2853: MMM Reader Case Study: The Man Who Didn't Realize He Was Already Rich by Mr. Money Mustache on Early Retirement

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[00:01:06] [SPEAKER_00]: This is Optimal Finance Daily, Mr. Money Mustache Reader Case Study.

[00:01:12] [SPEAKER_00]: The man who didn't realize he was already rich by Mr. Money Mustache of mrmoneymustache.com.

[00:01:20] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Diania Merriam.

[00:01:24] [SPEAKER_00]: We're going to get right to today's post as we optimize your life.

[00:01:32] [SPEAKER_00]: Mr. Money Mustache Reader Case Study, The Man Who Didn't Realize He Was Already Rich by Mr. Money Mustache of mrmoneymustache.com.

[00:01:43] [SPEAKER_00]: This week, Mr. Money Mustache was honored to answer more calls for help from his readers.

[00:01:49] [SPEAKER_00]: There was one in particular who had an interesting situation and was generous enough to let me share it with you, anonymously of course, after we finished the email discussion.

[00:02:01] [SPEAKER_00]: We'll call the reader Sam short for Surprisingly Advanced Mustache.

[00:02:08] [SPEAKER_00]: Check this out and see if any of it sounds similar to your own situation.

[00:02:12] [SPEAKER_00]: Age 41. Family, two parents and one young kid.

[00:02:19] [SPEAKER_00]: Desire to enjoy some form of Mustachian early retirement.

[00:02:25] [SPEAKER_00]: Fear. He didn't feel he would be able to accomplish this until at least age 65 based on his current situation.

[00:02:34] [SPEAKER_00]: Current spending situation.

[00:02:36] [SPEAKER_00]: Salary. 70,000 annual. One worker, one stay at home parent.

[00:02:43] [SPEAKER_00]: Living expenses. $2,351 a month including the mortgage at $1,250.

[00:02:52] [SPEAKER_00]: Remaining mortgage amount? 140,000.

[00:02:57] [SPEAKER_00]: Current saving situation.

[00:02:59] [SPEAKER_00]: Retirement account balance 401k and IRA 300,000.

[00:03:04] [SPEAKER_00]: Emergency fund or rainy day savings 80,000.

[00:03:10] [SPEAKER_00]: Annual savings rate about 28,000 including 401k IRA and additions to the rainy day fund.

[00:03:19] [SPEAKER_00]: What do you think? Is Sam almost ready for early retirement or still 25 years away as he fears?

[00:03:27] [SPEAKER_00]: Let's find out right now.

[00:03:28] [SPEAKER_00]: What I'm quickly realizing is that Mr. Money Mustache readers are all in rather different situations.

[00:03:36] [SPEAKER_00]: For people with high incomes and low savings, the solution is getting people motivated to find interesting ways to streamline their lifestyle.

[00:03:45] [SPEAKER_00]: But many of the self-selected crowd who read an early retirement blog like this are already quite frugal.

[00:03:52] [SPEAKER_00]: This situation, for example, describes someone spending even less than we do in the Mr. Money Mustache household for a family of the same size.

[00:04:03] [SPEAKER_00]: For these people, the solution might be a bit of financial wizardry.

[00:04:09] [SPEAKER_00]: Number one. Let's look at Sam's retirement balance.

[00:04:13] [SPEAKER_00]: It's $300,000 right now, which is actually a fairly sizable stash.

[00:04:18] [SPEAKER_00]: But lest the younger folks get discouraged, this is the amount you end up with if you just let your 401k run with auto deductions of $1,000 a month from age 25 to 40 and it compounds at 7%.

[00:04:32] [SPEAKER_00]: If Sam stops contributing right now, this balance will automatically grow to a million bucks by the time he's 60 even after adjusting for inflation.

[00:04:43] [SPEAKER_00]: So it's already on track to be much more than he needs to live on from age 60 for an unlimited time, living only off the passive income it gains and not even counting some eventual social security income.

[00:04:58] [SPEAKER_00]: And number two. We've established that Sam is done saving for old age retirement.

[00:05:05] [SPEAKER_00]: Now he just has to get enough money to get from his current age until age 60 when the million dollar retirement kicks in.

[00:05:12] [SPEAKER_00]: How much does he need to do this?

[00:05:15] [SPEAKER_00]: His family is living on $2,351 per month right now or 28 grand per year.

[00:05:22] [SPEAKER_00]: To generate that much income with no work, he would need another $403,000 working at 7%.

[00:05:30] [SPEAKER_00]: With $80,000 in the bank right now and a 28,000 annual savings rate, he's already less than 8 years away from a full retirement if he continually invests the early retirement money as he goes along.

[00:05:45] [SPEAKER_00]: It's actually even better than this because this assumption assumes that he uses none of the $403,000 principle to live on only the investment gains and dividends it generates.

[00:05:58] [SPEAKER_00]: And it assumes he never makes another cent after he retires.

[00:06:03] [SPEAKER_00]: I believe most people who retire well under 60 will find that they want to do some paid work occasionally to keep their mind sharp and to have challenging interactions with other adults.

[00:06:15] [SPEAKER_00]: So here was the final Mr. Money Mustache prescription for Sam.

[00:06:21] [SPEAKER_00]: Number one, immediately put your $80,000 rainy day fund into a mixed 60% stock 40% bond fund.

[00:06:31] [SPEAKER_00]: Adding the bond component makes the return far less volatile.

[00:06:35] [SPEAKER_00]: This is important since you will be starting to use this money in less than 10 years and so you need lower risk.

[00:06:42] [SPEAKER_00]: If you simply buy the Vanguard Balanced Fund VBINX, this whole step is done with just a few clicks.

[00:06:52] [SPEAKER_00]: You can set up a line of credit on your house which you won't actually use for small rainy days.

[00:06:59] [SPEAKER_00]: And of course you can always sell shares of VBINX whenever you want if there is more rain.

[00:07:06] [SPEAKER_00]: And number two, pay off your mortgage over the next five years or so using your 28 grand per year savings rate.

[00:07:13] [SPEAKER_00]: Then you're done with mortgages forever.

[00:07:16] [SPEAKER_00]: This technically earns less return than just investing the extra money.

[00:07:21] [SPEAKER_00]: But if you're conservative like me, you like to be out of debt earlier.

[00:07:25] [SPEAKER_00]: If not, just invest extra and pay the mortgage slower.

[00:07:28] [SPEAKER_00]: At this point you can subtract about $900 from your monthly budget.

[00:07:34] [SPEAKER_00]: That's the principal and interest part of your mortgage payment.

[00:07:38] [SPEAKER_00]: You still have to pay property taxes, of course.

[00:07:41] [SPEAKER_00]: Your new annual living cost will be about 22 grand.

[00:07:45] [SPEAKER_00]: Your VBINX fund will have compounded to about 100,000 by this point.

[00:07:50] [SPEAKER_00]: You can safely withdraw $10,000 per year from that and it will only run out right as your million dollar 401K fund kicks in.

[00:08:00] [SPEAKER_00]: So now you only need about 12 grand of annual income.

[00:08:05] [SPEAKER_00]: Option one, you could drop down to about quarter time employment just enough for free health insurance

[00:08:12] [SPEAKER_00]: and a thousand or two dollars of easy income per month.

[00:08:15] [SPEAKER_00]: Then you'll still be saving a bit each month and you can increase your lifestyle, vacation or college savings budget.

[00:08:23] [SPEAKER_00]: This is sort of my own path since I still actually like to work occasionally.

[00:08:28] [SPEAKER_00]: And option two, you could work three more years stashing all that now unneeded mortgage pay off money

[00:08:35] [SPEAKER_00]: to really build up the VBINX early retirement fund and quit early.

[00:08:41] [SPEAKER_00]: Congratulations Sam. You are not 25 years from retirement after all.

[00:08:46] [SPEAKER_00]: You'll be sitting on the front porch thoughtfully grooming your money mustache on a weekday morning before your young child starts second grade.

[00:08:55] [SPEAKER_00]: There are two lessons in this story.

[00:08:58] [SPEAKER_00]: Lesson one, you can retire a lot earlier than most people if you have moderate living expenses, even without a million dollars in investments.

[00:09:08] [SPEAKER_00]: And lesson two, it's really fun to stay just a teensy bit engaged in some sort of business even after you retire.

[00:09:17] [SPEAKER_00]: It doesn't have to be in your original work field, but it does have to be fun.

[00:09:22] [SPEAKER_00]: This also gives you reassurance that if you ever do want extra money besides what you've saved, you can always turn it on with a switch.

[00:09:34] [SPEAKER_00]: You just listened to the post titled Mr. Money Mustache Reader Case Study.

[00:09:39] [SPEAKER_00]: The man who didn't realize he was already rich by Mr. Money Mustache of Mr. Money Mustache.com.

[00:09:46] [SPEAKER_00]: And I'll be right back with my commentary.

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[00:10:50] [SPEAKER_00]: This article makes me think of the case study meetups we do in Cincinnati with our local ChooseFi group.

[00:10:57] [SPEAKER_00]: For context, ChooseFi is a popular podcast in the FIRE community

[00:11:02] [SPEAKER_00]: and they have a network of informal local meetup groups to help connect people pursuing financial independence.

[00:11:09] [SPEAKER_00]: R started gathering around this concept of case studies where one volunteer shares their income, expenses, investment strategy

[00:11:18] [SPEAKER_00]: and any questions or concerns they have.

[00:11:21] [SPEAKER_00]: The group then chimes in with suggestions and points out blind spots.

[00:11:26] [SPEAKER_00]: But more often than not, we spend a lot of time easing concerns.

[00:11:32] [SPEAKER_00]: I find that most people participating in the case studies are doing so much better than they think they are.

[00:11:38] [SPEAKER_00]: And while they may walk away with a few tactical tweaks, the best thing they get out of the experience is more confidence in their plan.

[00:11:47] [SPEAKER_00]: This was the case for me personally.

[00:11:49] [SPEAKER_00]: I went to my first FIRE event in 2019, Camp Mustache in Seattle, and I presented my financials to a group of about 60 people.

[00:11:59] [SPEAKER_00]: I was so tied up in knots over my math and things like tax loss harvesting or if I was holding too much in cash.

[00:12:08] [SPEAKER_00]: The group did an amazing job of sharing their knowledge with me and it felt like such a huge weight off my shoulders.

[00:12:14] [SPEAKER_00]: If you think you could benefit from something like this, just Google Choose FI Local Group and see if there's an active group in your area.

[00:12:24] [SPEAKER_00]: But that should do it for another edition of Optimal Finance Daily. I'll be back tomorrow as usual, so I'll see you there where your optimal life awaits.