Living-an-average-lifestyle-of-5-million
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and what a past couple weeks we've had in
00:00:05.400 | the stock market. October 10th and 11th, we saw what, 800 something points on the Dow
00:00:11.440 | drop and then followed by another 550 points or something. So that was like 6% to 6.5%
00:00:18.840 | drop. And then the NASDAQ dropped more as tech stocks got slaughtered. You know, it
00:00:23.840 | was interesting because on October 10th, I was wondering to myself, okay, fine. So the
00:00:28.720 | 10-year bond yield went to 3.25%. People are freaking out about higher borrowing costs,
00:00:34.960 | you know, slow down in investments, using a higher discount rate to calculate the future
00:00:41.840 | cash flow of companies to value them. So I was like, okay, fine. It's dropping and that
00:00:47.240 | is a surprise, surprise move to 3.25%. But then on October 11th, I was thinking, wait
00:00:52.120 | a minute. So the 10-year bond yield now declined by about eight to nine basis points down to
00:00:57.580 | about what, 3.15%, 3.13%. And yet the market still went down another two to two and a half
00:01:07.120 | percent. So I thought, you know what, it's time to buy. It's time to buy. And I believe,
00:01:12.640 | let's see what happens. The S&P 500 will close up about 8% for the year. We're going to rally
00:01:17.360 | into the close. And this sell off was irrational. It was one of those things where just, you
00:01:23.680 | know, algorithms, computers just hitting the sell button, rushing out. And it's just a
00:01:27.920 | one way trade out and it was just irrational. So as of October 16th, 2018, we got some relief
00:01:35.680 | in tech stocks. Well, Netflix, they reported better than expected third quarter results
00:01:40.880 | of the stock is up 10% after the close. So that should help give confidence, at least
00:01:47.920 | in the tech sector. And you saw bank stocks, Goldman Sachs, Morgan Stanley report pretty
00:01:52.480 | good numbers. So overall, I am pretty confident. Well, I believe with 70% probability, we're
00:01:59.760 | going to do well into the close and end the year on a higher note. But enough about the
00:02:05.460 | markets and buying the dips. In this podcast, I want to talk about how a $5 million investment
00:02:12.680 | portfolio provides a pretty average early retirement lifestyle. There's a lot of talk
00:02:18.200 | about how you need multi millions of dollars in after tax investments to retire early.
00:02:25.720 | And I showed this in my after tax investment amounts by age post and podcast, which shows
00:02:31.640 | that yes, you actually do need millions of dollars because at a safe withdrawal rate
00:02:36.040 | or a 4% rate of return, you're not generating that much income. So if you have $5 million,
00:02:43.480 | you're generating at 4% rate of return $200,000 in gross income before tax. Now, here in San
00:02:51.120 | Francisco, the Department of Housing and Urban Development say that you are quote low income
00:02:57.400 | if you have income of less than $100,000 with a family of three or four. And if you talk
00:03:03.960 | to private grade schools, and also private universities, they also provide financial
00:03:09.480 | aid if you have income of less than $100,000 per kid. And what I find really, really interesting
00:03:16.240 | in the personal finance community is that there seems to be a lack of acceptance from
00:03:23.920 | literally half the population in the United States who live in the on the coast or in
00:03:29.880 | higher cost areas of the country, that yes, you actually do need multi millions of dollars
00:03:35.440 | to be able to retire early and support a family. You know, when toddlers close their eyes,
00:03:40.200 | they think other people can't see them. That's fine. That's because their logic is still
00:03:44.720 | developing. But I wouldn't expect grown adults to think the same way. And we know what happened
00:03:51.920 | the last time, you know, half of America ignored the other half of America. I mean, wasn't
00:03:57.440 | there some type of surprise presidential victory the last time this happened? Yes, there was.
00:04:03.080 | So I'm hoping in this podcast in this post, that, you know, all the people and all the
00:04:08.840 | personal finance bloggers who don't live on the coast, which is a majority of them for
00:04:13.920 | some reason, actually, it's probably not some reason it's because, you know, it's easier
00:04:19.400 | to retire earlier or achieve financial independence if you live in a low cost area of the country,
00:04:24.040 | right? That's obvious. But I hope through this post and podcast that more people realize
00:04:29.640 | how the other half live, right? Let's let's try to understand everybody else. You know,
00:04:34.880 | it's as if the majority of Americans are overweight, wasteful in their spending and only speak
00:04:39.520 | one language or something. I mean, surely nobody's so irrational as to purposefully
00:04:44.120 | harm their long term wealth, health and mindfulness with their one and only life. So I don't believe
00:04:51.400 | financial samurai listeners and readers are irrational. I think we all do things to better
00:04:57.280 | ourselves over time. You know, if we want to lose weight, we're going to eat healthier
00:05:01.600 | and exercise more if we're going to want to achieve financial independence before 60.
00:05:05.960 | We're going to save more, invest more wisely and take some calculated risks, right? It's
00:05:10.040 | all logical. So I believe that you need probably at least 3 billion and probably closer to
00:05:17.160 | 5 million in after tax investments if you want to retire early. The key word here is
00:05:22.360 | early. So let's say you have a 4% annual rate of return on 5 million dollars. That equals
00:05:29.240 | $200,000 a year in passive income. And I'm fortunate to have Jerry and Linda, a couple
00:05:37.080 | financial samurai readers share their budget. So Jerry is 43 years old and has an eight
00:05:43.080 | month old daughter and a non working spouse named Linda, who is 35 years old. They've
00:05:48.080 | lived in Los Angeles for the past 20 years. And obviously Los Angeles is a higher cost
00:05:53.320 | area of the country. Weather is good, lots of employment opportunity, property prices
00:05:58.120 | are rising and so forth. So both decided to retire early in order to spend as much time
00:06:04.160 | as possible with their daughter. After both negotiated severance packages equal to $120,000
00:06:10.680 | for Jerry and $70,000 for Linda, they have a combined net worth of roughly $5.6 million
00:06:17.680 | if you include the $600,000 in equity they have in their primary residence, which they
00:06:22.440 | bought in late 2013 for a million dollars. Their goal is to stay retired forever, and
00:06:29.040 | perhaps do some part time consulting once their daughter goes to kindergarten. Neither
00:06:33.080 | parent is doing any sort of side hustling at the moment, because they want to be very
00:06:37.260 | present with their daughters. So Jerry and Linda are kind of like my family. I've cross
00:06:42.840 | referenced all the numbers based on my family's own household expenses over the past year
00:06:47.640 | since we have an 18 month old toddler and also live in California, and San Francisco
00:06:52.760 | is actually a little bit more expensive. So if you click over to the post, you'll see
00:06:57.720 | a detailed expense budget on how they live off $5 million in after tax investments in
00:07:05.400 | early retirement. And I wanted to go through these numbers here. So if we look at the income,
00:07:10.320 | it's $200,000 in investment income. And the good thing about investment income is that
00:07:15.640 | it's taxed at a lower rate than W-2 income. So $200,000 is taxed at a 15% capital gains
00:07:23.560 | tax rate, versus if they had made $200,000 from a day job, they would be taxed at 24%
00:07:30.080 | as a married couple. After paying roughly 8% in California state income tax, which unfortunately
00:07:37.280 | doesn't have a lower capital gains tax rate, Jerry and Linda's effective federal plus state
00:07:43.200 | tax is only 24% versus 30% if they were W-2 employees. So this is important to know. If
00:07:50.520 | you're able to generate investment income, not only is it passive, and you have to work
00:07:55.440 | for it, it's taxed at a lower rate. So it's a much more efficient way of earning. However,
00:08:00.720 | due to the state and local tax deduction cap, the salt cap of $10,000, they're losing out
00:08:08.200 | on probably at least $5,000 in tax refunds they would have received before Trump's tax
00:08:13.640 | reform act was passed. So coastal city real estate folks, you guys will feel the hit sometime
00:08:20.880 | in 2019 when you do your 2018 taxes. Trust me on this, folks. And I think once people
00:08:25.760 | see that, there's going to be a little bit of a another leg down in the real estate market
00:08:30.440 | on the coast. So again, because Jerry and Linda want to be completely present, they've
00:08:34.680 | promised not to do any activity to generate money before their daughter goes to preschool.
00:08:39.920 | And as a result, they must be disciplined and stick to their budget if they want to
00:08:43.960 | remain retired. All right, so after taxes, and after getting a credit from the salt refund,
00:08:54.640 | their net income is $154,400. So think about that, folks, they're paying $48,000 in combined
00:09:03.760 | taxes. And that's a lot, right? Because the median household income in America is about
00:09:09.920 | $60,000. So their taxes alone are, you know, almost equal to the median household income.
00:09:18.360 | So for these folks, don't be angry at them, they're actually contributing a lot to our
00:09:24.920 | great country. And so just don't forget that next time you want to hate on people who make
00:09:30.020 | a lot of money or more money than you. And let's look at the expenses here. And I hope
00:09:35.420 | you guys click over to the chart because this, this chart is pretty interesting. So childcare,
00:09:42.840 | because they have a daughter, their kid expenses per year is 36,000. So 36,000, the 10 hours
00:09:50.400 | a week of childcare assistance is extremely important to them to keep their sanity. Sometimes
00:09:55.440 | they go and use this time to go on dates. Other times they use these hours to have me
00:10:00.260 | time to get away from each other, which is really, really important. Because being a
00:10:04.940 | stay at home parent is really hard. And I've gone through this for 18 months. And it is
00:10:09.820 | so much easier having a day job, even a banking job, even a strategy consulting job, any job
00:10:14.900 | you can think of is so much easier than being a full time parent, because there's never,
00:10:19.600 | ever really an off switch. But it gets easier, it gets easier every month their daughter
00:10:25.140 | sleeps a little better through the night. Now they take their daughter to swim class
00:10:29.460 | twice a week, and gym class once a week. And other other days, they go to the local science
00:10:34.340 | museum. And they have a family membership there. And they also go to the zoo when the
00:10:39.340 | weather's okay. And that's like another $150 an annual family membership. And despite each
00:10:45.760 | being able to contribute about 11,000. So 11,000 each, the 22,000 a year total, they
00:10:52.700 | can't do more, even though they can do more, right, you can contribute 15,000 each, that
00:10:57.260 | won't hit your estate. And so that's total of 30,000. But they can't do more than 22,000.
00:11:03.340 | If they want to maintain their lifestyle. They don't believe making their daughter a
00:11:06.740 | five to nine millionaire is particularly wise, given the possible lack of motivation, so
00:11:12.660 | much money might cause, although they think sending their daughter to public school in
00:11:17.100 | order to make her a millionaire upon graduation sounds pretty good. And I agree with that
00:11:21.860 | wholeheartedly. Because look, internet technology is making education accessible and free. So
00:11:29.620 | all this like pedigree stuff, you know, it's nice, look, hey, if my son got into Princeton
00:11:35.540 | and XYZ grade school and got a scholarship that I'd be, you know, to the moon. But I'm
00:11:41.860 | going to try not to stress about it. Because pedigree doesn't really matter anymore. It's
00:11:46.100 | what you do. Alright, so property about $4,800 a month, which believe it or not, for West
00:11:52.980 | LA is pretty reasonable. You know, they live in a modest 1500 square foot three bedroom
00:11:58.340 | two bathroom home at the edge of Santa Monica, Santa Monica is a prime neighborhood, but
00:12:02.860 | they're at the edge, you know, closer to the inland. Their house is valued at 1.3 million,
00:12:08.920 | or 400,000 below the median priced home in the area. And again, they bought it for a
00:12:13.820 | million dollars about five years ago. And that's about right. They've been thinking
00:12:18.420 | about upgrading to a house closer to 2500 square feet, because having a kid really shrinks
00:12:23.300 | your house by about 30%. But such a house will cost about $2 million in the neighborhood,
00:12:30.060 | maybe even more, but actually maybe less now that the coastal market is slowing. And so
00:12:35.980 | they decided not to, they read my buy utility, rent luxury strategy, borough strategy. And
00:12:42.140 | they decided to keep costs low and earn a higher rental yield in other parts of the
00:12:46.220 | country through real estate crowdfunding, and aristocrat dividend stocks instead. So
00:12:53.020 | one of the key things about early retirement is healthcare premiums. It's actually the
00:12:58.580 | thing that probably bothers me the most and that people really, really need to be aware
00:13:02.660 | of. According to the Kaiser Family Foundation, the average annual premium for employer based
00:13:09.640 | family coverage in 2018 is $19,616, or that's $1,635 a month. And the breakdown is $14,069
00:13:22.580 | comes from the employer, while 5547 comes from worker contributions, right? So it's
00:13:28.780 | subsidized by the employer. And you the worker got to pay on average, I don't know, 450 to
00:13:34.460 | $450 a month. That sounds about right. I remember when I was working, I paid about $200 to $250
00:13:40.520 | a month in premiums, just for myself. So think about this, folks. J&L, given they no longer
00:13:48.120 | have jobs, they must bear the entire cost of health insurance. So we're talking $1,650
00:13:54.240 | a month for a gold plan. They decided with an 18, sorry, eight month old daughter, they
00:14:00.240 | decided not to mess around and maintain a gold health insurance plan. Their daughter
00:14:05.160 | not only sees a pediatrician every three months, but she also sees an ophthalmologist every
00:14:10.560 | three months because she has ocular albinism and strabismus. strabismus is a misalignment
00:14:16.160 | of the eye. Some say it's a esotropia, exotropia, a lazy eye, and they need to make sure her
00:14:22.920 | daughter's prescription is correct to help her eyes align properly during development.
00:14:29.280 | So in the first five years of life, it's important, you know, all the wires and neurons in your
00:14:33.520 | brain basically are getting wired and hardwired. But there's plasticity in the brain. So especially
00:14:40.960 | in the first five years, you can kind of mold your child and the neurons to where you best
00:14:46.080 | see fit. But after about five to 10 years old, they start hardwiring and it's really
00:14:50.960 | hard to change. And so maybe maybe God not willing, she might require surgery, but who
00:14:58.920 | knows, hopefully glasses will help. So health insurance is clearly one of the largest and
00:15:03.280 | most necessary expenses early retirees must consider. And you could get Affordable Care
00:15:09.200 | Act subsidies if your household income is below a certain threshold. But J and L need
00:15:15.140 | the income to live and don't want to draw down principles so early. The next line item
00:15:20.720 | is food at $1,800 a month. Is that a lot? Maybe, but I don't think so. They value their
00:15:28.080 | time Jerry and Linda more than anything. As a result, they're happy to pay $5 for food
00:15:32.880 | delivery and save one to two hours of cooking in order to spend more time with their daughter.
00:15:38.320 | Food is the one area where they could cut expenses by maybe $500 a month if they ever
00:15:42.840 | get desperate. Los Angeles consistently ranks as one of the healthiest cities in America
00:15:49.600 | and also one of the best cities for food. They've got huge variety and really healthy
00:15:54.920 | food selection. You know, there are vegan, vegetarian restaurants and all that. So at
00:16:00.000 | the end of the day, combine their food selection with the ubiquity of food delivery companies
00:16:04.240 | and they can't help but continuously order great food most of the week. They also supplement
00:16:11.040 | their grocery shopping with Amazon Prime about once a month as well. And so all in $1,800
00:16:17.360 | a month for three people. What is that? $60 a day. I don't think that's that unreasonable
00:16:25.000 | folks. You let me know. In terms of non-essential expenses, they hardly ever buy new clothing
00:16:30.760 | for themselves. So they're spending, you know, definitely less than $200 a month. Their $330
00:16:38.000 | a month sports club they think is well spent, you know, fitness, health, social aspect,
00:16:43.560 | it's all there and they go three times a week. And finally, they decided to stay local for
00:16:48.680 | the first two to three years of their daughter's life. They have so much of Los Angeles, Newport
00:16:53.960 | Beach, Big Bear, San Diego, left to explore that, hey, why not just explore as a family
00:17:00.280 | together? They can go to Las Vegas as well. Besides, they agree with me that extensive
00:17:04.680 | travel before the age of three and probably before the age of five is a waste of time
00:17:10.000 | since their daughter won't remember a thing when she's older. You know, my wife and I,
00:17:14.360 | we recently went to just an hour away trip to Sonoma at a friend's house. And it was
00:17:19.480 | an amazing, amazing place and we stayed there for six nights. And it was awesome. But man,
00:17:26.160 | we filled our car to the brim with food supplies, with like a crib, with a stroller, just bumpers
00:17:35.160 | for the bed guard, toys, books, you name it. And of course, obviously our stuff. So I can't
00:17:40.600 | imagine flying with that much luggage with our son. So in terms of, you know, budget
00:17:47.040 | cuts, once again, they could cut money with food, food delivery, they could spend less
00:17:53.200 | money on childcare, and they could contribute less to their daughter's five to nine plan
00:17:58.200 | that overall will save maybe 5000 to 10,000 a year. But I'm not sure and they're not sure
00:18:03.960 | the additional savings would outweigh the decline in their lifestyle. Because if you
00:18:07.680 | look at the budget, again, it's not that extravagant. I just don't see that much extravagance. They
00:18:13.760 | are really responsible with regards to providing whatever it is for their child's future. You
00:18:20.840 | know, they could move to a lower cost area of the country. That's obviously, you know,
00:18:25.040 | something a lot of people have suggested. A lot of people have told me, hey, Sam, why
00:18:28.320 | don't you leave San Francisco because it's so expensive. And hey, guess what, folks,
00:18:32.280 | I am planning that move. Once our son, you know, is old enough to go to preschool, or
00:18:38.360 | maybe kindergarten plan go to Hawaii, which is cheaper, believe it or not. But JNL, they'd
00:18:44.320 | rather stay warm all year, rather than face the brutal Midwest winters. Come on, folks,
00:18:49.640 | it's brutal. For four months a year. You know, life is about living 12 months a year. Further,
00:18:55.440 | as a Latino, and as an Asian woman, and as a daughter who is mixed race, do they prefer
00:19:02.000 | the diversity of LA that can only be matched by even more expensive places like New York
00:19:06.760 | City or San Francisco? I don't know if you folks, you know, who are not minorities realize
00:19:12.240 | this, but being in an environment with diversity is really, really, really important. Just
00:19:17.080 | the food, the culture, the festivals, and just feeling comfortable, you know, walking
00:19:21.240 | around, driving around. When there's more diversity, there's more acceptance. And I
00:19:25.280 | think that's a wonderful thing. So instead of these budget cuts and moving, it seems
00:19:30.080 | better to just continue sticking to their budget and earn supplemental income if they
00:19:34.440 | ever need or want more money. So for example, they could clearly do part time consulting,
00:19:41.120 | let's say 10 hours a week combined. So five hours each at $100 an hour, and earn $52,000
00:19:47.840 | a year. Why do I believe they can do that? Well, I did that. And if you look at their
00:19:52.600 | backgrounds, Jerry was 20 years as a management consultant. And Linda was, let's see, I don't
00:19:58.200 | know, 15 years, something like that. 13, 13 to 15 years in digital marketing. So they
00:20:04.320 | clearly have some expertise, and a lot of work, a lot of work is now being done for
00:20:10.400 | freelancers as freelance jobs, because it's cheaper and more flexible for companies. So
00:20:16.320 | the trend is there folks, and it's easy for them to make more money and bridge any kind
00:20:20.160 | of gap or shortfall if they have one. Every single early retiree I know eventually does
00:20:25.280 | something they love that generates some type of income. They have the energy, enthusiasm
00:20:30.400 | and expertise since they're still relatively young, right? late 30s, early 40s. And pursuing
00:20:36.280 | something you love to do while making money is the dream scenario, folks. So this pursuance
00:20:41.380 | is what early retirement allows you to do. And once you have enough passive income to
00:20:45.760 | cover your general living expenses, you will keep searching until you find what you're
00:20:50.740 | looking for. So please be aware that whatever you listen to or read online, try to figure
00:20:57.800 | out how much passive income that person has. Are they early retired financially independent
00:21:03.480 | because they have passive income that allows them to do what they want? Or are they really
00:21:07.640 | just transferring their career to becoming a blogger or podcaster, video, you know, YouTuber,
00:21:12.480 | and they're just they just have another job, folks. So it's really important to kind of
00:21:16.400 | differentiate this. But do not confuse retiring early with doing nothing. In Jerry and Linda's
00:21:22.120 | case, they are busy being full time parents, which is harder than any job in the world.
00:21:26.520 | It's the most important job in the world. And in my case, I'm also trying to be a full
00:21:30.200 | time dad while continuously writing about personal finance. And I know despite detailing
00:21:36.620 | the numbers and providing context around Jerry and Linda's financial situation, I'm sure
00:21:42.520 | there will continue to be disbelievers that 5 million or more in after tax investments
00:21:47.240 | is what's required to live a comfortable but not extravagant lifestyle in a high cost location.
00:21:53.120 | It's become a national pastime to hate the rich, no matter how hard or how long you studied
00:21:58.620 | in school, no matter how many hours you've worked, and no matter how many risks you've
00:22:03.840 | taken to provide a better life for your family. You know, when the downturn happened in, say,
00:22:09.000 | the recent one, October 10th and 11th, you know, the people who are going to be winners,
00:22:13.720 | probably the ones going to say, Hmm, let's, let's buy something, let's buy that stock,
00:22:19.920 | or you know, the index that we've been waiting on, and then hopefully in 10 years, things
00:22:23.640 | will be higher. But the people who are going to be left behind are the ones who say, I'm
00:22:28.000 | not going to take any risk, I'm too scared, and I don't want to do any research or anything.
00:22:33.600 | And it's just much easier to hate on people. And it's, it's normal, it's normal to not
00:22:39.560 | like or dislike or hate what you do not understand. So hopefully this podcast and this post will
00:22:46.280 | help, you know, broaden people's perspectives who don't live in high cost of area, places,
00:22:54.320 | you know, just like how more international travel and the mastery of a second language
00:22:58.220 | can help to create more harmony around the world. Hopefully this article and podcast
00:23:04.000 | will do the same. And finally, I just want to reiterate once again, not everybody can
00:23:10.340 | and will retire early and not everybody should retire early. If you found a job that you
00:23:14.720 | love, just keep doing it. Be blessed, thank the Lord that you found something that you'd
00:23:20.280 | be willing to do for much less or even for free. I think most people are disengaged from
00:23:24.680 | work. So please, please keep on building your savings, your investment portfolio, to provide
00:23:32.840 | yourself options in the future, just in case, you know, you suddenly say I want to do something
00:23:37.000 | else. And hopefully everybody can open their minds and appreciate this podcast and this
00:23:42.960 | post. Thanks so much, everyone.