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May 20, 2011

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Jack, I have ambitions like you and also live in a very expensive east coast city. To retire in your 40s, what is your target amount of money saved so it will last ~40 years?

@KT:

I don't intend to retire on the expensive east coast. I'm likely either going to retire to NewHampshire/NewYork/Maine/Vermont or someplace totally new like Oregon. As a result, I expect my expenses to go down dramatically, but my target amount is about 2.5-3M spread between tax deferred and taxable.

Jack- Thanks so much for sharing. From what you've written, we are in somewhat similar life stages and have had similar experiences with our finances. I too am curious about whether you have specifics on how you will retire early and what this means for what you put in your 401k vs outside savings. We max out our 401ks, but that also means we have a big portion of our savings in our 401k that we cannot access for quite some time. Do you plan to live on passive interest and dividend income once you retire or draw from principal. How much do you need?

In addition, do you have plans for how your finances will change once you have kids. I am shocked at how much harder it is to save once the kids come around. We have a toddler and #2 on the way. #2 is going to mean more childcare costs, and eventually more housing costs as we still live in a small two bedroom. Not to mention saving for college. Kids have made me really rethink how easy it would be to retire early.

Thanks so much for sharing your story.

FMF- I love these reader profile posts, great addition to your regular line up.

@NoTrustFund:

I believe in cranking my 401k savings to the max. First of all, it lowers my current tax burden, and secondly my employer match is so good that I could just withdraw the money immediately (paying the 10%+taxes), and still come out ahead. I intend to keep 401k money sacrosanct, and only drawing it down later.

My early retirement will likely include a small parttime job. (In a previous life, I used to teach continuing education and community college.) So, I will maintain a low level of income (10-12k/year) from that in addition to my investment income. But, I will likely be drawing down from my principle. There is no preventing it.

So, what is the result: I save as much as I can in tax deferred, but then dump as much as I can into the market. Right now that means buying cheap large caps (which are incredibly cheap right now), and DRIPing any of them that offer it.

I think by the time I retire, I'll have the (current day) equivalent of 40k of dividend income and 10-12k of salary. I'll draw down the remainder I need (30 or so a year) from principle. I've used FIRECalc enough to make me comfortable with my current plan, but even if it's not perfect, I'm shooting for such an early retirement age that moving it back a year or two won't hurt any way you cut it. (The funny thing about returns is that they're exponential. It doesn't take too many years on an exponential to really see benefit.)

With regard to kids: We intend to do a nanny share with friends, and beg/borrow/steal as much of the capital equipment that children require. I anticipate reoccurring expenses to be bout 30k/year for the first child, and a bit less for the second. I cannot manufacture that money from thin air, but I'm gonna try by continuing to build my career.

All in all, I think the most important thing is to have a plan. If I miss it, fine, that's life. I'll adjust. But we've set an aggressive goal, and work hard for it. If kids set that back, no worries. I'm sure the benefit will outweigh the costs.

"Plans are nothing; planning is everything." -- Eisenhower.

I make only about $65,000. I'm almost as old as Jack. If I could make as much money as Jack... dreams would be realized. -sigh-

@Nameless:

Again, I only recently started getting this money. Until < 2 years ago, I was making ~110k a year.

If you're in a career that pays well (eg, engineering, science, etc), and you're not making ≥ the median salary, find a new job. Develop a new skill set. Start a parttime company. Manage your career.

If you're in a career that doesn't pay as well, my advice is still the same. Do you work for a non-profit? Then how do you become a director? Or ask yourself if your skill set could be used in industry.

I'm not advocating choosing money over career satisfaction, but I am saying make a conscious choice between the two. If you're happy in your job and have already explored all career options and you think you'll stay happy -- great, don't change. Live beneath your income, and enjoy life. There's more to it than money.

Anyone can do what I do -- I just work hard at it. There's no innate talent, I didn't go to an ivy league and get my job through nepotism, I work. You can do it too, if you choose.

Jack - I am a software engineer and I am impressed with your annual earnings! Can you share any details about how you got to this situation as well as any details about the position (e.g. the industry, the nature of your job, workload, etc.)?

Jack,

As a software engineer, have you considered programming on the side, either something like apps for smartphones/tablets/PCs or possibly freelance software for small businesses? Who knows what the market for stuff like that may be in 10 years, but if I retired today I definitely would spend some time on that sort of thing (I wrote an app that has been selling modestly for about 18 months now, and it's fun!).

@Barry:

I can't easily share anymore about the company I work for. If I did I'd give away a bit more than I'd like, and likely could be identifiable. Sorry. Again, It's fortune 500 company, well known, and I'm fairly certain you've used our products.

As far as more details -- I work about 50 hours a week, and 60 on weeks before shipping. I got to where I am by specialization. I do work that few others do, helping make me a unique snowflake. As far as my career, I consider 2 things to be the most important:

1) I was an RA in college. The people skills you develop doing this have proven to be invaluable. As people in industry cannot easily go back to being an RA, I recommend everyone read books like, "what color is your parachute?" and Dale Carnegie books.

2) At the end of every meeting with my superiors, I ask them, "is there anything else you need from me?" and I follow up. I keep myself on their radar as a goto person to getting things done that make their job easier.

I have found both things have helped my career.

@Jonathan:

Well, in the industry, generally your company owns your ideas. As a result, doing stuff on the side is generally a non-starter. As a result, I spend my off hours (when I want to code), trying to do good things in the codebase I have to spend my time in anyway. Sometimes it gets old, and when it does I do personal projects, but nothing I can publish without first running it past the higher-up-muckety-mucks.

Once I retire, sure I could program for iOS and Android for fun. Unfortunately, I think that ship will have mostly sailed by the time I retire. I see myself more teaching the key computer science concepts. Those things tend to have a longer shelf life.

Jack - I am also a highly paid east coast professional. I have two kids. I agree with NoTrustFund that kids are such a huge expense - we were able to save so much more before having kids - even while travelling like crazy, paying for a wedding and buying a house. I don't know where on the east cost you are, but here in DC, the cost of a nanny share can be $20k. The recurring purchases like diapers and clothes (they just keep growing!) really add up too. But I think the biggest unplanned for expense for us has been convenience spending. As in, I'm so tired/busy from the kids, I'll pay a little more to make my life easier. Of course, these are all optional expenses, but for us, adding kids to the mix has made us much more likely to spring for house cleaning, higher food costs (because I don't have time to shop around or do extra prep), even high clothing costs, because I don't have time/focus to wait for the sale. Little stuff, but again, it adds up. Just something to think about as you plan for the future.

Jack,

Please forgive me. I know this question does not relate to you fiancial situation or outlook but as you may have noticed, there has been a lively discussion regarding higher education - should a person go to college or not. I would be interested in your opinion on the subject.

Thanks for sharing, Jack. The only thing I don't like is this is another post from another engineer/computer programmer. It seems they're the only people who get it.Nothing agasint you, Jack. I just get frustrated that most other people/occupational groups seem so clueless and/or unwilling to do what is required.

Jack,

Why don't you put the max into a non-deductible traditional IRA then instantly convert it to a Roth IRA while the no-income-limit conversions exist?

@Eric:

Truly I haven't researched it closely. Last time I looked at it I think it was most advantageous if you thought your income in retirement was going to be higher than your income before, a case I likely don't fall into.

Hi Jack - thanks for sharing your story. Just curious - will you or your wife work less/stop working after the baby is born? If not, why not? I'm not familiar with nanny-sharing and my first thought when I read your incomes and how much your saving is, "will one parent stay home?" It just seems like yes, working 50-60 hours a week will definitely allow you to retire early, but by then, your kid(s) will be grown and out of the house. Will you regret working/working so much then?

Again, I'm just curious. I don't even have kids and if I did, I'd probably still work.

@Joe:

(This might be a dupe comment, please ignore if it is.)

My company is fairly progressive when it comes to hiring, not really requiring a college education. Quite a number of successful engineers at my company never finished college, and I interviewed a kid that wasn't out of high school the other day.

I think my company is the exception rather than the rule. Additionally, I think the incredible people I work with who have no college education are also the exception, not the rule.

I think college provides two main things: a formalization of your learning, and a chance to grow at a time when parental influence is waning. I think normal individuals need both, and I think I certainly did.

I don't think college is for everyone. You can be a Bill Gates without college, and you can be a total bozo who never learned but still with a college degree. The degree doesn't make the person.

If my children decide not to go to college, than I will support that. I will encourage them, but I will not force them. The money I would spend on college would go a long way towards starting a business.

So, should you go to college? I can't answer that. I can say statistically, you probably should. But I don't know you. I'd recommend you have a good reason why you don't want to go to college, and plan if you don't.

Hey, Jack. What are you doing hanging around here? Don't you have a movie to be in this weekend? ;-)

@Mary:

Good question, and one that plagues me. I don't know.

My wife currently works from home, so a nanny share will have wife/nanny/my_baby/friends_baby home during the week. It's possible my wife will stop working, or go part time, and it's also likely I will ramp down somewhat the 50hours. However, not all of my 50 hours are done at work -- some are on the couch while watching Jon Stewart. I also have fairly flexible hours, and currently come in early/leave early, and could use that to get more "kiddie time".

I can see myself being the type of person that wants to be around my kids; however, I know that I'm a worrier about money, and find safety in knowing I have a giant pile of it.

So, to answer your question, I can honestly say, I don't know. My notion of retiring early is really "I am financially independent and I make choices on what I want to do, not what I'm compelled to do because of income and savings." Many of the early retirement blogs call this, "Financial Independence." (Or FIRE [financially independent, retired early]).

The whole point of financial independence is that you don't miss life. I certainly don't want to overwork now -- a situation that proverbially could be described as throwing the baby out with the bathwater... :P

@FMF:

We wrapped weeks ago... :)

I was originally going to change the tag with every post, (the Ripper, Daniels, Black, etc) but I forgot when I posted the second time.

Oh well. Next time.

Thanks for sharing Jack. I am in my early twenties and work as a software engineer as well. I hope to be in your position in ten years! It's interesting to hear of someone in a similar position who doesn't spend like crazy, as many of my friends do.

Thanks for sharing.
I'm an engineer as well and have been saving for a long time. It's really nice that you guys can live on one income and save the other. Not many people can do that.

How far along are you to your goal? 50%? 75%?
How much are generating from your dividend portfolio? Is it close to 40k now?

Good luck!

I had to smile when I read this part: "We live on my wife's salary, and save mine". So smart to live on the lower salary and sock away the larger salary for as long as you can. The faster/earlier you build up the nest egg, the more you can take advantage of the adage "money makes more money" with dividends, interest, DRIPs, etc. I enjoyed reading your profile, great job and good luck reaching your goals!

@RetireByForty:

Not as much as I would like. Again, if our goal is around 2.5-3M, we're real close to 1/3 of the harder to reach number. I don't see much trouble in our reaching it in 10 years. I figure 1M from investment growth, and 1M from continued savings.

My dividend income is a paltry 5k or so a year. I'm heavily invested in a couple of non-dividend paying large caps. I do have some other passive income from a rental, but I don't consider it in any of my equations as we co-own it with others, and we only get a partial vote in how to maintain it, etc.

Geez... everyone here is in engineering :/

(including me... just got my first job outside of college)

Hi Jack,

Thx for sharing. Do you ever worry that by saving 100% of your after tax income, you're not experiencing life to the fullest? I felt weird saving 50% of my aftertax income when I was at your level. It got to the point where I questioned why bother working if I don't spend. It was only after breaching double what you're making did I up the savings to 70% after tax, and I still wonder if that is being too frugal.

You will likely continue to make more than 250k given you're in your 30s still. Hence, even though you plan to retire earlier, why not spend more on experiences

Thx, Sam

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