How_to_retire_early_with_kids
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about how to retire early with kids
00:00:05.740 | Because I truly believe it is nearly an
00:00:08.700 | impossible task
00:00:10.760 | I've talked about early retirement and financial independence since I started Financial Samurai in 2009 and that was when I didn't have kids and
00:00:17.880 | Then when I left in 2012, you know, I struggled here and there with trying to identify as an early retiree
00:00:24.040 | So I stopped and I did a lot of consulting work
00:00:27.340 | And I wrote on Financial Samurai and did it a lot of traveling and so forth
00:00:30.720 | But now that I've been a father for the past two and a half years
00:00:33.600 | I truly believe that retiring early without kids is like going for a walk in the park
00:00:38.700 | Maybe it's like getting a two or three hour Swedish massage the best massage you can ever have
00:00:44.100 | Retiring early without kids seems so easy now. I just wonder why don't more people get on board?
00:00:51.120 | There are absolutely various levels of difficulty for being able to retire early
00:00:56.560 | The easiest way to retire early is to have a working spouse
00:01:00.060 | If you got no kids to care for you're truly free to do whatever you want
00:01:04.980 | All you've got to do is keep encouraging your spouse to keep on providing while you kick back relax go play tennis
00:01:11.520 | Drink some Mai Tais and just hang out with your girlfriends or guy friends
00:01:16.200 | And that is the best way and I know a lot of people who've done that and I even wrote a post about it called
00:01:21.360 | How to convince your spouse to work longer so you can retire earlier
00:01:24.720 | It's a little bit far-schooled, but it's true. People are doing this all the time
00:01:29.920 | Another easy way to retire early is to be willing to live in or near poverty in retirement
00:01:35.900 | This is the definition of poverty according to the government the federal poverty level limit
00:01:40.200 | Ironically being willing to live like a monk is also one of the hardest hardest ways to stay retired
00:01:46.340 | Because you might start wondering what's the point of retiring early if you can't live it up with your free time
00:01:51.360 | If you got to count every single dollar in your wallet in your bank account
00:01:56.240 | Whether you can go to that movie during the middle of the day whether you can go out for drinks or whatnot
00:02:01.160 | So it's kind of hard. I believe to stay retired if you're living so spartanly a
00:02:06.920 | Much much harder early retirement achievement is to try to maintain the same standard of living in retirement
00:02:14.620 | Which you had while working without some budget sacrifices this route to early retirement is quite difficult
00:02:21.120 | nowadays
00:02:22.280 | Simple math suggests that it's hard to accumulate enough capital to sustain a middle-class lifestyle
00:02:27.800 | Because interest rates have fallen drastically
00:02:30.320 | Yet just like proponents of the Roth IRA
00:02:33.680 | There are plenty of misguided people who think their investment income will be higher than their average working income. This is a near
00:02:41.720 | impossibility folks unless you're the best saver
00:02:45.280 | best investor in the world
00:02:46.720 | You are likely not going to be able to accumulate enough capital to generate as much as you did while you were working
00:02:53.520 | Do the math folks you now need two million dollars at a two percent interest rate to generate forty thousand dollars in income
00:03:00.840 | When in the past you only needed about a million dollars because the ten-year bond yield is at about one point seven percent
00:03:07.680 | It's under two percent
00:03:09.240 | So why is it so hard to retire early with kids?
00:03:12.160 | Well besides the cost the extra cost of raising children
00:03:16.140 | The main reason why it's so hard is due to them sucking up all your remaining time and energy outside of work
00:03:23.220 | Every early retiree I know spent hours outside of their day jobs finding ways to make more money to save and invest more
00:03:31.240 | Examples of what they've done include starting a blog on the side like I did creating online products
00:03:37.440 | driving for uber and lyft
00:03:40.360 | coaching youth sports
00:03:42.360 | Pet-sitting consulting and freelancing buying rental properties and managing those terrible tenants
00:03:48.200 | Actively managing an investment portfolio to try to optimize it for dividend income going to business school part-time
00:03:54.620 | So you can earn more and helpfully get a promotion
00:03:58.060 | I used to spend 25 hours a week outside of full-time work writing on financial samurai. I wake up around 5 a.m. Or 6 a.m
00:04:06.320 | type for a couple hours go to work just get my face beat up and then maybe check my mobile phone for
00:04:12.640 | 30 minutes during lunch break and
00:04:14.720 | Then work some more and then come back and have the energy and passion to write more and do more online
00:04:20.860 | For another two or three hours and that went on and on until I finally left in 2012
00:04:26.320 | If I'd had adolescent children, then there's no way I'd have spent more than five hours a week on financial samurai
00:04:34.400 | Maybe nothing at all being away from my kid for 50 to 60 hours a week
00:04:39.040 | Would have made me feel even more guilty to work any longer at home
00:04:43.240 | Therefore, I probably would have devoted 70% of my time outside full-time work to my kids and wife
00:04:48.820 | 20% with friends and playing sports and the remaining 10% to financial samurai or frankly probably more nap time
00:04:57.280 | I love napping and I would nap every single day if I could if I was working and actually I did
00:05:03.680 | During lunch break when I would go down to my car in the basement and take 20 minutes shut eye, but don't tell anybody
00:05:09.280 | So even though not having children while I was working is one of the top retirement regrets
00:05:14.400 | Having children while working would probably have delayed my retirement by at least 10 years
00:05:19.520 | If not 20 plus years because I know myself and I think having the goal to work until my kid graduates college
00:05:26.680 | Would have definitely been top of mind
00:05:29.560 | It's also hard to stay retired once kids come
00:05:33.200 | After we had a kid our already owner of
00:05:37.240 | $1,620 a month health care premiums jumped to $1,800 a month after our son was born for 2020 our health care premiums will rise to about
00:05:46.720 | $1,927 a month if we continue to only have one child we're talking over
00:05:55.640 | $30,000 a year in health care premiums alone and this does not include our deductibles and
00:06:01.000 | Copay out-of-pocket expenses capped at about sixty four hundred dollars
00:06:05.440 | Hope we never use them, but come on folks if we do use it
00:06:09.640 | It's like thirty thousand dollars a year in health care premiums a year that that's just crazy
00:06:13.920 | We could try to and limit our household income to less than 400% of the federal poverty limit
00:06:19.740 | Which is eighty three thousand for a household of three to get health care subsidies
00:06:23.920 | But then we wouldn't have enough to comfortably live on
00:06:26.460 | Besides we would feel bad getting subsidies from the government when the purpose of the Affordable Care Act is to help those who are financially
00:06:33.480 | Struggling all my life since graduating from college
00:06:36.900 | I have aggressively paid into the tax system to support my fellow Americans, and I don't feel bad about it at all
00:06:44.000 | I've always been a contributor, and I want to continue that way so to go from being a contributor to
00:06:49.840 | Retiring early and then getting health care subsidies. It just wouldn't feel right
00:06:53.880 | In addition to higher health care premiums we obviously have extra expenses for diapers
00:06:59.600 | Clothes toys occasional babysitting to help keep our sanity and now he's in preschool and the tuition is
00:07:06.000 | $1,950 a month and there's probably two hundred dollars to five hundred dollars worth of other activities such as
00:07:12.920 | Fundraisers and donations and so forth that we have to pay as well
00:07:17.840 | We're hoping to send our son to public grade school because we find paying
00:07:21.560 | 30,000 to 45,000 a year in private grade school tuition to be
00:07:25.560 | absolutely ridiculous
00:07:28.200 | But the problem is San Francisco has a lottery system a public school lottery system for social engineering purposes
00:07:35.560 | It hasn't worked, but that's what our system is so even if you pay
00:07:40.040 | 30,000 50,000 in SF property taxes your child has no guarantee of getting into your local neighborhood public school
00:07:47.960 | You could end up with your 10th choice 15th choice and have to drive 20 to 30 to 40 minutes across town
00:07:54.400 | And it just is a little bit ridiculous and it's another reason why we want to get out of here eventually
00:08:00.440 | So I've gone ahead and run the numbers in a detailed post on retiring off 200,000 a year in gross
00:08:07.240 | investment income for a family of three
00:08:09.920 | $200,000 a year sounds like a lot
00:08:12.920 | But it really isn't if you live in an expensive coastal city in this budget, which you should click on the post to see
00:08:19.480 | You end up with about
00:08:21.720 | $1,400 in cash flow and that's not a lot
00:08:24.260 | So I guarantee you that this family living off 200,000 a year and it's not an outlandish budget at all
00:08:30.720 | We'll likely have to dip into
00:08:33.040 | Principle and that doesn't sound good. Now. You might look at the budget and think well
00:08:39.080 | $1,600 a month for food for three is unreasonable. Okay, let's cut that
00:08:43.040 | You might look at the budget and say 9600 annual vacation budget is unreasonable
00:08:47.720 | Okay, let's cut that. So let's cut five thousand to ten thousand a year from their budget
00:08:53.560 | Guess what if they have another child in other words a second child
00:08:57.880 | They are screwed. There is no way they can afford a second child on a two hundred thousand dollar a year investment income budget
00:09:06.040 | Well, they could but a lot of changes would have to be made now. Let's say you don't need two hundred thousand dollars
00:09:13.280 | You're like, well, that's just ridiculous
00:09:14.960 | I can take care of two children off two hundred thousand dollars a year easy because I'm gonna relocate to a lower cost a
00:09:21.640 | Living area and so forth. Well, let's just run the math
00:09:25.520 | Based on various returns or withdrawal rates. Here's how much capital you would need to generate
00:09:31.180 | $200,000 in investment income a year and
00:09:35.560 | $200,000 a year in investment income
00:09:37.560 | So at 1.5% where the 10-year bond yield hit several months ago
00:09:42.040 | You would need thirteen point three million in capital or about six point seven million in capital
00:09:48.000 | to generate two hundred thousand and one hundred thousand at a 2% rate of return
00:09:52.520 | Ten million and five million at 3% six point seven million and three point three million at 4%
00:09:59.720 | Five million and two point five million at 5% four million and two million at a 6% withdrawal rate or rate of return
00:10:07.240 | You would need three point three million or one point seven million at 7%
00:10:11.600 | Two point eight five million or one point four three million and at 8%
00:10:16.240 | Two point five million and one point two five million
00:10:19.520 | That's a lot of millions folks with the median net worth for Americans under a hundred thousand dollars
00:10:25.720 | Coming up with 13 times to 135 times the median net worth in order to retire early with children is not very
00:10:33.400 | Realistic be realistic folks do the math look at your numbers
00:10:38.680 | If you are retired
00:10:40.280 | You also likely have a much more
00:10:42.280 | conservative portfolio
00:10:43.520 | Because the last thing you want to do is get blown out of the water in terms of losing money in the markets and then having
00:10:49.320 | To go back to work and not spend time with your kids
00:10:52.040 | Therefore you've probably constructed a more conservative portfolio that might only generate closer to four to five percent a year if you're lucky
00:10:59.560 | Therefore you would reasonably and probably need closer to two to five million in order to retire early with kids in America
00:11:08.720 | During bull markets like one we are experiencing right now
00:11:12.280 | People tend to forget that stocks bonds and other risk assets sometimes decline in value the sequence of risk returns right right now
00:11:19.880 | It's like betting on black and hitting black ten times in a row in roulette
00:11:24.400 | You're eventually gonna lose and when it comes you're gonna suddenly have to rejigger your retirement investment model
00:11:31.560 | Alright now that I've deflated your spirits
00:11:34.480 | Here are some solutions I can think of if you still want to have your cake and eat it too
00:11:40.080 | Because having kids is really really wonderful
00:11:43.160 | But it is really really expensive and really really time-consuming
00:11:47.720 | So one make sure you pay yourself first
00:11:50.320 | No matter what don't let your desire to provide the absolute best of everything for your kids blow up your path to early retirement
00:11:56.920 | To relocate to a lower cost of living area instead of living in a city where the median priced home is over a million dollars
00:12:05.200 | Relocate to one of the hundreds of great cities across America where the median home price is closer to the national median of two hundred
00:12:12.760 | $40,000 before you relocate though
00:12:16.240 | It's best to take a visit first to see if you will feel comfortable and included and it might not be as easy for some
00:12:24.080 | Groups of people than others. Let's be honest
00:12:26.600 | Three consider joining the military foreign service law enforcement or any organization that provides a pension
00:12:34.560 | You know teachers get pensions too if you join between 18 to 22 years old
00:12:39.440 | You can retire as early as 38 to 42 with a pension
00:12:43.640 | Even if you work for 10 more years to get a bigger pension, you can still retire much earlier than 60
00:12:48.800 | I truly believe joining, you know
00:12:51.920 | A service industry is really one of the most underrated things you can do because that pension is worth
00:12:57.680 | Gold, I mean it is so valuable. It blows the private sector benefits out of the water
00:13:03.960 | For send your kids to public grade school only unless your kid has a scholarship or you are rich
00:13:11.080 | In other words income of at least five to ten times the annual cost of annual private school tuition
00:13:15.520 | Private school tuition is a huge financial drag the amount you could spend on your kid once they're in private school is endless
00:13:22.380 | Because you will be forever pressured by other parents richer parents and also by the kid to spend and donate more
00:13:29.340 | Five make yourself feel better about not sending your kids to private school by selectively reading
00:13:35.040 | Perspectives from parents who sent their kids to private school and regretted their decisions
00:13:40.680 | You know not all private school kids go on to great universities and do great things
00:13:45.680 | A lot of them end up just like regular folks or worse
00:13:49.460 | Then read up about all the great Americans who went to public school and did just fine
00:13:54.320 | Six encourage your kids to help out around the house more to not only save money, but also build their character as well
00:14:01.880 | Making kids consistently work for what they think they deserve is one of the greatest life
00:14:08.280 | lessons seven swallow your pride and start accepting health care subsidies intended for the
00:14:14.720 | Financially struggling to do so you may have to rejigger your portfolio to produce less income and focus more on capital appreciation
00:14:22.120 | To make yourself feel better about taking instead of giving
00:14:26.120 | Look into all the ways other Americans have succeeded by taking advantage of the system
00:14:30.980 | Also, tell yourself that you've already paid into the system while working so it's time to get yours
00:14:38.120 | Next keep the fact that you're taking health care subsidies from the government a secret from your children
00:14:44.560 | Otherwise your children might grow up to be entitled and spoiled and decide to leech off you when they are adults for the rest of
00:14:51.440 | their lives
00:14:52.680 | Next negotiate a severance given pensions are rare for early retirees
00:14:57.760 | It's only logical to try and negotiate your own pension through a severance
00:15:02.880 | There is no downside to trying given you plan on leaving anyway without my severance
00:15:08.120 | I probably would have worked for at least another five more years
00:15:11.560 | Next if you're feeling the financial strains of early retirement make your spouse go back to work leave the house
00:15:18.720 | Even though having one working spouse and one stay-at-home spouse is not considered being early retiree
00:15:24.480 | Sometimes it's worth being selfish and delusional for your own sanity and just tell yourself
00:15:30.880 | Hey, I'm an early retiree because my spouse works even though I live off her health insurance and all that good stuff
00:15:37.320 | Once you have a working spouse life is kind of easy, you know health care and expense
00:15:42.280 | Yeah, it's subsidized by the employer by on average 71%
00:15:46.000 | Also a working spouse can also greatly reduce the amount of capital needed to produce early retirement income
00:15:53.100 | And finally number 11 if you don't wish to fool yourself into thinking you're retired while your spouse works
00:15:59.280 | Then take on some part-time work to supplement your income
00:16:02.600 | I found that working about 20 hours a week is the optimal amount of time for intellectual stimulation
00:16:08.800 | Earning an active income is rewarding if you can do so in moderation and with autonomy
00:16:15.040 | Autonomy is the key here folks when someone's telling you what to do for 20 hours a week. That just doesn't feel great
00:16:22.080 | So although life is short life is also very long
00:16:25.560 | Don't feel like you have to retire ASAP just because you saw someone else online retire early
00:16:31.040 | You're suffering from the classic new car in your neighbor's driveway envy syndrome
00:16:35.980 | Each year you delay retirement is one less year
00:16:39.600 | You have to pay for retirement and one more year you can save for retirement
00:16:43.200 | Before negotiating severance consider taking an easier at your job for one year to see how things go
00:16:49.040 | Maybe take a sabbatical as well
00:16:51.360 | Take all your vacation days definitely
00:16:53.360 | Utilize the full hour for lunch get back to your boss a little later than normal and leave right at 5 p.m
00:16:59.680 | Let's see if life might be a little bit better
00:17:02.200 | If you didn't pressure yourself so much to work so hard to outperform your peers to get that raise in promotion
00:17:08.320 | By grinding less hard you might just start enjoying work a little bit more
00:17:12.680 | Further each additional year you work will add to your potential severance check when you finally walk away
00:17:19.520 | The severance calculation is generally one to three weeks of severance per year worked
00:17:23.920 | In conclusion, I say having kids is worthwhile. They're the best thing ever that will happen to you
00:17:31.120 | But they also put a tremendous strain on your finances. So make sure you put on your oxygen mask first
00:17:38.040 | Thanks so much everyone
00:17:39.800 | I'd love to hear from you how you plan to achieve financial independence with kids or how you did achieve financial independence with kids
00:17:46.720 | And if you enjoyed this podcast, please leave a great review five stars, and I'll talk to you guys later