Reader Case Study: Is this 26-year-old Ready to Retire?

Mr. Money Mustache recently received a request from an up-and-coming Future Early Retiree. His name is Mike, and at the time of writing he wrote a blog called “Mortgage Free by 30”. Here’s what he had to say:

“Basically, I hate my job. The company is great. The job isn’t.  I want to work for myself.
After reading your blog, it has made me wonder if there is a possibility of “retiring” in the near future.  And by retiring, I mean working part-time.  If you’d be up for it, I would be willing to send you all of my specific numbers to see what I need to do to be like you.”

First of all, I must say this sounds like a very ambitious young man with wisdom far beyond his years. Being like Mr. Money Mustache? There’s a goal I approve of.

Mike is pretty new to the world of high-income professional employment, and the associated high savings rate that comes with it if you don’t become a typical martini-swilling car-financing Ultraconsumer. But he’s already got some big dreams – paying off his mortgage before age 30 (March 2015), quitting his real job, and moving to a creative and unbounded life of freelancing and other random ways to earn and save.

Here are some vital stats to get us started:
Annual Income: $70k
Annual employer 401K match: $4900
Total Income: $74,900
Income taxes, SS, Medicare deductions: $13,000
Total Annual Spending: = $18310 (further details at the bottom of this article for voyeurs)
Total annual savings is therefore $74900 – 15,000 taxes – $18,310 living expenses = $43,590.

This annual chunk of savings gets distributed roughly like this:
401K including employer match: $9100
IRA contributions: $2400
Mortgage principal payments: $32,090 (the man is really jonesing to be mortgage-free).

That covers the income/expenses side, now let’s review the ‘Stash to see how it is looking:
Home Value: $120,000
Remaining Mortgage Balance: $74,000
401K balance: $9,000
Roth IRA balance: $11,000
Other assets: owns a 2010 Honda Civic with no loan

So what’s the plan for Mike?

The key to financial success for any person is having expenses lower than income. He’s got it, with living expenses of $18k per year. These expenses currently include $2775 of mortgage interest, which will drop to zero as he gets his mortgage paid off. But once he quits the cushy job, he will want to replace his current employer-paid health insurance with a self-paid policy. At a good outlet like ehealthinsurance.com, this will cost him a similar amount to what he now spends on the mortgage interest.

The first option is quitting the job immediately and dropping down to a $40k freelance income. Can he afford it? YES.. but it will definitely slow down his mortgage payoff plans. For simplicity, let’s suppose his after-tax income will now be $34,000. If living expenses stay the same at $18k, he will have 16,400 to save each year. If he distributes half of this to long-term savings like an IRA, and the other half to the mortgage, he’ll take about eight years to pay off the mortgage. Even if he goes crazy and devotes all 16,400 to the mortgage, he will take four years or so. Mike might not become mortgage free by 30 with this program, and thus he would lose his prestigious blogger identity! But he’d probably have a lot of fun in the process.

The second option is keeping the Dilbert-quality job just until the mortgage is paid off. At the current payoff rate of $32k per year, that will be done in just two years. He’ll be 28 years old, and he will also have another $23,000 or so packed into retirement accounts from his 401k/IRA contributions and the employer match. Plus he will save a few thousand in health insurance premiums.

In the end, either option will work. It all depends how adventurous you feel versus how much you want some financial security. I’ve always been a bit on the conservative side myself – which is why I saved up a lifestyle-sustaining ‘stash before quitting my job, even though I don’t really need it since my lifestyle is cheap enough to sustain on just part-time work. I could have jumped into this lifestyle as early as age 21, but then I wouldn’t be Mr. Money Mustache, just Mr. Simple Living Sideburns or something.

The other issue is his longer-term savings plans. If he keeps the big corporate job and the frugal lifestyle, his wealth will exponentially rise into the realm of the Rather Rich. The mortgage will be gone in 2 years, and the 46k+ being saved per year, plus a growing amount of compounding gains and possibly even salary raises would place him solidly into the Millionaires Club sometime in his 30s.

At some point you have to decide how much is Enough. If you have plans to eventually own a bigger house, or raise some kids, you might find it convenient to stick to the high salary for a couple of extra years. Even if the job sucks on paper, you can teach yourself to enjoy it more if you know you are just around the corner from lifetime freedom. If you already had $300k or more in retirement savings, I would be suggesting you bail quickly. But since your Money Mustache is still just stubble at this point, it is wise to consider the fact that a short day at the office may pay as well as two long days of freelancing.

An Extreme Mortgage Payoff discussion would not be complete without considering the tradeoffs. Mike’s investment in extra mortgage payments amounts to a fixed income stream with a guaranteed 3.75% annual return, since that is his mortgage rate. It’s not too shabby – better than a checking or money market account.. but he could also easily get a smooth 6-7% dividend cashflow just by picking out some nice REIT funds – the topic of another article coming up later this week. The REITs have a bit more risk associated with them, but the higher return is usually worth it to people with decades of investing in front of them.

However, with the entire house tying up only $120k in this case, it’s not a big factor in his long-term wealth. In fact, I must again make fun of myself for owning a much more expensive house. It is costing me a lot of money (in the form of foregone investment returns), so the house must continue to deliver a very pleasurable lifestyle to the MMM family to earn its keep. In the long run when the young lad grows up, we’ll probably sell it and downsize.

To round out the case study, here are a few more details on the expenses as he sent them to me, in case you want to compare them to your own situation. As you’d expect, I have added a few MMM comments of my own to his numbers.

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Expenses:

Monthly
Mortgage $625
Condo fees $375 (Temporarily higher, but for the next couple years.  Normal is $250-ish)
Electricity $40 – $60
Groceries $150 – $200
Gas $100
Laundry $20
Internet $40
Dog $30 – $40
IRA $200
Restaurants $100
Gym $30 <-MMM: perhaps I can help you here.
Hair $20  <-MMM: And Here. 
Gifts $25
“Other” $100 – $150
** I have no cable TV bill or cell phone bill.  I have a cell phone, but I am part of a family talk plan and the policy is not in my name.
Semi-annually
Auto Insurance  $440 every 6 months <-MMM: Driving around in a 2010 car is luxurious, but I’d definitely advise trading down if you can handle it, especially once you are done the job and thus not driving around as much. My own car insurance is less than $160 per 6 months because I do low annual miles and don’t need collision/comprehensive insurance. County taxes are much lower on older cars as well. And it’s still pretty new by my standards – a 2005.
Dog shots/meds $75 every 6 months

Annually
Property taxes $800 – $1,000
Homeowners Insurance $185
Car tax = $250
Some other details for you:My mortgage balance is $73,999, due to my prepayments.   I have some equity in the home.  Value is $120,000.
I have a paid off a 2010 Civic.  If I went freelance, I might ditch it.  I live in a city, but due to my overnight hours, I felt the need to get a car.  I won’t work overnights if I freelance.
Roth IRA balance is 11K.  This serves as my emergency fund as well.
401K balance is 9K
Total investments 21K
Checking accounts keep low balances intentionally, but I usually have 1K or so for emergencies.

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What do you think? Early Retirement or Stick it out and Slave for a few more years?