When Can A 20 Year Old With No Debt Retire?
Trent over at The Simple Dollar explains that if you’re a twenty year old with no debt, saving 20% of your current salary until your 40 years old will ensure a healthy retirement.
The math is pretty simple, and better yet, cautionary. By and large, though, if you live below your means and put that ‘extra’ money away diligently, you’re looking at an early retirement.
If you were to take 20% of your annual income starting at age 20 and put it in a S&P 500 index fund, that index fund continues to grow at the long-term historical rate (12%), and you received a 4% raise each year, you could walk away from your job and live off the interest at age 41 matching your current salary, or quit at 43 and be able to give yourself a 4% “raise” each year from the interest, which is probably the better plan because it combats inflation.
I’m Twenty Years Old And Have No Debt - When Can I Retire And Live Off My Investments? - [TheSimpleDollar]
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Comments
Wolfger says on May 29th, 2007 at 9:51 am
A 4% raise each year? That alone is preposterous. Especially for a 20-year-old, who hasn’t had time to get a 4-year degree, which is how you’re most likely going to obtain a job giving yearly raises. I also question the existence of a debt-free 20-year-old, and a 20-year-old who is willing/able to save 20% of his (presumably gross) income.
Bryan Price says on May 29th, 2007 at 3:10 pm
If you’re debt free, the you aren’t going to college, which means not a great starting salary to start with. 4% raises are barely above inflation, and there might not BE any raises. And then saving 20%? Not going to happen.
Brian says on May 29th, 2007 at 5:07 pm
Never say never. I am 20yo, just graduated 2 weeks ago from Creighton University, Omaha, NE in 3 years with a B.S. in Mathematics and Physics. I have no debt to speak of, actually I have 20K+ saved right now (got to love working from a young age). With a previous budget of less then 5K a year for housing, util, food, entertainment, transportation - basically everything but tuition. Saving 20% of 56K is easy - it is a 9x increase in my budget.
20 years to retire sounds good and a worthy goal.
Sabrina says on May 29th, 2007 at 10:59 pm
4% raise???? OMG thanks. I needed that laugh.
Bobby says on May 31st, 2007 at 12:47 pm
This is highly hypothetical, right?
First, what 20 year do you know is going to save 20% of their income? Even if you make $50k a year gross (unlikely for a 20 year without a degree), after taxes you will be putting away around $8,000 a year leaving you with about $30,000 a year to live on. That’s about $2,500 a month.
Second, you won’t be 20 forever, and I assume a significant other and children may be in the future. That’s not enough to support a family where I’m from (Chicago). Possibly if you combine salaries with your spouse, but don’t you think paying bills and groceries trump saving 20% of your paycheck?
And last but not least, the 4% raise per year is flawed for Wolfger’s reasons that a 20 year old without a degree will most likely be stuck with the same salary for a few years and reach a pretty low ceiling. Where did you come up with this reasoning anyway?
Good luck with your plan, but you may want to rework the numbers.
Steve says on June 21st, 2007 at 11:24 am
It’s actually not that hypothetical at all. The math makes sense. One you don’t “need” a degree to make a comfortable salary…I don’t have one. Granted, perhaps a dose of luck is needed but I have definitely had my share of setbacks. After a series of car accidents one year with multiple cars (don’t ask), I was only able to save 5%. Since then I have been able to make that up in subsequent years.
Yes, my salary is well above average ($72,000) for being 23 and yes I’ve lucked out with averaging 4% raises (one year it was 0%, one was 10%) but before you knock this you are all missing the point. The point is to SAVE! I know I won’t be able to keep this 20% up forever and I would be stupid to believe that. Yea, I may be five years in with saving, but I don’t think I can retire at 38…I wish, but I doubt it. So what I retire in 25 years, or even 30 years. The point is I retire period! Think how many people can’t do that?! And if you and I are lucky, maybe we can retire in our 40’s or 50’s. And I wish all of you the best of luck. Remember people who want, make things happen…and people who don’t want…well…from looking above, the knock it now and will be b*itching later!
nutbastard says on July 23rd, 2007 at 4:41 pm
I got my job when i was 21, with NO DEGREE, not even any college, and my company does 4% annual raises for pretty much everybody. This is in addition to pitching in $1.50 for every dollar i put into 401K, up to 6% of my pretax paycheck. Granted, because of my lack of a degree, I don’t make a whole lot of money to begin with, but it’s enough to live off of and buy a few toys here and there… Anyways, it’s not preposterous to find a job w/o a degree, you just have to do a bit of networking and audition for positions more aggressively than someone with a degree would have to. they luck out because they dont have to pay me much, and i luck out because im still making more than i could anywhere else.
as for saving 20%, that would be tough. Rent around here is about $600-700 a head minimum (San Jose) for anything decent, which eats up quite a bit of what i make. Since I only bring home about 22K a year, with 7K being rent, Im left with about 1100 a month for all bills and such. 20% would be $4400/ year, which is a really tough thing to do, although i have taken some steps to help bring costs down, such as:
I only eat the same frozen burritos for lunch, every day. That saves me around $5/day, or about $1600/ year. Also, i stopped buying rolled cigarettes, and so my filthy habit only costs around $150 a year, a savings of about $1500. I started cooking soup and meals in large quantities that last for days, so most of the time, dinner costs me under $2. it’s not the most lavish way to live, but again, i don’t make much, didn’t go to college etc. BUT i have the oppertunity for a 4% annual raise, the possibility of having my title changed (which brings money with it) the 401K, stock options etc… and the 22K i quote is after those contributions and after my medical and dental, which runs around $20 / week. but i’d rather progress and make a ton of money rather than stagnate and squiril 20% away.
Bill says on October 2nd, 2007 at 8:06 pm
The much bigger problem with this scenerio is the implicit assumption that ANY portfolio can return 8% after inflation. Over the past several decades, the market returned about 6.7% after inflation, and most economists expect lower GDP growth going forward.
Even if you can save that 20% for 20 years or so, you would be very lucky to get an 8% real return … You would need a miracle to continue to get that from 40 to 80+ …. That’s 60 years of well above average returns.
However, at age 43 you could STOP contributing, and not worry about saving any more for retirement. At 4% real (8% nominal), you could last until 90 by retiring at about 60 on 80% of your final income (assuming $0 for Social Security).
If you kept on putting 20% beyond 43, you could make it to 90 on 80% by retiring at age 56. Bump that to 25% saved and 75% spent, you could retire at 52. If by some miracle you can stretch that to 30/70, it becomes 48. You’d have to go to 37/63 to make it 43. At 5% real (instead of 4%), you could do it at 43 on 31/69. At 6% real, it would be 26/74 (or age 47 on 20/80).