MarketWatch had a very thought provoking post about a couple in Colorado who retired when they turned 30 (they are 39 now). In 2011 they took their story to the blogosphere with the very popular blog Mr. Money Moustache.
Their story is a combination of a high income when they were young, a very high savings rate, a very low spending rate and time spent becoming financially literate in terms of things like the 4% rule and other crucial building blocks of investment understanding.
As for some specifics on the life they have created for themselves; they live on about $25,000 per year, they retired with about $600,000 believing they needed 25 times their spending need in savings. They rarely eat out but say they eat very well at home, they do travel but do so on the cheap, they have a car but use it infrequently, do their own home repairs and they “also work when they want, on their own terms.”
Their investment mix is a combination of index funds and rental property. The MarketWatch feature drew over 500 comments at last look with many of them arguing whether or not this couple was lazy or industrious.
Whether they are lazy or not misses the entire point of the article. The bigger takeaways are that these folks figured out early on what would make them happy and then doing what they needed to do to achieve their idea of happiness. Anyone reading the article may have a completely different idea for their own happiness but reasonably speaking most people are interested in getting to their version of happiness if they are not there yet.
One commenter boasted that he makes their yearly income need, $25,000, every two weeks. The sentiment also misses the point entirely. No matter the dollars involved, it is a good situation if income exceeds outgo and it is a bad situation if outgo exceeds income.
The MarketWatch article does miss the mark somewhat in terms of this story being a template for others to retire at 30 years old. A couple this young, having accumulated $600,000 and having paid off the mortgage on what they admit is a large house either had remarkably high incomes, benefitted from stock options (he worked in the software industry) or inherited a lot of money. None of these are bad things but they are not necessarily common things. No mortgage and $600,000 in the bank seems far more plausible for moderately successful 50 year olds.
The obvious lessons include the worthwhile pursuit of taking the time to understand the ingredients for happiness (it is different for everyone) and the importance of cutting expenses. Everyone can cut back at least a little on their outgo, of course they may not want to but the reality is that spending habits are far more controllable than investment returns; investors can’t count on a 10% annualized return for the next 20 years if the market only goes up an average of 2% annualized for the next 20 years.
There is also a crucial concept here for anyone thinking about some version of early retirement which is some sort of part time work. As mentioned above the featured couple “also work when they want, on their own terms” and although that is quite vague they only need $2,083 per month plus another $400 or so for taxes depending on the actual makeup of their income (a combo of earned income, investment portfolio income and positive cash flow on rental properties).
Although no detail was provided in the MarketWatch article, someone who was this successful when they were younger could easily cobble together a few hundred dollars per month doing very little consulting work which does not sound like much but in the context of $2,083 is a difference maker.
Also, the Mr. Money Moustache blog itself has ads and so would appear to generate revenue. It started in 2011 and has had 4 million page views since inception according to MarketWatch. Although blog traffic can be uneven those numbers could easily generate several hundred dollars per month if not more.
If these numbers are close to accurate, and they are plausible, then their investments only need to provide half of their spending needs and considering part of their income is from rental properties the income needed from the index fund portfolio could be nominal.
This dynamic speaks to part time work’s ability to relieve part of the burden off of an investment portfolio. Assuming $600,000 and a 4% withdrawal rate, the featured couple could be taking $24,000 per year from the portfolio which is a generally accepted rule of thumb providing a reasonable chance for not running out of money. Obviously, if that same $600,000 only needs to generate $12,000 or even just $6,000, then the odds of not exhausting the portfolio will improve.
The concept of retirement will have to change for many Americans and things like spending habits and small revenue streams to relieve some of the portfolio’s burden will be part of the solution.