I’m 35, I saved $700k and about to have my first child. I want to stop working forever. Any strategy on how to proceed?
Congratulations on your impending first child. I wish you and yours a wonderful life and success. Further congratulations on amassing a very tidy nest egg of $700K, especially given that you are only 35 years old; quite an achievement.
You are looking to stop working… forever. While I completely understand the desire, after all the ability to be free of the daily grind is appealing for most of us, it night be a bit of a reach. The reason: your child.
Kids are expense. Numerous reports suggest that the average child in America costs its parents about $250K over the first 18 years of its life. That doesn’t include college. Public universities would likely add another $100K or so; private schools could more than double that figure. So you could be looking at a third to almost half a million dollars more in expenses. As I said, kids are expensive.
Back to your question, how to plan to retire… One of the biggest issues here is what your expenses will be in retirement. For some people, the $700K that you have already amassed might be good enough. For instance, if your annual expenses today are $28K, theoretically, you could retire right now. The reason: the 4% rule. Many financial advisors and economists suggest that when you retire, you should not plan to withdraw more than 4% of your nest egg in your first year of retirement, and then increase that amount each year by the cost of living. (Historically that’s about 2.5% – 3.0%.) So in year two, you’d take $28,840 (3% more than the $28K from year one), in year three, you’d take $29,705, etc.
Can you live on $28,000 today? I didn’t think so; few among up can. Further, your expense are about to increase. That new child is going to cost considerably more than $13,000 each year. So if you back that out, that would mean that you would have to be able to live on $15,000 today in order to allow for the expense for your child. Okay, I suspect that your plan to retire is not something you are things about today. So let’s look at an example.
Let’s assume that you and your spouse (presuming you have one given the imminent child) have an annual salary of $150,000. (I’m assuming an amount that much higher than the national average given how much you’ve saved to date.) Let’s also assume that you can save 10% of your wages, so that would be $30,000 a year.
If you invest that $15K along with your $700K into an S&P 500 – with its historic annualized return of about 9.5% including reinvested dividends – that $700K nest egg could grow to over $1 million after just five year and over $2 million after 10 years. That’s the good news. The potentially not-so-good news is that the 9.5% annual returns from the S&P 500 are not linear. There can (and frequently are) several bumps in the road. Some years earn more than 9.5%, some years less. Some years, the value of your investment will decline. Just think back to 2008 when the S&P declined by 37%. That would drop the value of a $700K portfolio to just about $450K. If you were living on that money every year, and were expecting to withdraw about 4%, which would be at least $28K, you’d be making a bigger dent in your nest egg. In that year alone, you’d be pulling out well over 6% of your money. The 4% rule is a good rule-of-thumb, but you probably want to have more money than you need to allow for the up and down, sometimes gut-wrenching, gyrations of the market.
My suggestion would be to save as much as you can and plan to continue working for at least 10 more years. If you are able to save just 10% of your $150K annual wages, as mentioned above, you could have over $2 million in 10 years. The more you save each year, the more you’ll likely have when it comes time to stop working. Presumably, each year you will be getting a raise, if you keep on putting aside 10% each year, the total that you are invest will increase as well. Assuming a 3% annual increase in your wages could bump up that nest egg to almost $2.25 million after 10 years. An extra $35K simply by continuing to do what you are already doing. If you could save more, you could really feather your nest egg. Since you have $700K already, I’m assuming you have the willingness to save money. If you could put away 20% of the $150K salary each year (that’s $30K), assuming that same 3% annual salary increase, you could have over $2.6 million after 10 years.
The real magic takes place the longer you let your money grow. Using the same example, if you work for 15 years, you could have almost $4.4 million. After 20 years, you could have more than $7 million! It’s great to think about retiring really early, but a little bit of patience will allow your portfolio to reach levels that will allow most people to live comfortably thereafter.
The more you save and invest, the more you will have. It just takes time. The longer your time horizon, the more you will have. Everything gets more expensive. That college education which I indicated might cost $100K to $250K tends to increase by about 6% every year. If you are having a child today, 18 years from now, that expense could be $300K to over $700K. I know retiring really early is appealing, but everything gets more expensive. A child for most of us one of the top two biggest expenses (the other being your home). Further, you referred to this child as your first child. The expression “two can live as cheaply as one” doesn’t really apply here. Kids are really expensive. Looking at it purely from a financial point-of-view, each child is essentially the equivalent of buying another house.
Planning to retire is great. It’s something that every one of us needs to do. The longer you can work, and the more money you can invest, the better off you will be financially. Everyone wants to retire early. It’s a great goal, but there’s a balance. You can’t retire unless you have enough money. The market gyrations suggest that you should probably have more money than you think you need. Having amassed $700K by 35 is an incredible accomplishment. I suggest you save as much as you can, work for another 10-15 years, then look and see where you are. If you stay on that path, I suspect you’ll be quite pleased with the amount of cash you have then. You and your family will be able to live very happily thereafter.
Best of luck to you and yours.
originally published: quora.com