Hello everybody, it's Sam from Financial Samurai and what a past couple weeks we've had in the stock market. October 10th and 11th, we saw what, 800 something points on the Dow drop and then followed by another 550 points or something. So that was like 6% to 6.5% drop. And then the NASDAQ dropped more as tech stocks got slaughtered.

You know, it was interesting because on October 10th, I was wondering to myself, okay, fine. So the 10-year bond yield went to 3.25%. People are freaking out about higher borrowing costs, you know, slow down in investments, using a higher discount rate to calculate the future cash flow of companies to value them.

So I was like, okay, fine. It's dropping and that is a surprise, surprise move to 3.25%. But then on October 11th, I was thinking, wait a minute. So the 10-year bond yield now declined by about eight to nine basis points down to about what, 3.15%, 3.13%. And yet the market still went down another two to two and a half percent.

So I thought, you know what, it's time to buy. It's time to buy. And I believe, let's see what happens. The S&P 500 will close up about 8% for the year. We're going to rally into the close. And this sell off was irrational. It was one of those things where just, you know, algorithms, computers just hitting the sell button, rushing out.

And it's just a one way trade out and it was just irrational. So as of October 16th, 2018, we got some relief in tech stocks. Well, Netflix, they reported better than expected third quarter results of the stock is up 10% after the close. So that should help give confidence, at least in the tech sector.

And you saw bank stocks, Goldman Sachs, Morgan Stanley report pretty good numbers. So overall, I am pretty confident. Well, I believe with 70% probability, we're going to do well into the close and end the year on a higher note. But enough about the markets and buying the dips. In this podcast, I want to talk about how a $5 million investment portfolio provides a pretty average early retirement lifestyle.

There's a lot of talk about how you need multi millions of dollars in after tax investments to retire early. And I showed this in my after tax investment amounts by age post and podcast, which shows that yes, you actually do need millions of dollars because at a safe withdrawal rate or a 4% rate of return, you're not generating that much income.

So if you have $5 million, you're generating at 4% rate of return $200,000 in gross income before tax. Now, here in San Francisco, the Department of Housing and Urban Development say that you are quote low income if you have income of less than $100,000 with a family of three or four.

And if you talk to private grade schools, and also private universities, they also provide financial aid if you have income of less than $100,000 per kid. And what I find really, really interesting in the personal finance community is that there seems to be a lack of acceptance from literally half the population in the United States who live in the on the coast or in higher cost areas of the country, that yes, you actually do need multi millions of dollars to be able to retire early and support a family.

You know, when toddlers close their eyes, they think other people can't see them. That's fine. That's because their logic is still developing. But I wouldn't expect grown adults to think the same way. And we know what happened the last time, you know, half of America ignored the other half of America.

I mean, wasn't there some type of surprise presidential victory the last time this happened? Yes, there was. So I'm hoping in this podcast in this post, that, you know, all the people and all the personal finance bloggers who don't live on the coast, which is a majority of them for some reason, actually, it's probably not some reason it's because, you know, it's easier to retire earlier or achieve financial independence if you live in a low cost area of the country, right?

That's obvious. But I hope through this post and podcast that more people realize how the other half live, right? Let's let's try to understand everybody else. You know, it's as if the majority of Americans are overweight, wasteful in their spending and only speak one language or something. I mean, surely nobody's so irrational as to purposefully harm their long term wealth, health and mindfulness with their one and only life.

So I don't believe financial samurai listeners and readers are irrational. I think we all do things to better ourselves over time. You know, if we want to lose weight, we're going to eat healthier and exercise more if we're going to want to achieve financial independence before 60. We're going to save more, invest more wisely and take some calculated risks, right?

It's all logical. So I believe that you need probably at least 3 billion and probably closer to 5 million in after tax investments if you want to retire early. The key word here is early. So let's say you have a 4% annual rate of return on 5 million dollars.

That equals $200,000 a year in passive income. And I'm fortunate to have Jerry and Linda, a couple financial samurai readers share their budget. So Jerry is 43 years old and has an eight month old daughter and a non working spouse named Linda, who is 35 years old. They've lived in Los Angeles for the past 20 years.

And obviously Los Angeles is a higher cost area of the country. Weather is good, lots of employment opportunity, property prices are rising and so forth. So both decided to retire early in order to spend as much time as possible with their daughter. After both negotiated severance packages equal to $120,000 for Jerry and $70,000 for Linda, they have a combined net worth of roughly $5.6 million if you include the $600,000 in equity they have in their primary residence, which they bought in late 2013 for a million dollars.

Their goal is to stay retired forever, and perhaps do some part time consulting once their daughter goes to kindergarten. Neither parent is doing any sort of side hustling at the moment, because they want to be very present with their daughters. So Jerry and Linda are kind of like my family.

I've cross referenced all the numbers based on my family's own household expenses over the past year since we have an 18 month old toddler and also live in California, and San Francisco is actually a little bit more expensive. So if you click over to the post, you'll see a detailed expense budget on how they live off $5 million in after tax investments in early retirement.

And I wanted to go through these numbers here. So if we look at the income, it's $200,000 in investment income. And the good thing about investment income is that it's taxed at a lower rate than W-2 income. So $200,000 is taxed at a 15% capital gains tax rate, versus if they had made $200,000 from a day job, they would be taxed at 24% as a married couple.

After paying roughly 8% in California state income tax, which unfortunately doesn't have a lower capital gains tax rate, Jerry and Linda's effective federal plus state tax is only 24% versus 30% if they were W-2 employees. So this is important to know. If you're able to generate investment income, not only is it passive, and you have to work for it, it's taxed at a lower rate.

So it's a much more efficient way of earning. However, due to the state and local tax deduction cap, the salt cap of $10,000, they're losing out on probably at least $5,000 in tax refunds they would have received before Trump's tax reform act was passed. So coastal city real estate folks, you guys will feel the hit sometime in 2019 when you do your 2018 taxes.

Trust me on this, folks. And I think once people see that, there's going to be a little bit of a another leg down in the real estate market on the coast. So again, because Jerry and Linda want to be completely present, they've promised not to do any activity to generate money before their daughter goes to preschool.

And as a result, they must be disciplined and stick to their budget if they want to remain retired. All right, so after taxes, and after getting a credit from the salt refund, their net income is $154,400. So think about that, folks, they're paying $48,000 in combined taxes. And that's a lot, right?

Because the median household income in America is about $60,000. So their taxes alone are, you know, almost equal to the median household income. So for these folks, don't be angry at them, they're actually contributing a lot to our great country. And so just don't forget that next time you want to hate on people who make a lot of money or more money than you.

And let's look at the expenses here. And I hope you guys click over to the chart because this, this chart is pretty interesting. So childcare, because they have a daughter, their kid expenses per year is 36,000. So 36,000, the 10 hours a week of childcare assistance is extremely important to them to keep their sanity.

Sometimes they go and use this time to go on dates. Other times they use these hours to have me time to get away from each other, which is really, really important. Because being a stay at home parent is really hard. And I've gone through this for 18 months. And it is so much easier having a day job, even a banking job, even a strategy consulting job, any job you can think of is so much easier than being a full time parent, because there's never, ever really an off switch.

But it gets easier, it gets easier every month their daughter sleeps a little better through the night. Now they take their daughter to swim class twice a week, and gym class once a week. And other other days, they go to the local science museum. And they have a family membership there.

And they also go to the zoo when the weather's okay. And that's like another $150 an annual family membership. And despite each being able to contribute about 11,000. So 11,000 each, the 22,000 a year total, they can't do more, even though they can do more, right, you can contribute 15,000 each, that won't hit your estate.

And so that's total of 30,000. But they can't do more than 22,000. If they want to maintain their lifestyle. They don't believe making their daughter a five to nine millionaire is particularly wise, given the possible lack of motivation, so much money might cause, although they think sending their daughter to public school in order to make her a millionaire upon graduation sounds pretty good.

And I agree with that wholeheartedly. Because look, internet technology is making education accessible and free. So all this like pedigree stuff, you know, it's nice, look, hey, if my son got into Princeton and XYZ grade school and got a scholarship that I'd be, you know, to the moon. But I'm going to try not to stress about it.

Because pedigree doesn't really matter anymore. It's what you do. Alright, so property about $4,800 a month, which believe it or not, for West LA is pretty reasonable. You know, they live in a modest 1500 square foot three bedroom two bathroom home at the edge of Santa Monica, Santa Monica is a prime neighborhood, but they're at the edge, you know, closer to the inland.

Their house is valued at 1.3 million, or 400,000 below the median priced home in the area. And again, they bought it for a million dollars about five years ago. And that's about right. They've been thinking about upgrading to a house closer to 2500 square feet, because having a kid really shrinks your house by about 30%.

But such a house will cost about $2 million in the neighborhood, maybe even more, but actually maybe less now that the coastal market is slowing. And so they decided not to, they read my buy utility, rent luxury strategy, borough strategy. And they decided to keep costs low and earn a higher rental yield in other parts of the country through real estate crowdfunding, and aristocrat dividend stocks instead.

So one of the key things about early retirement is healthcare premiums. It's actually the thing that probably bothers me the most and that people really, really need to be aware of. According to the Kaiser Family Foundation, the average annual premium for employer based family coverage in 2018 is $19,616, or that's $1,635 a month.

And the breakdown is $14,069 comes from the employer, while 5547 comes from worker contributions, right? So it's subsidized by the employer. And you the worker got to pay on average, I don't know, 450 to $450 a month. That sounds about right. I remember when I was working, I paid about $200 to $250 a month in premiums, just for myself.

So think about this, folks. J&L, given they no longer have jobs, they must bear the entire cost of health insurance. So we're talking $1,650 a month for a gold plan. They decided with an 18, sorry, eight month old daughter, they decided not to mess around and maintain a gold health insurance plan.

Their daughter not only sees a pediatrician every three months, but she also sees an ophthalmologist every three months because she has ocular albinism and strabismus. strabismus is a misalignment of the eye. Some say it's a esotropia, exotropia, a lazy eye, and they need to make sure her daughter's prescription is correct to help her eyes align properly during development.

So in the first five years of life, it's important, you know, all the wires and neurons in your brain basically are getting wired and hardwired. But there's plasticity in the brain. So especially in the first five years, you can kind of mold your child and the neurons to where you best see fit.

But after about five to 10 years old, they start hardwiring and it's really hard to change. And so maybe maybe God not willing, she might require surgery, but who knows, hopefully glasses will help. So health insurance is clearly one of the largest and most necessary expenses early retirees must consider.

And you could get Affordable Care Act subsidies if your household income is below a certain threshold. But J and L need the income to live and don't want to draw down principles so early. The next line item is food at $1,800 a month. Is that a lot? Maybe, but I don't think so.

They value their time Jerry and Linda more than anything. As a result, they're happy to pay $5 for food delivery and save one to two hours of cooking in order to spend more time with their daughter. Food is the one area where they could cut expenses by maybe $500 a month if they ever get desperate.

Los Angeles consistently ranks as one of the healthiest cities in America and also one of the best cities for food. They've got huge variety and really healthy food selection. You know, there are vegan, vegetarian restaurants and all that. So at the end of the day, combine their food selection with the ubiquity of food delivery companies and they can't help but continuously order great food most of the week.

They also supplement their grocery shopping with Amazon Prime about once a month as well. And so all in $1,800 a month for three people. What is that? $60 a day. I don't think that's that unreasonable folks. You let me know. In terms of non-essential expenses, they hardly ever buy new clothing for themselves.

So they're spending, you know, definitely less than $200 a month. Their $330 a month sports club they think is well spent, you know, fitness, health, social aspect, it's all there and they go three times a week. And finally, they 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, San Diego, left to explore that, hey, why not just explore as a family together? They can go to Las Vegas as well. Besides, they agree with me that extensive travel before the age of three and probably before the age of five is a waste of time since their daughter won't remember a thing when she's older.

You know, my wife and I, we recently went to just an hour away trip to Sonoma at a friend's house. And it was an amazing, amazing place and we stayed there for six nights. And it was awesome. But man, we filled our car to the brim with food supplies, with like a crib, with a stroller, just bumpers for the bed guard, toys, books, you name it.

And of course, obviously our stuff. So I can't imagine flying with that much luggage with our son. So in terms of, you know, budget cuts, once again, they could cut money with food, food delivery, they could spend less money on childcare, and they could contribute less to their daughter's five to nine plan that overall will save maybe 5000 to 10,000 a year.

But I'm not sure and they're not sure the additional savings would outweigh the decline in their lifestyle. Because if you look at the budget, again, it's not that extravagant. I just don't see that much extravagance. They are really responsible with regards to providing whatever it is for their child's future.

You know, they could move to a lower cost area of the country. That's obviously, you know, something a lot of people have suggested. A lot of people have told me, hey, Sam, why don't you leave San Francisco because it's so expensive. And hey, guess what, folks, I am planning that move.

Once our son, you know, is old enough to go to preschool, or maybe kindergarten plan go to Hawaii, which is cheaper, believe it or not. But JNL, they'd rather stay warm all year, rather than face the brutal Midwest winters. Come on, folks, it's brutal. For four months a year.

You know, life is about living 12 months a year. Further, as a Latino, and as an Asian woman, and as a daughter who is mixed race, do they prefer the diversity of LA that can only be matched by even more expensive places like New York City or San Francisco?

I don't know if you folks, you know, who are not minorities realize this, but being in an environment with diversity is really, really, really important. Just the food, the culture, the festivals, and just feeling comfortable, you know, walking around, driving around. When there's more diversity, there's more acceptance. And I think that's a wonderful thing.

So instead of these budget cuts and moving, it seems better to just continue sticking to their budget and earn supplemental income if they ever need or want more money. So for example, they could clearly do part time consulting, let's say 10 hours a week combined. So five hours each at $100 an hour, and earn $52,000 a year.

Why do I believe they can do that? Well, I did that. And if you look at their backgrounds, Jerry was 20 years as a management consultant. And Linda was, let's see, I don't know, 15 years, something like that. 13, 13 to 15 years in digital marketing. So they clearly have some expertise, and a lot of work, a lot of work is now being done for freelancers as freelance jobs, because it's cheaper and more flexible for companies.

So the trend is there folks, and it's easy for them to make more money and bridge any kind of gap or shortfall if they have one. Every single early retiree I know eventually does something they love that generates some type of income. They have the energy, enthusiasm and expertise since they're still relatively young, right?

late 30s, early 40s. And pursuing something you love to do while making money is the dream scenario, folks. So this pursuance is what early retirement allows you to do. And once you have enough passive income to cover your general living expenses, you will keep searching until you find what you're looking for.

So please be aware that whatever you listen to or read online, try to figure out how much passive income that person has. Are they early retired financially independent because they have passive income that allows them to do what they want? Or are they really just transferring their career to becoming a blogger or podcaster, video, you know, YouTuber, and they're just they just have another job, folks.

So it's really important to kind of differentiate this. But do not confuse retiring early with doing nothing. In Jerry and Linda's case, they are busy being full time parents, which is harder than any job in the world. It's the most important job in the world. And in my case, I'm also trying to be a full time dad while continuously writing about personal finance.

And I know despite detailing the numbers and providing context around Jerry and Linda'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 become a national pastime to hate the rich, no matter how hard or how long you studied in school, no matter how many hours you've worked, and no matter how many risks you've taken to provide a better life for your family.

You know, when the downturn happened in, say, the recent one, October 10th and 11th, you know, the people who are going to be winners, probably the ones going to say, Hmm, let's, let's buy something, let's buy that stock, or you know, the index that we've been waiting on, and then hopefully in 10 years, things will be higher.

But the people who are going to be left behind are the ones who say, I'm not going to take any risk, I'm too scared, and I don't want to do any research or anything. And it's just much easier to hate on people. And it's, it's normal, it's normal to not like or dislike or hate what you do not understand.

So hopefully this podcast and this post will help, you know, broaden people's perspectives who don't live in high cost of area, places, you know, just like how more international travel and the mastery of a second language can help to create more harmony around the world. Hopefully this article and podcast will do the same.

And finally, I just want to reiterate once again, not everybody can and will retire early and not everybody should retire early. If you found a job that you love, just keep doing it. Be blessed, thank the Lord that you found something that you'd be willing to do for much less or even for free.

I think most people are disengaged from work. So please, please keep on building your savings, your investment portfolio, to provide yourself options in the future, just in case, you know, you suddenly say I want to do something else. And hopefully everybody can open their minds and appreciate this podcast and this post.

Thanks so much, everyone.