18

Given:

  • Married couple age 40 with one child under 5
  • $800K combined 401k
  • $400K combined savings/investments
  • No debt
  • 90K average yearly expenses, includes mortgage

Is it possible to retire now with one partner working a part time job, providing decent health insurance (i.e Starbucks $12/hr) ?

  • 10
    Could there be a chance your expenses are too high?? ("Move to a cheaper area" situation??) – Fattie Oct 31 at 14:29
  • 83
    Wait. "no debt", but "includes mortgage"? Is the mortgage not a debt? – D M Oct 31 at 18:26
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    IMHO it would be good to know how much of the yearly expenses are mortgage and what the total mortgage debt is. It makes a difference if you bought a $2M house and pay $40k/y or you bought a $200k house and pay $10k/y. Certainly, mortgage will turn into repair cost. – Thomas Weller Nov 2 at 8:18
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    Mathematically, assuming you don't want to touch your 401k then you'll burn through $400,000 in 5.12 years at your current rate. If you're earning 3% interest on it then you might survive for 6 years. If you want to burn through all of it then you might make it for 15 or 20 years. I hope your child plans to fund their own college because you'll be very close to broke by that age. Good luck getting a high-paying job after 20 years of stagnation. – MonkeyZeus Nov 2 at 19:33
  • 4
    @DM: Obviously mortgages are debt and I agree this could be more clearly expressed. But the OP's attitude is not completely unreasonable. A long term fixed rate mortgage with a low interest rate and deductible interest is not the same beast as short term, high interest, easily abused revolving credit. It's reasonable to think of mortgage payments the same way you think of rent, or property taxes, or HOA fees, or any other fixed recurring costs associated with housing. The "no debt" here is likely an attempt to communicate "currently living within our means". – Eric Lippert Nov 2 at 22:08
3

Just look at the math for a sec. Ok, so it's more than a second...

Math

Let's assume your $12/hr job is 30 hrs a week, that gives you an income of $18,720 (52 weeks * 30 hrs/week * $12/hr). That's not even your take home pay, which you'll likely pay about 25% of for taxes and other deductions like health insurance, so you're looking at just over $14k a year.

If we take that $14k from your $90k yearly expected expenses ($90k - $14k), that's still $76k you're spending each year more than you make.

With $1.2m total, you're looking at almost 16 years ($1,200,000 / $76,000/year = 15.7895 years) you can survive before your money completely runs out, including your retirement money, which doesn't include all the fees, fines, and taxes for withdrawing your 401k early.

Any returns you expect from your savings or investments aren't going to significantly change this math. You might get 1 more year, if the markets are continuously and reliably fantastic, but that's not much. And the more you take out of the investments, the less it earns, too, so you're looking at the definition of diminishing returns. And these returns might not even make up for the fees, fines, and taxes for withdrawing your 401k early I mentioned just a bit ago, so you might not even get more time than I calculated.

Emergencies

And this doesn't even account for emergencies. If your appliances go out, you're probably looking at around $1000 extra expense that you didn't account for. A washer or dryer might not be that much, but a fridge can easily be double that. And an AC or furnace can be even more. A water heater might run $500-800, but then you still have to pay for the labor, unless you get a tankless, then you're talking $1200 for the unit and even more for labor.

If your house gets damaged from a natural disaster or the roof just needs replaced, that's more money you're spending beyond your expected expenses. If a window breaks, which can happen just because of extreme cold, that's another expense. A kitchen fire can cost thousands to repair. A busted water pipe can damage multiple floors and cost thousands to clean up and fix.

Any remodeling is not going to happen.

Vehicles

What about your vehicle(s)? They aren't going to last forever. Even if you can do all the work yourself, the older they get, the more money it takes to keep them running. It also takes a lot of time to do the work. I kept one car to 185k miles and another to 215k miles, so I know that situation.

Yes, you're going to have to replace your vehicles at some point. And you aren't likely going to get a loan for a good replacement at less than $20k income. It doesn't matter how good your credit is, the bank knows that it can't squeeze more money out of you than you make. In fact, they will look at all your expenses vs. your income and see your $90k expenses for your $18k income and just flat out deny you the loan, as they run away screaming. Your debt to income ratio will be atrocious.

Sure, you could just pay in cash, but then that's going to reduce how long you can survive on your savings. Even if it's "only" $5000, that's almost a full month's expenses ($90k / 12 months = $7.5k/month). And $5k doesn't get you much for a car anymore. You're looking at a high mileage (90k-120k miles) 5-10 year old car at best, which is when major repairs start to crop up, so you're likely to start repairs on it within a few months.

I just spent almost $1000 getting a new set of 4 tires. The tire pressure sensors were out, so that added to the expense. And when they did the alignment, they found the rack and pinion steering and the tie rod ends needed replaced, so that's going to be another $900, unless I find some place less expensive or do it myself. Even if I do it myself, it's still $300-500 with the parts and another alignment, not to mention the likely +4-6 hrs to do it, since I've never done this before. And that's with me already having +90% of the tools, a spot to do it, quite a bit of experience under the hood, and watching a video of someone else doing it.

Children

Your family might accidently, or purposely, grow. Your insurance isn't going to completely cover the birth, so that's more expenses. Not to mention another kid to feed, clothe, take to their sports events, and so much more.

Even if that doesn't happen, your current child is likely going to break an arm, leg, or have other hospitalizations at some point. I don't care what insurance you think you'll get, it's not going to cover everything. Nor is it going to cover the time you have to take off work to deal with it. And yes, even with a stay at home parent, the working parent is still going to have to take time off to deal with their kids at some point.

Next is schooling expenses. Even at public schools, you're expenses are going to be ever increasing. If the child takes sports, you're likely looking at a minimum of $1000 a year for equipment and other fess. That doesn't include stuff like trips, food/snacks/drinks, extra gas for the car, and so much more. Being in the band, a vocal, debate, or 100 other groups aren't free either.

Books aren't cheap, if they get lost or damaged. Graduation from high school usually includes a fairly expensive party. And you're going to have to figure out how to get Junior their first car. Do you make them buy it 100% themselves? Some people do, which isn't a bad thing, but that can lead to an unsafe and unreliable vehicle. And if they need a loan to get a decent car, you'll have to be on it as a co-signer, which your situation isn't going to help, as I mentioned earlier. Also, by this time, you'll be getting near to the end of your money. You might still have $330k in 12 years, but that'll be looking pretty tiny compared to what you're starting out with. (And don't forget that's only about 4 years of your expenses before you're completely broke.)

So in the middle of your child wanting to go to college, you'll be out of money. You won't be able to co-sign their student loans, you won't be able to help them pay their loans, and you'll be looking for your own money.

Vacations

Forget going on vacation. You just can't afford it.

Retirement

Since you won't have been adding much to your Social Security for 16 years, you won't have much to live off of. Your 401k will be drained, so you'll have to continue working until you die.

My dad worked as a welder for 20 years and as a farmer for over 20 years before that. His income from the welding job and the profit from farming wasn't much more than what you're going to making part time. After retiring at 65, he ended up working part time until either 72 or 76. He managed to squirrel away some "investment" he calls it, so now he's finally fully retired. He even helped his brother and some friends farming even after he quit his part time job to get some extra cash.

My mom had a variety of jobs, but one good one that paid really well. Until they canned everyone about 15 years ago and stole the retirement fund. She's now in her late 70's and still working, when she can find someone that'll hire her due to her age and health problems. She didn't even have a reliable job to officially retire from.

These are just 2 examples of the dozens of people I personally know and millions of people who work past "retirement age" to make ends meet. Don't be like them. Most of them didn't have a choice, with their health, employment opportunities (or lack thereof), lack of education, economic upheaval, and a thousand other reasons why they never made any real money, or lost what they did manage to make.

You do have the choice, so for you and your family's sake, don't take that option.

Stress

Is the stress of money problems a good trade-off for the stress of your current situation? Let me tell you, working a retail or food service position like Starbucks, as you mentioned, isn't without stress. You'll have to deal with the Karen's of the world when you don't get their order 110% correct. You'll also likely have to deal with under or un-educated managers who are unreliable, unreasonable, and unwilling to work with you.

You'll also have to deal with under or un-educated co-workers who are unreliable, unreasonable, and unwilling to work with you. There's a high turnover rate in these positions, and usually for a reason. And if you happen to stay at one job for long enough, you might have a manager that thinks you're trying to take their job and will get fired for that.

Is that stress worth $12/hr? Is that worth trying to stay within a budget that math has already shown isn't going to last you very long?

Raises

You'll probably think you can count on getting raises as the years go on. Sure, that's what everyone one else looks for. But at a low paying job like Starbucks and with you being part time, you're looking at 1.5-3% raises, if you get one at all. And they might even cap your pay at some point. And that's if they don't use excuses like "economic hardship", not performing as well as they'd hoped, not learning as much as you "should", having a few late arrivals or other bad marks on your record, or 100 other reasons they will give.

And that 3% of $12/hr doesn't even begin to cover the 3-5% increase in spending on the $90k you're currently doing. When people say "3% cost of living raise", they generally make more than they spend. And even 3% raises are just to keep you at your current level. That doesn't get you ahead. Not to mention that most pay raises are because of moving to another job, rather than just time-in-grade at a single position. Getting a new job takes time and money, and a fair amount of stress when you're trying to hide it from your current employer, as many people have to do. Getting fired simply because you're looking for another job is a real problem people face.

My qualifications

For over a decade, I wasn't doing as well as this Answer talks about. I tried to put myself through college on far less than $12/hr and on far less than 30 hrs/week.

Those old cars I talked about earlier? They were my daily driver and spare cars that I had at the same time. I'd bounce between them as one broke and I could afford to fix things. I ended up having to trash both, as the frames rusted completely through and they continued to require more repairs than I could keep up with.

I'm in a much better situation now, but it took over 5 years to pay off most of the credit card and personal debt I had racked up during that time and another 5 years to finish paying off student loans. Even still, I don't make as much as you are spending each year, and that's after me increasing my income around 2.5 times over the past 4-5 years.

Conclusion

While it's very appealing to retire early, you just don't have the money and situation combination to do it. As another Answer mentions, some people could retire now with the money you have, but not with your expenses. You'd have to severely reduce your yearly expenses to make the math work. If you increase the amount you get paid or the amount you work, that's great, but then is it really much different than what you're doing now?

Yes, I painted a pretty bleak, even fairly horrible picture of your future in this Answer. You might think I'm just trying to scare you and that it's not very realistic. Well, I am trying to scare you because it is all too realistic.

| improve this answer | |
  • 25% taxes on an $18k income?! Maybe in NY or parts of CA. Not really anywhere else in the U.S. FIT on that should be $0 for a married couple (standard deduction is $24.8k, so the entire wage income would be deducted.) FICA will be 7.65%. I think a lot of people look at the marginal tax rate tables and dramatically overestimate how much middle-class Americans pay in federal income taxes. Even on a six-figure income as a single person, I usually end up < 10% FIT. I think last year might have slightly passed that figure (like maybe 11-12%.) – reirab Nov 2 at 21:54
  • @reirab, the OP doesn't state exactly where they are, but good point. I ignored other deductions, like extra healthcare insurance expenses for the whole family SS, FICA, etc., so I've amended that paragraph. I still think 25% is accurate, as I remember that being about what came out of my paychecks when I made that little. And that was not getting any health insurance for other family members, since the employer usually doesn't cover more than just the employee. – computercarguy Nov 2 at 21:59
  • @computercarguy: thanks, like the math. Stupid question regarding: "Any returns you expect from your savings or investments aren't going to significantly change this math."....say we took the early withdrawal penalty and put everything in the S&P 500 fund, wouldn't that be an average of 100k year ? – Vested Nov 14 at 23:22
  • @Vested, that sounds like a new question, but the stock market is about the same as gambling. You might come out ahead some times, but most of the time not. If it was that easy to get even a 10% return, literally everyone would be doing it, and it wouldn't take high priced stock brokers to make gains. Eg: FXAIX is listed as having a 31.47% return in 2019, but a -53.75% growth rate this year. investopedia.com/articles/markets/101415/… and seekingalpha.com/symbol/FXAIX/dividends/dividend-growth – computercarguy Nov 16 at 16:49
  • Yes, those are two different stats, and I'm not a stock guy, but it seems as if a negative growth rate, you're losing money. And nearly 54% seems like a lot of loss. Also, looking at the graphs on the 2nd link, the returns go from $0.45 to $0.75, to less than a penny on a fairly frequent basis, meaning it's not very stable. If you plan to live off just the returns, you might have $50k one quarter and maybe $5k another. You have to budget accordingly and that's not easy to do when you get less than $10k 2-3 quarters in a row, especially with your expenses. – computercarguy Nov 16 at 17:01
44

Can a small family retire early with 1.2M + a part time job?

With the right sacrifices, almost certainly. Can you retire early in the scenario you described? No.

You're spending more per year than most people earn, so if you wanted to partially retire now you'd have to drastically reduce your expenditures or achieve higher part-time income. If you were spending around $40k per year you'd have a much better chance, or if instead of working at Starbucks part-time you were able to earn significantly more working part-time in your current field that would help. Assuming you've paid into social security, that and Medicare will help significantly once you hit retirement age. The main challenge is surviving until retirement age without hitting your savings too hard.

Perhaps you've got enough equity in your home that you could move to a cheaper area/smaller house and have no mortgage at all, that would be a huge step towards retiring early. Perhaps you could rent out a room in your house to help offset expenses.

Forget what the other answers say, you aren't paying for your child's college education. If they don't get a scholarship they can do 2-years at a community college and can transfer to an in-state university after that (and they should work part-time throughout).

You won't be buying/leasing new cars, you're a value shopper now, you need something in the 3-4 year old range that you can drive for 10+ years at least and it'd be best if you learned how to do basic maintenance yourself. Speaking of maintenance, you'll want to learn how to handle most home repairs too.

Cut entertainment spending, fewer and less expensive vacations, cook almost all of your own meals, grow a garden if you can, etc.

The point is people can and do live on very little. How much comfort/safety are you willing to sacrifice to be partially retired soon? You have solid income and a fairly expensive lifestyle, so odds are you'll be far more comfortable continuing to work/save as you have been than drastically changing your lifestyle. The most reasonable approach is to keep earning as you are, but to start planning and adjusting lifestyle with the goal of earlier retirement in mind. This gives you time to experiment and see which cost-cutting measures you are content with before reducing your income significantly. Also, I mentioned it above but will re-iterate, you can likely achieve a much higher part-time income leveraging the skills you've acquired in your career.

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  • 9
    A couple of points. First, if you know (or learn) about auto mechanics, you can easily drive 10-20 year old cars, especially if you stick to reliable makes like Honda, Toyota, & Mazda. Second, instead taking fewer vacations, take cheaper ones. A long weekend spent camping or bike touring is a lot cheaper than flying across the continent to take the kid(s) to Disneyworld, and IMHO a lot less stressful. – jamesqf Oct 31 at 16:41
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    @jamesqf Agreed on both points, I went with fewer and less expensive vacations above but it's whatever suits the target budget/lifestyle people are going for. Flying across the country to Disney every 5 years might be more exciting to some than going on a road trip every year. Cutting out cars entirely is an option for people in some locations. – Hart CO Oct 31 at 16:59
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    How much money does grow a garden really save? – gerrit Nov 2 at 9:57
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    @gerrit unless it's more like "grow a farm" very little, and that would be a lot of work. On the other hand if you're digging, you're not spending – Chris H Nov 2 at 11:28
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    @gerrit For people who would otherwise buy organic produce and live in an area with a long growing season it can be substantial savings for relatively little work. I don't particularly care about organic produce and don't live in the greatest growing climate, but gardening is still worthwhile to me because it's pretty low effort. It's not for everyone, just like renting out a room in your house is not for everyone. – Hart CO Nov 2 at 14:28
33

$90K expenses. Less $12,000 Income. That’s $78,000. You are asking if $78,000 can be returned from an investment of $1.2M.

As a rule of thumb, we talk about a 4% safe withdrawal rate. But even then, that rate is based on a retirement that has about a 30 year horizon. So, $48,000 might be possible as an annual withdrawal, but many would say even that is too aggressive. Also, keep in mind, 4 may be the age of lowest child cost. You are post diaper, and day care. But, sports start, food intake goes up, clothing is every year, etc. My kid is a college senior, and the total tab was about $175,000. No loans, we saved every year since she was born. In 15 years that same education might be $300k, or it might be free. Who knows?

You are on a great path, early retirement probably soon, just make sure you have your budget nailed down. And that you are aware of how to withdraw funds to avoid a 10% penalty.

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  • 4
    Technically OP doesn't need to return $78,000 from $1.2m solely as income. More accurately, they just need $78,000 per year from income and capital depletion combined, for the rest of their lives. The capital alone provides 15 years worth of living at today's prices. If the investments produced 4% and they withdrew $78k per year, they could last approximately 25 years. Still not enough, but the main point is that they can spend more than the income and still have it last until some arbitrary point in time. – JBentley Nov 1 at 16:35
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    @JBentley - They are 40. 25 years is 65. At 65, I'd be planning to go another 20-25 years. Also - not to be pedantic about the word 'income', but I really just meant withdrawal. The 4% rule (which I am not married to) accounts for this, i.e. the drawdown. – JTP - Apologise to Monica Nov 1 at 16:48
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    If OP retires then there are no day care costs? – gerrit Nov 2 at 9:55
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    I suppose that's for the OP to correct. It's a bit of a budget breaker to try to be retired while still having the $10,000/yr median cost of day care. Yes, I made that assumption. 20 years ago, we had private (i.e. a nanny, not live-in) care and it was $30K/yr. That would be about $45K/yr inflated to today's dollars. That ended when kindergarten started, full day. – JTP - Apologise to Monica Nov 2 at 10:12
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    @JBentley OP would need to live primarily or entirely off of the $400k until retirement age, though, otherwise they face heavy tax penalties on early withdrawal of the 401(k). – reirab Nov 2 at 21:47
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with one partner working a part time job, providing decent health insurance (i.e Starbucks $12/hr) ?

Part-time may require 30 hours a week to qualify for the benefit. And that assumes that the ACA survives. If it doesn't, then it might require 40 hours to get benefits, or picking from a smaller bucket of employers.

$400K combined savings/investments

That 400K has to last you until you are 59.5, so about 20 years. At 90K a year in expenses that will never be enough. Though 18,000 to 20,000 working for health insurance will help replace some of the missing income.

Also with a 5 year old their college years will be hitting just before you hit 59.5

This would be easier if the house was paid for before retiring and there were 529 funds to make it possible to pay for tuition at the nearest state school and they plan to live at home during college.

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  • Good point on the insurance. I missed that (need for at least half time). They have $1.2M in retirement funds. If it were, say, $3M, I'd say go for it, regardless of what accounts it's in. – JTP - Apologise to Monica Oct 31 at 14:03
1

Not with that debt and annual expenses.

Working at 12/hr is equal to 24000/yr. Your expense is 90000/yr. Net shortfall is 66000/yr 401K is needed for when you stop working someday. And will barely last your expected lifetime at about 30000 income a year.T The lifestyle shock will be enormous compared to spending 90k/yr.

400K savings will last 6+ years until then. The kid will be 11 and still need support for several more years and have to work his way through college. At that point you will be in a world of hurt financially.

If you want to retire early then you both need to have high paying jobs for 20 years and build up your SS payments while saving a bunch more. Cutting your expenses way back would also be necessary.

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  • Your yearly salary is off, since they want to only work part time, not full time. Not to mention you ignore taxes and other reductions of the salary, like insurance. – computercarguy Nov 2 at 21:35
-5

Make half the portfolio as income and half as growth.

Then the 90K in expenses must be paid with the investment result of half the portfolio. Now 90K divided by 600K calls for an annual income investment result of 15%. Or allow for the part-time job and the needed annual income investment result is about 13%.

Now a regular 15% annual investment income result is possible with leverage and hedging but generally unusual.

Well, possibly account, say, 3% in annual dividends from the growth portfolio to the income portfolio. Then a remaining 10% annual result is needed from the income portfolio to make a total annual dividend of $78000 for the expenses-minus-part-time-income.

The 10% annual investment income result could be found in closed-end-funds such as ticker PCEF but a sell-side futures contract on the S&P500 would be a costly hedge in a rising market. (Well, a stop-loss order on the S&P500 futures could trigger the activation of a temporary hedge.) Or a sell-side futures contract on the 10-year Treasury Note would be a less risky hedge but only hedge general interest-rate trend. A mortgage-REIT might be hedged with a sell-side futures contract on the 2-year Treasury Note.

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    I'm always interested in the details when a member is willing to toss the 4% rule away. A 10% long term CAGR for the S&P is what supports the 4% rule. It doesn't mean 10%. – JTP - Apologise to Monica Nov 1 at 11:45
  • A regular 15% annual investment income result, premise, is not related to a buy-and-hold of the S&P500. The S&P500 is a growth investment and not an income investment. But income investments at regular high percentages of return require leverage and hedging. Some hedging strategies actually throw the income position into a situation of temporary speculative trading, well, because if the market reverses then there is loss on the hedge. The income investment is active while the growth investment is passive. I said that income investments at regular high rates of return is possible. – S Spring Nov 1 at 18:09
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    A premise of a regular, ongoing, 15% return, is problematic. – JTP - Apologise to Monica Nov 1 at 18:13
  • Leveraged and hedged income strategies are active endeavors. – S Spring Nov 1 at 18:17
  • This sounds like a part time job just trying to manage the investment and a considerable amount of stress hoping the market keeps working as expected. – computercarguy Nov 2 at 21:30

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