The earliest memory I have of Kelly is from when I was still in elementary school. Since I was best friends with her little brother, I once stayed at their house for a week when my parents were out of town. She woke up at 6 AM to deliver newspapers before she went off to high school to save up money to buy a prom dress. I remember this because her brother and I went with her one of those days to help and at the first house I delivered to, the newspaper somehow unraveled itself and flew everywhere when I dropped it on their neighbor’s doorstep. I quickly ran away and have felt bad about it ever since.
Fast forward to sometime last year; we were having a mini reunion at my parents’ house with some other families. Eventually it somehow became a Q and A session where the parents took turns asking Kelly questions about how she hustled to get her first job. In college, she took the bus for four hours every weekend to New York City so she could meet with people who worked in finance, whom she had cold called earlier in the week. Through this, she landed an internship and over seven years, worked her way up to Vice President at JP Morgan.
Ultimately, she realized she was unhappy with her job and became a software programmer. Why and how she made this move is interesting enough to write about in itself, but for the sake of time, I’ll just gloss over this for now. Fast forward three more years, she is now living in SF as a computer programmer.
The reason I wanted to write about Kelly is actually not because of her backstory. It’s because she is planning on retiring within six years, at the age of 38.
When I heard her plan through a mutual friend, I thought there were only two reasons this was possible for her. Either A, she was able to save up hella money in her banking days and had a crazy head start or B, she is making some crazy salary right now that allowed her to save a ridiculous amount of money.
Interestingly enough, it turns out this wasn’t exactly the case. She confessed that she had no idea how to budget her money when she first started working in finance. She was young and spent her money carelessly. So even though she may have had a bigger nest egg than most people her age, it definitely wasn’t enough to allow her to retire at 38. Furthermore, her current salary, at $125,000, is high, but it’s not “retire hella early” high.
However, after talking with Kelly and learning her thought process on this subject, I can see how retiring early is possible for almost anyone. Before I get into it, let me first warn you that this plan is very boring and not at all sexy, but it makes perfect sense.
Kelly’s rationale is this: The amount of money you need to spend, after taxes, is not as high as you might think. For the sake of argument, let’s pretend that you spend roughly $3,000 a month. So, in a year you will only need $36,000. Interestingly enough, the amount of capital gains tax you pay for $36,000 is $0, whereas currently, you will need to make $50,000 in regular income to take home $36,000 after regular income taxes.
So in order to safely retire, you just need to save up a nest egg where you can withdraw $36,000 a year in interest. Assuming you withdraw at a very safe rate, of 4%, this means once you save up $900,000, you can retire. While saving $900,000 might sound impossible, it actually isn’t too hard if you invest most of your money and make an average return of 7%-8%.
Just to give you an example, someone making $110,000 spending $3,000 a month can save $800,000 in less than 12 years at 8% interest. This is assuming he started out with $0 in savings and never received a raise in 12 years.
If you want to calculate how long it’ll take you to retire, download my super handy dandy excel workbook here. I started off trying to quickly calculate compound interest, but one thing led to another and now I have a full blown dashboard. I am especially proud of how accurate it calculates your take home pay after taxes (assuming you live in California and claim 0 dependents).
So let’s take a look at Kelly’s finances and see how she is doing this:
On a monthly basis, before she even gets her paycheck, $1,500 of it already goes to her 401k.
After that and taxes she brings home almost $6,000 and her expenses are as follows:
Living Expenses: $1,000 (sometimes increases to $1,500)
Mortgage Prepayment: $2,500 (which she is paying on top of the rent she collects from her tenant, so she views this as a savings since it is paying off the principle)
Wedding Saving: $1,000
Additional Saving: $500
So including her 401k, she is saving roughly $5,500 out of $7,500, which is about 73% of her “after tax” salary. Her future husband is also on board and saving as well. She calculates that they will be completely financially independent in seven years.
I know a lot of people may criticize this method because it’s boring and might not take future large unexpected expenses into account. And for me personally, in ten years, I definitely don’t want to have the same budget as I do now. Like you, I too want enough disposable income to hire a guy to operate a bulldozer and dump a pile of money into my backyard swimming pool so it can be in the background of up close picture I take of my face. But then again, never having to worry about money again is a pretty awesome too. Personally, my goal in life is to never have to do anything I don’t feel like doing and not being worried about money will be a huge step in getting me there.
But let’s take Kelly’s example. At 38, she’ll never need to work again, but it’s not like she’s just going to roll over and do nothing. She will have the freedom to do any job she wants, pursue any dream she has and never worry about the financial impact of her choices. I am positive she will still be able to find ways to make money while doing something she thoroughly enjoys.
But is she missing out on life now by budgeting so much? Maybe. Maybe not. She definitely doesn’t think so. She still spends money on stuff she enjoys and values, and cuts down on everything else. She makes small sacrifices like not eating out or going out as much as she used to, which allows her to pay for her hobbies of salsa dancing and yoga.
I definitely find Kelly’s way of budgeting preferable to what most of us are doing these days, which is basically to spend money on what society tells us to spend money on. Like financing a car that is beyond your means and spending the next 6 years paying $500 a month for it, or spending your entire paycheck every month on partying because everyone else is doing it and you have a bad case of the FOMO’s.
Anyways, whether or not you want to adopt her saving/retiring plan, it’s still nice to know that the option exists. So you don’t necessarily have to save as aggressive as she does, but can still plan to retire early by using the same strategy. Budgeting is all about finding a balance where you will be happy both short term and long term.
I’ll end this post with my three biggest takeaways I learned from interviewing Kelly: 1. As a young person, don’t hold too much of your assets in cash. You’re most likely not going to need it in the near future so just it’s probably better to just put them in an index fund and let it grow. 2. Saving up enough money to safely retire is actually a lot easier than you might think as long as you have a plan. Here is a retirement calculator I built to help estimate the amount of time it will take you to help you plan. 3. You can take home $37,450 a year without paying anything in long term capital gains tax!
In conclusion, I want to give a big thank you to Kelly (not her real name) for sharing her wisdom and also personal information on the subject. She was super interesting to talk to and hopefully will be the first of many interviews I will post here.