Folks have asked a lot how to retire in your 20s. The first step is to get out of college without owing your first born child to Sallie Mae. I got lucky and got a scholarship to a state school and worked part time while I was going to undergrad, so I started investing when I was 18. I didn’t have a big balance or a trust fund, rather I just would take whatever I made and instead of buying kegs (ok I bought a couple) I’d take it and buy stocks.
I did this the duration of the four years in college, so that when I got out of school rather than starting in the hole I started positive by about the same amount that the average person owes. I was pretty lucky as most of this money got invested post 2008 when the stock market was ridiculously cheap.
When I got my first real job, I kept my lifestyle like it was in college, with only slight upgrades around the edges. I saved about 55% of my total compensation that first year (I’m counting employer retirement contributions), and kept close to that savings rate from 2012 to 2015. During those three years the broad US stock market returned (these numbers are approximate) 16, 33, and 14%. Since my savings was all in the stock market I participated in these gains but not those exact numbers since my portfolio was not 100% Broad US Stock Market. My personal rate of return (IRR) during that period was 15%, as I held half my assets in international stocks, but overweighted small cap and value stocks which helped make up for the allocation to international (stinking Greece!)
I’m going to give close to real numbers here because I want to be credible lest no one believe my story that you can retire in your 20s. In addition to saving around 55% each of the three years while working, I started out with $40,000 post college (I worked part time, tutored, and got a scholarship that included room, board, and tuition, a very atypical experience). This is approximately how my contributions looked and how they grew.
Most financial advisors will tell you that 4% is the safe amount you can draw down in perpetuity without a huge chance of running out of money. If you look at how the big endowments are run, they usually assume 4-5% real returns (meaning after inflation). They are also supposed to exist forever. The way they make such a bold assumption is by having a high amount of money in risky assets and by accepting volatility in their portfolios, so I do the same. I have 100% in stocks in my investment portfolio with a few years expenses in cash to try and avoid tapping my portfolio if the stock market were to crash for a time. I would probably seek to hike the Appalachian Trail or some other low spending activity if that were to happen.
Retire in Your 20s With Income Supplements
Notice that 4% of $234,000 is only about $9300. Most of you will look at that figure and say that that’s not nearly enough to retire for life. In fact, you’d be right. A lot of people in their 70s work part time to supplement retirement income that is similar to this figure. I discovered that I could earn $40 or more an hour while tutoring on the side, so a few hours of that a week and I can meet my bare bones spending needs of about $16,000 a year.
The rest of my time I plan on spending on more exciting endeavors. Some of these might make money. Even so, that’s not my primary need or desire in pursuing them. If I write a book and make money, great. I am focusing on delivering something that I hope makes a difference in people’s lives. Not something that sells the best.
If I had $400,000 in my portfolio, based on my spending I’d have been officially Financially Independent. This is true even by the standards of the Internet Retirement Police (MMM trademark?). Some folks become upset when I say that I’m “retired” while I’m working a few hours a week. I intend to do this to supplement my income. After all, most retirees already do that. Look at how many people work at Wal-Mart that appear over 60. The difference is if something big changes I’ll be able to go back to work. I have health and human capital to make up the difference in what I have and what I need. When you are in your golden years it’s much more difficult.
High Recent Stocks Returns Give me pause, but consider that we’re all rich compared to the rest of the world
Stock returns have been high lately thanks to the Federal Reserve. It has stimulated the economy artificially with low interest rates. I fully expect a correction coming at some point. We’ve had positive returns since 2009. When it happens, you got to have enough in cash that you avoid panicking. You do not want to sell your holdings at the exact wrong time. I’ve tried to insulate myself somewhat from this by not holding everything in market cap weighted indexes. Major index funds hold a ton of Apple, Facebook, Amazon, etc. These tech stocks and social media stocks in general have done well lately. Even so, I’m happy avoiding them as 300+ P/E multiples already include a lot of good news.
So to figure out what you need to retire from your own job, figure out what your spending needs are. Anything over $20,000 a year for an individual is incredibly luxurious for a person with normal health. Some would not think you can get by comfortably on that sum. I would recommend traveling abroad and seeing just how the other 90% of the world lives. It made me content with a lot less in life materially.
Move to a cheap location, save like crazy, work in a high paying job, and you too can retire in your 20s
That $20,000 figure requires a $500,000 portfolio to generate enough income based on the 4% rule. Maybe you are really frugal and want to live in a cheap part of the country. Perhaps you want to wander around low cost destinations like Asia. In that case, your spending needs might be less than mine. Frugality is immensely rewarding. For each dollar less you spend, you need to save $25 less in your portfolio. That could could allow you to retire even earlier. Start at 22 and stay away from significant student debt and consumerist traps. Avoid car loans, mortgages, and credit card debt. If you do, you could reach even that figure by your 30th birthday. This is especially true if you have a technical job that starts out with a high income (engineering, finance, or programming/development/IT).
I’m writing a book 25 Is The New 65: How To Retire Outrageously Early and Do Whatever The Heck You Want. I hope you’ll check it out on Amazon when I finish it. Working up to a 55% savings rate is really tough. I’ll show you some of the tricks I used to make it easier for you. In the mean time, thanks so much for being a loyal reader of Millennial Moola as this thing gets going.
Feel free to leave comments on this or any of the other posts so far and I’ll respond.
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