The_amount_of_money_needed_to_retire_early_and_live_in_abject_poverty
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai,
00:00:02.480 | and in this episode, we're gonna talk about
00:00:04.240 | the amount of money needed to retire early
00:00:07.400 | and live in abject poverty or close to poverty.
00:00:11.960 | And I know this is a funny title,
00:00:13.680 | and you're thinking, what the hell am I talking about now?
00:00:16.520 | But I wanna highlight the math,
00:00:18.880 | because the math doesn't lie.
00:00:20.760 | It's really our emotions, our emotions that lie to us
00:00:23.880 | and make us believe that we need something
00:00:26.320 | or want something or can do something
00:00:28.920 | when we really don't need it or don't want it or can't.
00:00:32.440 | And so this is a combination of emotion, desire,
00:00:36.880 | and the ability to retire early.
00:00:40.280 | So as more people look to retire early,
00:00:43.000 | which I define as under 60 years old,
00:00:45.240 | more people are looking for shortcuts
00:00:46.760 | in order to get to early retirement quicker.
00:00:49.080 | And it's understandable that in this day and age
00:00:51.880 | of instant gratification,
00:00:53.960 | young folks nowadays aren't willing to grind it out
00:00:56.480 | for decades like previous generations.
00:00:58.920 | Instead of building a large enough passive income portfolio
00:01:02.160 | to cover a comfortable lifestyle,
00:01:04.640 | I've noticed more people are willing to retire early
00:01:07.440 | to live in or near abject poverty.
00:01:10.040 | My definition of financial independence
00:01:12.440 | or being able to retire early
00:01:13.960 | is to have enough investment income
00:01:16.640 | to cover your best life's living expenses.
00:01:19.320 | So you don't have to work, and you can do whatever you want.
00:01:22.520 | I think this is a logical definition,
00:01:24.200 | but I think people are really not taking
00:01:26.080 | this definition seriously.
00:01:28.440 | And I can empathize.
00:01:29.800 | When I was 25 years old,
00:01:31.560 | the terrorist attack of 9/11 happened.
00:01:34.760 | This terrible, terrible, terrible event
00:01:36.720 | ignited my quarter life crisis.
00:01:38.520 | I was working in finance.
00:01:40.120 | I just got to San Francisco for a new job.
00:01:43.000 | And I was seriously thinking about just hanging it all up
00:01:45.680 | and retiring with about $400,000
00:01:48.200 | due to some lucky investments
00:01:49.760 | and moving to Hawaii to become a fruit farmer
00:01:52.140 | on my grandparents' under-maintained farm.
00:01:54.760 | It's not, it wasn't a really big farm.
00:01:56.880 | It was only eight acres in Wai'anae,
00:01:58.880 | which is a really rough part of Honolulu or in Oahu.
00:02:02.800 | It's probably the roughest part of Oahu,
00:02:05.560 | but it was a nice place.
00:02:07.360 | There was some pummelo trees, mango trees.
00:02:10.400 | It was only about a couple miles from the beach.
00:02:12.760 | You could see the beach from the property just a little bit.
00:02:15.480 | And I was thinking, man, you know what?
00:02:17.720 | This could be a good lifestyle
00:02:18.880 | in exchange for clearing the brush,
00:02:21.160 | watering the trees, and doing general upkeep
00:02:23.920 | on a very old and dusty house.
00:02:26.620 | I could live for free and make some extra money
00:02:29.140 | selling mangoes, papayas, and pummelos down the street.
00:02:32.760 | Maybe $10,000, I don't know.
00:02:35.280 | But then after I thought about it a little bit more,
00:02:37.880 | I kind of slapped myself silly and bucked up.
00:02:40.760 | Throwing away a perfectly good career in finance
00:02:43.480 | at 25 years old was incredibly naive and stupid.
00:02:47.240 | It was one of those gotta get your patience down
00:02:50.680 | and grind it out because 400,000,
00:02:53.720 | even though that sounds like a lot,
00:02:54.960 | and it is a lot for someone who's 25 years old,
00:02:57.360 | is not enough for a long, long time in my head.
00:03:01.680 | So I gutted it out for another nine, 10 years
00:03:03.620 | until my investments could generate about 80,000 a year
00:03:07.200 | and cover my desired living expenses
00:03:08.840 | in San Francisco in 2012.
00:03:11.220 | So back in 2001, it's important to note
00:03:14.400 | that the 400,000 could only generate
00:03:16.420 | about 20 to $24,000 in risk-free income.
00:03:20.400 | And I used the wrong word.
00:03:22.000 | It's not only, it's, hey, not bad, 20 to $24,000 a year
00:03:26.000 | because the risk-free bond yield,
00:03:28.120 | the 10-year bond yield was more around 5 to 5.5%.
00:03:31.760 | But today, the $400,000 can only generate
00:03:35.000 | about 8,000 to 9,000 a year in risk-free income
00:03:38.380 | given the 10-year bond yield has collapsed down to about 2%.
00:03:43.120 | Therefore, there's no way today
00:03:44.760 | I could retire early on 400,000,
00:03:47.280 | even if I was a really happy-go-lucky guy
00:03:51.120 | and just one person,
00:03:52.560 | because the federal poverty limit,
00:03:55.480 | as determined by the federal government,
00:03:57.720 | for one person is $12,140 a year.
00:04:02.720 | So I wanted to use this episode and this post and podcast
00:04:07.820 | to talk about the federal poverty level limit.
00:04:11.720 | So if you go to the post, you'll see a great chart
00:04:13.920 | that highlights the federal poverty level limit,
00:04:16.880 | 100% up to 400%.
00:04:19.080 | And these numbers, these income figures are very important
00:04:22.560 | because these income figures are what allow you
00:04:26.960 | to get subsidized health insurance,
00:04:30.680 | whether you are retired or not.
00:04:33.200 | So in other words, the government believes
00:04:35.840 | that if you make 400% or less
00:04:38.760 | of the baseline federal poverty level,
00:04:41.660 | you are considered poor enough to receive federal assistance.
00:04:45.500 | You are not rich enough to actually pay more
00:04:48.520 | to help other people.
00:04:50.040 | Let's be honest here.
00:04:51.140 | Don't get defensive.
00:04:52.500 | Don't get sensitive that I'm saying this.
00:04:54.360 | This is what the federal government has decided.
00:04:57.040 | And to just go through some of these numbers,
00:05:00.240 | a household size of one,
00:05:02.000 | the federal baseline poverty level limit is 12,140.
00:05:06.560 | Household size of two is 16,460.
00:05:10.640 | Household size of three, 20,780.
00:05:14.180 | Household size of four, 25,105, 29,420.
00:05:19.180 | And then 200% of the federal poverty level
00:05:23.300 | is double that, basic math.
00:05:26.420 | So I think the household income levels
00:05:27.960 | between 300% to 400% of FPL seem comfortable
00:05:32.280 | as long as the household doesn't live
00:05:33.720 | in an expensive coastal city like San Francisco,
00:05:35.960 | New York, or Los Angeles.
00:05:38.000 | For example, I have to imagine a couple with two kids,
00:05:40.880 | so a household of four making between 75,300,
00:05:45.400 | that's 300% of FPL, to 100,400, which is 400% of FPL,
00:05:50.400 | is gonna be able to live a decent, comfortable lifestyle
00:05:54.480 | in the heartland of America
00:05:55.940 | where I've been aggressively investing in real estate
00:05:58.400 | for the past three years.
00:05:59.960 | Just recently, you heard the University of Texas
00:06:03.240 | out of Austin announce families earning less than 65,000
00:06:06.680 | would not have to pay a single dollar of tuition
00:06:09.080 | starting in 2020.
00:06:10.840 | Meanwhile, families making up to 125,000
00:06:13.840 | would also receive some type of tuition subsidy.
00:06:17.080 | So that's really, really great news,
00:06:18.600 | and obviously Texas, Austin, and this heartland of America.
00:06:22.000 | So again, if you're, they're saying you still get subsidies
00:06:26.700 | if you make up to 125,000, that's pretty good.
00:06:31.700 | However, I argue, as does the government,
00:06:36.160 | that any household income between 100% to 200%
00:06:39.800 | of FPL is gonna be a little difficult to survive on.
00:06:44.280 | It's gonna be difficult to get ahead
00:06:45.860 | if that's what you have.
00:06:47.240 | And even in retirement, I don't think that's enough
00:06:51.000 | because of just extraneous expenses that come up,
00:06:54.880 | whether it's trying to take care of your parents,
00:06:56.500 | taking care of your kids, accidents, healthcare,
00:07:00.560 | even though you're gonna get subsidies.
00:07:02.480 | Those subsidies, yeah, they're good,
00:07:04.760 | but man, there's some huge deductions at the ACA level
00:07:08.440 | where you get these subsidies.
00:07:10.200 | You know, we're talking 5,000, $10,000 subsidies,
00:07:12.700 | and that's after tax, which could easily wipe you out.
00:07:15.400 | So in a post, I highlight a chart,
00:07:18.860 | and I crunch the numbers that shows how big
00:07:21.800 | of an after-tax retirement portfolio you need
00:07:24.760 | by household size and percentage return
00:07:27.360 | if your household income is 100%, which is abject poverty,
00:07:32.360 | to 200% of FPL, which is near poverty.
00:07:36.520 | And so let me just share some numbers with you
00:07:38.520 | on this podcast.
00:07:39.740 | So in order to retire early and live in a household income
00:07:42.600 | equal to 200% of FPL, and a conservative 2% rate of return,
00:07:47.600 | or, quote, safe withdrawal rate,
00:07:50.000 | it really is safe at 2% because that's the risk-free rate
00:07:53.080 | of return right now, you will need to amass 1.214 million
00:07:58.080 | as an individual, and up to 3.374 million
00:08:02.720 | for a household of six.
00:08:05.800 | That's a lot, that's a lot, lot, folks.
00:08:08.600 | Now, let's say you don't wanna have a household of six,
00:08:11.200 | you know, let's say a household of four,
00:08:13.400 | you gotta amass about 2.5 million.
00:08:15.960 | If you're okay with living in abject poverty,
00:08:17.880 | or 100% of FPL, and expect a conservative 2% rate
00:08:21.520 | of return or withdrawal rate,
00:08:23.120 | then you'll only need to amass 607,000 as an individual,
00:08:26.980 | and up to 1.7 million for a household of six.
00:08:31.160 | If a couple wants to have two children,
00:08:33.680 | which is more or less standard nowadays,
00:08:35.580 | one and a half to two children,
00:08:37.000 | and earn up to 200% of FPL to have more breathing room
00:08:40.600 | in early retirement, they need to amass
00:08:43.200 | between one million to 2.5 million
00:08:46.360 | in an after-tax portfolio based on a 5%
00:08:49.320 | down to a 2% withdrawal rate, and so forth.
00:08:52.180 | So just think about that, folks.
00:08:55.280 | If you wanna retire early and live in poverty
00:08:59.200 | or near poverty with a family, right, with kids,
00:09:02.960 | you're probably gonna need at least a million dollars.
00:09:06.820 | So it's kind of backwards.
00:09:08.080 | It's kind of a weird thought process.
00:09:10.620 | And again, the math doesn't lie.
00:09:12.420 | It's just the way it is.
00:09:13.740 | And given that the risk-free bond yield is at 2%,
00:09:16.380 | I would really not use a withdrawal rate
00:09:19.020 | of higher than 4%.
00:09:20.780 | Yes, we've had a 10-year bull market,
00:09:23.900 | and the returns are like 8% to 9% to 10% a year,
00:09:27.320 | but do you really expect that to continue?
00:09:28.740 | And do you really wanna count on those type of returns
00:09:31.340 | to continue once you stop working?
00:09:34.040 | My answer is no, and I think your answer should be no, too.
00:09:37.000 | I would use a safe withdrawal rate
00:09:38.480 | or expected compound return rate of around 3%,
00:09:42.560 | so 50% higher than the risk-free rate of return.
00:09:45.440 | And remember, this is just assuming
00:09:47.560 | you're gonna steadily make money
00:09:50.080 | every single year in your portfolio,
00:09:51.960 | whereas in fact, you know that every 10, 15 years,
00:09:54.640 | there's like a downturn.
00:09:55.580 | 2018, we saw a downturn, right?
00:09:57.320 | The markets were down 6%.
00:09:59.880 | And obviously, 2008, 2009,
00:10:02.540 | the markets were down like 35%.
00:10:04.500 | So it can get ugly out there,
00:10:05.880 | so you don't wanna just count on this steady,
00:10:08.420 | unrealistic rate of return.
00:10:11.540 | So the question I have for all of you
00:10:13.560 | looking to retire early
00:10:14.740 | or looking for financial independence is,
00:10:17.300 | is it worth living in poverty
00:10:19.520 | or near poverty to retire early?
00:10:22.300 | For the first 13 years of my life,
00:10:23.900 | I grew up in emerging countries like Zambia and Malaysia
00:10:27.420 | because my parents were in the US Foreign Service.
00:10:29.700 | I was surrounded by poverty,
00:10:32.180 | and it made me question life,
00:10:34.860 | question why I'm studying or why I wanna earn money
00:10:38.380 | and what I wanna do with my life,
00:10:39.580 | because it's kinda scary.
00:10:40.820 | I had friends, a couple best friends
00:10:42.860 | in Kuala Lumpur, Malaysia,
00:10:44.260 | who would share one room and a bathroom
00:10:47.820 | with three other family members.
00:10:49.540 | We're talking one room, maybe 400 square feet,
00:10:53.820 | maybe 500 square feet,
00:10:54.900 | and bunk beds all along the walls,
00:10:58.880 | and where they would just hang out on their bunk beds,
00:11:02.060 | have lunch, dinner, breakfast in the center of the room,
00:11:06.780 | and then just go to the bathroom.
00:11:07.860 | There was no privacy, nothing.
00:11:09.700 | So here in the United States,
00:11:11.060 | I mean, we've got it large and we've got it good,
00:11:13.620 | and because I saw so much poverty growing up,
00:11:16.860 | it just made me afraid of becoming poor.
00:11:19.380 | And when I came to America in 1991,
00:11:21.740 | I decided not to take my good fortune for granted.
00:11:24.540 | I was like, you know what?
00:11:25.360 | I don't wanna live in a one room
00:11:27.180 | with four other people or three other people.
00:11:30.000 | I wanna have my own car, I wanna have my own place,
00:11:32.240 | and I wanna have some options.
00:11:33.640 | So I just hit the books and I just really focused.
00:11:35.900 | And until this day, at 42 years old in 2019,
00:11:40.500 | I'm not taking my good fortune for granted.
00:11:42.680 | There is no way, because if I do,
00:11:44.960 | I feel like I'm disrespecting the people
00:11:46.680 | who don't have the same opportunity.
00:11:48.540 | So, even though money doesn't buy happiness,
00:11:52.540 | money has to at least cover all our basic living expenses
00:11:55.360 | before we can really believe in such an ideology.
00:11:58.680 | So I personally would not be willing to retire early
00:12:00.960 | if I had to live in or near poverty.
00:12:04.320 | Although my work in finance was very stressful,
00:12:08.000 | and my wife's work in finance was pretty stressful,
00:12:11.160 | it allowed us to own a comfortable home in San Francisco.
00:12:14.800 | It allowed us to take four to six weeks of vacation a year.
00:12:18.760 | It allowed us to drive a reasonably safe vehicle,
00:12:22.400 | and also it allowed us to potentially raise a family
00:12:25.160 | if our son came while we were still working.
00:12:28.520 | And these are great things.
00:12:31.120 | I mean, the work wasn't that bad.
00:12:32.760 | Yeah, there were micromanagers,
00:12:34.680 | terrible amounts of pressure and unreasonable clients,
00:12:37.540 | but hey, we were living a life that we enjoyed.
00:12:41.720 | And for the now three of us, since we have a son,
00:12:44.140 | to live off only $41,560 a year, or 200% of FPL,
00:12:49.140 | that would require us to leave San Francisco
00:12:53.040 | and start living with my parents in Hawaii to save on rent.
00:12:56.480 | And although plenty of readers have stated
00:12:58.320 | they have no problem living at home
00:12:59.760 | with their parents as adults, we definitely do.
00:13:02.680 | Our parents, they're in their 70s.
00:13:04.920 | They value their privacy.
00:13:06.880 | We're in our late 30s and early 40s.
00:13:08.880 | We value our privacy.
00:13:10.000 | We're all set in our ways.
00:13:11.720 | Living together for an extended period of time
00:13:13.680 | would be very, very difficult.
00:13:16.560 | And then there's alternatives.
00:13:19.040 | Well, one alternative is living
00:13:21.760 | a more comfortable early retirement lifestyle
00:13:24.120 | by having a higher withdrawal rate.
00:13:26.440 | But I will tell you that if you spend 10, 20, 30 years
00:13:30.880 | saving and investing aggressively, you will feel very odd.
00:13:35.080 | It'll be very difficult for you to draw down more
00:13:38.520 | or spend more.
00:13:39.360 | It's just kind of a weird thing, and I just can't do it.
00:13:42.840 | I feel like it's like a sin to withdraw down principle.
00:13:47.840 | The other alternative, which I think most early retirees
00:13:51.320 | do nowadays, is freelance or take on odd jobs
00:13:54.240 | to make up for their earnings shortfall.
00:13:56.520 | And I think this makes a lot of sense.
00:13:58.160 | If you have a wealth of experience,
00:13:59.760 | surely you can at least get a minimum wage job
00:14:01.800 | doing something that isn't gonna hurt your back
00:14:04.360 | or something.
00:14:05.200 | But where things can get hairy is when the early retiree
00:14:08.720 | spends endless hours trying to make extra income
00:14:11.720 | because their investment portfolios are too small.
00:14:13.920 | So again, it goes back to my definition
00:14:15.600 | of what is financial independence
00:14:17.880 | and what is being allowed to retire early comfortably,
00:14:21.960 | and that is having enough investment income
00:14:24.800 | to cover your desired lifestyle's living expenses.
00:14:27.960 | So if you're just hustling for another 40 to 60
00:14:31.280 | to 70 hours a day trying to make money online
00:14:34.000 | or doing something else, you've essentially traded
00:14:36.680 | one job for another, and that's fine,
00:14:40.320 | but don't pretend like you are financially independent
00:14:42.840 | or you've retired, 'cause you're not.
00:14:46.040 | And I've personally been accosted
00:14:47.880 | by the internet retirement police many, many, many times
00:14:50.960 | before over this 10-year journey of Financial Samurai,
00:14:54.600 | and they say, "You know what?
00:14:55.680 | "You're not retired because of Financial Samurai."
00:14:58.880 | And I say, "You know what?
00:15:00.680 | "You're probably right," which is why I don't tell anybody
00:15:02.760 | that I run Financial Samurai in real life.
00:15:05.020 | I just say, if they ask, I'm a writer
00:15:07.080 | or a high school tennis coach,
00:15:08.640 | and then just make them wonder,
00:15:10.000 | why do I have so much free time?
00:15:12.760 | But isn't it funny that if Financial Samurai
00:15:14.720 | was a little speck, it still is a speck on the internet,
00:15:17.920 | but if it was much smaller, I'd get more approval
00:15:20.960 | from the internet retirement police.
00:15:22.320 | They would allow me to say that I am an early retiree
00:15:25.600 | or whatever, so the lesson here is never stick out
00:15:30.120 | because a hammer will try to bang you down.
00:15:33.020 | In real life, you should be as stealth wealth as possible.
00:15:36.480 | Keep low key.
00:15:37.620 | So in a post that I wrote about this subject,
00:15:41.680 | I highlight a budget on retiring early on 200%
00:15:45.660 | federal poverty level limit for a family of three.
00:15:48.520 | And that number comes out to about $3,100 a month
00:15:52.700 | after a 10% effective tax rate.
00:15:54.700 | And I don't know, I look at it and I get mad
00:15:59.040 | at how little I can spend because I want better
00:16:01.920 | for my wife and son.
00:16:03.560 | I mean, I think every single parent wants better
00:16:06.400 | and because I see how little I can spend.
00:16:09.000 | I mean, I'm talking about like $50 a day.
00:16:12.480 | No, sorry, $50 a month for my boy.
00:16:15.880 | You know, I can't even send him to like a Jamboree class
00:16:19.600 | 'cause that's like $100 a month.
00:16:22.040 | So this budget makes me mad, but it also makes me motivated.
00:16:25.680 | And it also makes me realize that I just can't do 200% FPL.
00:16:30.680 | I need an income of about 300% of FPL or $62,340
00:16:37.280 | in early retirement to feel reasonably comfortable.
00:16:40.160 | At a 3% safe withdrawal rate,
00:16:42.360 | we therefore need a portfolio of at least $2.1 million.
00:16:45.840 | And again, the math doesn't lie.
00:16:47.940 | So I want you guys to do the math, to do the math yourself,
00:16:51.400 | to be really honest about your budget
00:16:53.280 | and your withdrawal rate
00:16:55.320 | and how your lifestyle might change over time.
00:16:59.080 | Don't rush early retirement.
00:17:00.680 | Don't rush it because you're feeling this FOMO
00:17:03.280 | or seeing other people do it.
00:17:05.780 | I can guarantee you that there's a lot of negatives
00:17:08.160 | on early retirement and there's a lot of doubt
00:17:10.000 | for people who retire too early.
00:17:12.200 | One of my big regrets was retiring too early.
00:17:14.400 | You know, 34, 34 and a half,
00:17:16.200 | it's just in retrospect, it's kind of stupid.
00:17:18.360 | It really is, folks.
00:17:20.360 | I wish I gutted it out for probably
00:17:23.480 | two or three more years at least.
00:17:25.840 | You know, originally it was to 40,
00:17:26.920 | but two or three more years, I would have saved more,
00:17:31.080 | earned more, built more passive income.
00:17:33.240 | And I think it would have been better.
00:17:35.000 | But you know what, I can't rewind the past
00:17:37.800 | or I can't go back in time.
00:17:39.080 | And I can just only advise you folks,
00:17:41.200 | you younger folks who are just itching,
00:17:44.480 | itching to get out there,
00:17:46.020 | just take your time and please, please run the numbers.
00:17:51.220 | So I did a cool survey, 1,200 votes so far,
00:17:54.800 | 1,200 participants, and I asked,
00:17:56.700 | are you willing to live in poverty or near poverty
00:17:58.640 | so you can retire early?
00:17:59.960 | And 72% or 885 votes say no.
00:18:05.800 | 72%, that's good.
00:18:08.040 | I'm thankful that people are pretty logical.
00:18:11.200 | And the second highest vote getter was 13% saying yes,
00:18:14.760 | I'm willing to live near poverty.
00:18:17.120 | That's 200% of FPL so I can retire early,
00:18:19.880 | but not in abject poverty or 100% of FPL.
00:18:23.800 | So I thought that was interesting, folks.
00:18:26.060 | I'm glad I'm reaching out to you guys
00:18:28.560 | and trying to make some sense.
00:18:30.380 | Nobody can tell you how you can live your life.
00:18:32.380 | I'm just telling you,
00:18:34.160 | the government has the numbers.
00:18:35.960 | I've gone through this experience now
00:18:38.200 | as a seven plus year unemployed guy with a family.
00:18:42.780 | And you might look back if you retire too soon
00:18:46.020 | and regret it because you'll be like,
00:18:47.320 | well, life wasn't too bad.
00:18:49.000 | The health benefits, the income, the security, not so bad.
00:18:53.720 | So don't take your work for granted.
00:18:55.240 | Find ways to improve your work environment
00:18:57.680 | or find another job.
00:18:59.620 | I'd love to hear from all of you guys
00:19:01.240 | and leave me a comment if you got some time.
00:19:03.560 | Otherwise, I'll talk to you guys later.