Dear Travis,
I’m 27 years old. I have only been working full time for 1 year because I spent 8 years [in the entertainment industry] and I am left starting from scratch. I moved back in with my parents and I have very little in savings. My fiancée makes $25,000 per year currently with little savings. Neither of us have debt. I make $50,000 a year with an unknown bonus. Can this New York City worker retire early?
SAVINGS:
Online bank savings account (0.99% interest per year): $6,000
Vanguard Brokerage account (88/12 AA): $6,000
US Stocks (VTI) – 35%
Developed Markets (VEA) – 20%
Emerging Markets (VWO) – 19%
Natural Resources (VDE) – 5%
Bonds – 21% (Breakdown below)
Interm-Term Muni (MUB) – 9.5%
Short-Term Muni (SHB) – 8.4%
Short-Term Total Bond (BSV) – 3.2%
Roth IRA + 401k (88/12 AA): $14,000
US Stocks (VTI) – 31%
Developed Markets (VEA) – 19%
Emerging Markets (VWO) – 20%
Real Estate (VNQ) – 13%
Natural Resources (VDE) – 5%
Bonds – 12% (Breakdown below)
Corporate Bonds (VCIT) – 3.5%
Short-Term Total Bond (VCSH) – 3.5%
TIPS (SCHP) – 3%
EM Bonds (VWOB) – 2%
SPENDING:
Live back at home, so no rent. My parents are great, letting me get back on my feet. They’ve even offered to help me with a down payment when I’m ready.
Personal Bills/Fuel per month: $400
Food Shopping/Eating out per month: $450
Entertainment per month: $200 depending. Broadway show, concerts.
Travel to NYC commute: $491 per month.
Health and Dental: $50 per month, not including co-pays of $25.
Misc: $200 per month depending. Car problems, etc.
Total: $1791 per month
Future prospects:
We want to get married. Small wedding will cost $16,000. Parents will help pay. My fiance and I both live at home with parents. We want to move in together and away from the big city lifestyle. Small town would be a great place to raise kids. We are fine with getting simpler jobs, cost of living would reduce if we moved away, and we’ll eventually start a family. Quiet life. We would want to avoid renting and just buy a small house. With my parents helping with a down payment, this should be possible.
In the future, I would be interested in writing a book on diet and health. This book could make me some money someday. My fiance is interested is starting an independent online store for selling clothes. Just some ideas for future projects for us. Wouldn’t mind retiring by 50 years old.
I would also like to know what you think of my asset allocation. I love Burton Malkiel. His books taught me everything I know. You have mentioned maybe not owning all Vanguard funds in the past…what did you mean? You also mentioned that you’re worried about index funds becoming too popular.
Any other thoughts would be excellent. Thank you!
Sincerely,
Reader in NYC
Dear New Yorker,
First of all congrats on pursuing financial independence. Getting people to realize that there is another path free from extreme consumerism and materialism is half the battle. During our entire lifetimes, we are told that more will make you happier. The bigger the car, house, boat, and clothing collection, the more you’ll smile and be fulfilled. The reason why marketing companies are paid millions of dollars to craft messages like this is because they are counter to a fulfilled existence where family, friends, and finding your purpose in life take center stage. I’m going to comment on a few areas of your financial life that really stand out to me and then we’ll see if early retirement could be in your future.
Your Portfolio is Looking Pretty Good
So just looking at your asset allocation makes me feel confident you will make a great future for your family. If I had to compare asset allocations to levels of education, I would say 10% commission variable annuities would be middle school, 5% commission Ameriprise funds would be high school, super low cost Vanguard S&P 500 Index Fund would be college, and your mix that takes into account asset location and modern portfolio theory would be graduate school. It is well balanced between US and International Stocks, with different assets mixed in such as natural resources and real estate. Furthermore all the bonds are in the right place. You have munis in your taxable accounts, and taxable bonds in your retirement accounts. You also have the Real Estate fund, VNQ, correctly placed in your retirement account because these funds are so tax inefficient.
The only thing I might do if it was my money is have an International Real Estate fund in my taxable brokerage and dump the bonds. I use VNQI for the international real estate. The valuations, dividend yield, and ratios are significantly more attractive than VNQ, the domestic real estate fund. It’s probably better to have it in a retirement account if you have room, but you get some credit for the international taxes you pay on it that you lose if it’s in an IRA, so since you aren’t a multimillionaire its probably fine to have it in your taxable brokerage. Bonds are so terrible right now because of their expected future yields I see no reason to own them so you could carve out international real estate instead of your bond holdings, again if it was my money.
When I say that I think there are some benefits to not having all Vanguard Funds, I think that’s true if you have a lot of assets and/or a lot of investment acumen. There’s something to be said for keeping it simple and just using an honest and ethical company like Vanguard for investing. One reason I think investing in stocks directly can be nice is that you can emphasize other things besides what Vanguard funds do. For example I prefer to have a higher income stream from my domestic stocks in the form of higher dividends, so instead of using Vanguard’s Dividend Fund I build my own by selecting stocks that fit those characterizations. A beginner could do this by picking the ETF or Fund that you want your stocks to be like style-wise and randomly choosing 10 to 20 stocks from the the published holdings. It will likely perform very similarly. You won’t have to pay expense ratios every year, and you eliminate arcane mutual fund risks like capital gains distributions or forced liquidation because the fund sponsor decides to close it.
That said, unless you have $500,000 or more, I’d sit back and relax and use all Vanguard Funds. If you ever sell ETFs remember to use limit orders, especially after the carnage we saw recently.
Your Income Can Expand
Here’s a funny suggestion. You would actually save money in taxes if you got married tomorrow. You are correct that you are in the 25% federal bracket at $50,000 plus bonuses. However, the 25% bracket’s starting point is doubled when you are married, so her $25,000 plus your $50,000 plus bonus should fall solidly in the 15% tax bracket. So if you are engaged and going to get married anyway, I’d suggest a sooner rather than later wedding date because you will save money on your taxes! How romantic right?
Your $50,000 plus a potential bonus is pretty solid. Remember the more you earn the faster you retire, and companies will almost never give you substantial raises without the threat of a competing offer, so look around. Apply other places, unless you are so happy with that company you can’t contain yourself. In New York City after a few years of experience I would be surprised if you couldn’t locate a $70,000 a year job because the high cost of living is really burdensome. After all, this is a city where a lot of the subway cops are pulling down six figures after benefits, so be open to higher income.
The same would go for your fiance. $25,000 is equivalent to a $12-$15 an hour wage. In New York City a good waitress in a solid but not five star restaurant should be able to pull down $20 an hour. If your fiance has any special skills beyond this I think she could make even more. If you are already commuting into the city then maybe she could come along? My advice on your living situation will make it even better for her to increase her income.
Spending and Living Decisions
It’s great that you are living with parents to save money, but I think there might be a real opportunity to lower some expenses and make more money. When you get married, I’m assuming you will move out and into your own place together. Why not get a studio apartment across the river in New Jersey for as low a cost as you can close to a train line? New Jersey’s taxes start at a lower level so you will probably pay less than if you were a New York State or City resident.
Though you’d suddenly have a $1000-$1500 a month cost to deal with, you could sell your car and reduce your monthly expenses to maybe $200 for transportation. Furthermore, all of NYC would be opened up to your fiance to make more money, and you’d spend less of your life stuck in traffic, possibly making it easier to work hard at your job and get more raises and bonuses.
If you are comfortable trying something extreme, I bet you could rent a bedroom from someone in a larger apartment for something like $700-$800 a month. Since you would be married I understand if you want your own place but just throwing all options on the table.
In terms of transit, I should have my website shut down if I didn’t mention how expensive that commute sounds. if you decide to stay where you are at, $500 a month for a car is standard for a normal person but there’s way better ways to use your money than that if you aspire to financial independence. Mr. Money Mustache, the most popular early retirement advocate, calls long car commutes a “clown-like car habit” that Americans are afflicted with. I’d say sell your car if you can take a loss of less than $2000 from it and buy something way cheaper or take public transit. You mentioned a $500 a month car cost and $400 additional that included fuel and personal bills, as well as $200 a month in case your car has problems. So that car might be costing you like $700 a month or more if you throw in insurance, inspections, fees, parking fines, etc.I would look really hard at dumping that ASAP. I sold my car to a rapper I met on craigslist in an all cash deal before I left to travel around the world and it’s been absolutely amazing. No annoying insurance reminders, tag renewals, or worries about depreciation or an idle engine falling apart while I’m gone. It’s scary at first but selling my car was one of the happiest moments of my life and I think it would make a lot of other people happy too. Limit yourself to a car no less than 10 years old for max savings as that is an arbitrary psychological inflection point, just like 100,000 miles is, so you’ll get a really good price.
Your food cost seems too high to me. $450 a month means you are going out a few times a week on average as well as buying nice groceries, which is fine if you really enjoy those things. However, I bet your relationship would grow even more if you guys learn to cook together and eat out less. Also you’ll get tons of savings with being able to buy things for two people instead of one when you eat in. The cost of a second person to cook for is minuscule compared to the first. Another financial reason to get married sooner haha.
What Spending Would I Avoid Like the Plague
The first bit of caution I’d give you is in the NYC metro area, ABSOLUTELY NO WAY SHOULD YOU BUY A HOUSE! Property taxes are sky high, valuations are even higher, rental yields are bottom of the basement low, and mortgage payments would eat up at least 30% of your take home pay even with down-payment help from parents. A home is a good investment if you live somewhere where the Price to Rent Ratio is really low, which usually means places like rural New York State, cities in the Southeastern US, Las Vegas Metro Area, etc.
New York City and San Francisco are the two easiest places in the country for me to tell people that are seeking financial independence, DON’T BUY, RENT! A medium sized house in New Jersey close to New York City would be at least $400,000, and that’s probably with an hour long commute each way. It’s a way better idea to rent a small space because it gives you flexibility if you get tired of the Big Apple even sooner and it will cost you much less.
If you wanted to live in a state like Colorado with great outdoor living and had a physician spouse, you could look into the Colorado physician mortgage programs if you were trying to arbitrage the mortgage interest rate deduction. But it’s still probably better to rent and not buy.
When you move to an area with the lower cost of living, it might actually then make sense to buy because you won’t be dealing with billionaires and millionaires bidding up real estate prices like you have in New York City and the metro area. In the mean time until you find yourself in an affordable out of the way area, consider using that parental willingness to provide down-payment help in other ways like pinch hitting for child care issues and other spending you would do that they might want to pay for like joint vacations or things like that.
The $16,000 wedding is as American as home ownership and apple pie, but I bet you could easily find a way to cut that in half and still have the people you want there. People love to have weddings in big central locations that are really sought after, like a chapel in an exclusive spot that needs 2 years notice to reserve it. However, did you know that there’s a strong negative correlation between how much you spend on a wedding and if you get divorced? Give yourself a better chance for success in marriage and spend less! Haha. Maybe you can use that as an explanation with your fiance and your families?
Even if her family and/or your family wants to help out with the wedding costs, a wedding is one day in the rest of your lives. I have heard of people that have had weddings that cost a few thousand bucks. Yours can be $8,000, way higher than the ones I’ve heard of, but still representing savings of 50% that can go towards your early retirement. While I’m talking weddings, be careful about registering at Target and Bed, Bath, and Beyond and all the traditional stuff. There are startups out there like Wanderable that allow guests to fund experiences on your honey moon that otherwise would come out of your pocket. That is much better and less tacky than asking for money but it’s the same thing effectively and lowers your spending needs. I would accomplish the cheaper wedding by seeking out a less traditional venue for the reception and be wary of unlimited alcohol as that can be 25% or more of the total wedding cost. A cash bar is a great middle ground as people that want to drink can but you aren’t stuck footing the bill if people binge. While I would suggest avoiding a catering company if at all possible, if you go with one, choose a simpler meal option and save on the per head costs. A wedding can easily be $125 a head or $50 a head, depending on how you deal with food and alcohol at the reception as well as the location of the reception. If you go with cheaper options, that means you can afford to invite more people that are close to you, which means more than having nice steak and vegetables as the meal choice.
Total Budget Makeover, so This New York City Worker Can Retire Early
If I were to redo your spending per month, this is how I’d change it assuming you two are living together (this budget is for the BOTH of you):
Personal Bills: $200 (no more fuel costs)
Food Shopping/Eating out per month: $250
Entertainment per month: $200 depending. Broadway show, concerts.
Travel to NYC commute: $200 per month.
Health and Dental: $50 per month, not including co-pays of $25.
Misc: $300 per month (same level but no misc car expenses)
Rent Spare Room in Jersey: $800
Total: $2000 a month
Increased take home pay from fiance getting better job from proximity to NYC: $500 a month
Net total spending per month after income boost: $1500 (or $18,000 a year, less than before and this budget includes rent!!)
The Answer: Can You Afford to Retire Early?
I’m assuming your combined income of $75,000 from before get’s hit by 20% in taxes, with $60,000 in take home pay for both of you (I’m not including the bonus you mentioned you might get, and I’m just cancelling the extra money your fiance makes from living closer to NYC against an equivalent spending amount to make things easier). $42,000 of this is potentially save-able during the year. If you are willing to control your spending and increase your standard of living in NYC at a rate below your salary increases, you can retire in about eight years to a place that is lower cost. I’m assuming you will need between $18,000-$20,000 to spend annually in retirement. Also I’m assuming that your portfolio is going to grow over this time period by 6%, which is approximately the expected return for the stock market over the next 10 years that has been estimated by folks like John Bogle, founder of Vanguard.
If you really wanted to live in a little bit nicer apartment and own a car, then you can add three to four years to your retirement date in eight years. If you want those things as well as going out to eat often and occasionally buying nice clothes or furniture you can add seven years to eight to get your retirement date. If you decide that $20,000 is too low for an annual spending amount then you will be looking at working until you are 50. However, if you have a serious conversation with your fiance and what you both value in life, I would sacrifice a lot of material possessions for a short eight year working career followed by decades of coaching your kids sports teams and taking a really active role in their lives.
That means your dream of raising your kids away from the urban hustle and bustle of New York is totally doable. Say your first kid comes along in three years time and you end up having three total around a year apart each time. You could literally be retiring by the time your youngest hits 1 years old as a 35 year old dad, and even faster if you are willing to “Worktire.”
What do I mean by that? You mentioned some hobbies that you and your fiance have that you’d like to be able to turn into businesses or side projects. You could write books and she could start an online clothing company. Sadly, as a fellow author I am here to confirm that most books do not make very much money and should never be counted as a reliable income source for the non professional writer. However, a realistic expectation is that you could make about $1,000 for a book you self publish on Amazon over the course of the entire year.
The clothing side business would be riskier in that you would be spending money on inventory and shipping goods. I’m no expert in that but look for others that have done the same thing and see how they did it. You might make a few thousand a year from that. In addition to these hobbies, you or your wife could pick up a part time gig working 20 hours a week something like that. The combination of pursuing potentially paid hobbies and part time employment doing something you enjoy is my definition of “Worktire.” Since you would not need your portfolio for 100% of your income in this case, you could afford to walk away from the NYC lifestyle even earlier, say after five to six years once you have at least one kiddo in strollers.
“Worktiring” is what I did. I wrote a book, I can tutor if I wanted to, and I get requests all the time to help with financial questions. I could turn the dial up on these skills and get paid for it. This website could make money too but I’m putting that off until I figure out how to do it my way. That’s a privilege only possible because of substantial savings that insulate me from the pressures of paid work. I can’t wait until you start feeling this same freedom.
Congrats on being way closer to retirement than you thought!
*Disclosure: None of this should be considered investment advice. Consult with your own financial professional to consider your investment objectives and goals.
Cheers,
Travis
PS: The fact that people need to write disclosures about their thoughts not being investment advice but regulators are cool with life insurance company agents charging 5-10% commissions for putting people in junk investment products in beyond me. If you are broke and need investment guidance or advice just call Vanguard or sign up with Wealthfront or Betterment.