for potentially being comfortable much later in life. But I also don’t think that financial advisors that suggest only saving 10-15% of your income have your best interest at heart. If the pandemic has shown us anything is that people are able to save 2-3X their normal amount when not spending frivolously.
So some much smarter people have come up with a 25X rule for retirement savings. The calculation is quite simple, you estimate how much money you need to save for retirement by multiplying the early amount by 25. The idea being that even in the worst of times this would allow you to safely pull out enough to live indefinitely as long as the balance is invested into the market, usually in low cost index funds. Others have estimated that you would need 70-80% of your current salary after retirement to maintain the same standard of living. So if we take the median household income in the US of $62K X 25 = $1.55M for 100% or just ~$1M for 70% of that. So you would need to invest $5K a month at 10% return over 10 years to reach this target. Since it’s unlikely you can save 97% of your pre-tax salary, let’s shoot for 70% of your salary, then some side hustles will be necessary along with savings to make up the rest. But side hustles are whole different topic.
What’s your retirement number?