23-year old Electrical Engineer Pursuing FIRE
His long-term goal is to retire by 50 with $2 million saved. He is obviously well versed in the FIRE movement as he mentioned his plan would be to use the 4% rule as his safe withdrawal rate once he hits the $2 million mark. This would give him an $80,000 per year income during retirement.
He wants to know what he should do to hit his $2million mark. Let’s start by reviewing his financial situation.
Income and Benefits
- Currently, his pre-tax income is $78,500. That is a strong income for any individual, but for a 23-year old that is an incredibly strong salary.
- He has a predictable wage growth in his current role of 2.8% per year which is very solid.
- 2.8% may not seem impressive, but remember this kid is making $78,500 at the age of 23. By the time he is 50, he would be making more than $165,000 per year.
- This highlights the power of compounding not only on your investments but on your income. Starting off with a strong starting salary sets yourself up for long-term financial success.
- Of course, if gets promotions along the way or takes another job that pays more, he has the potential to earn even more than I am projecting in his current job.
- His employer also offers a 401(k) and offers a 75% match on up to 8% of his salary. He wisely has opted to take full advantage of the employer match.
- Between his contributions and his employer match, he has about $11,000 going into his 401(k) every year.
- With his projected wage growth, he could save more than $1 million through his 401(k) by age 50 assuming a 6% rate of return. Proving once again that a properly managed 401(k) is the simplest way to become a millionaire.
- His annual take-home pay after deducting taxes, 401k contributions and union dues is $55,013.66, which works out to $4,584.47 per month.
Average Monthly Expenses
- Gas $151
- Groceries $455
- Therapy $520
- Rent $1468
- Car lease $210.08
- Car insurance $152.15
- Renter’s insurance $13.17
- Cell phone bill $104.52
- Internet $52.09
- Electricity $35
- Gym membership $110.10
- Spotify premium $10
- Costco $12 ($120 per year)
- Xbox live gold membership $5 ($60 per year)
- Other expenses: $328.03
Total Average Monthly Expenses: $3,626.14
Monthly Surplus: $958
Current Assets & Debt
He currently has no debt and about $13,600 already saved in his 401(k).
How he can Reach FIRE by 50
I don’t think he is going to have any problems reaching his goal. Give his age, income, access to a 401(k) and the fact that he is financially planning his future at the age of 23 tells me he is going to be fine.
As I previously stated even by simply contributing enough to get the full employer match, he is on pace to have more than $1 million in his 401(k) by the time he is 50.
To save the other million, he’ll need to invest around $1,000 per month, increasing his contributions by 3% per year until he hits age 50. Again, this assumes a 6% rate of return.
He’s got about $958 in free cash flow now, so he only needs to tighten his budget slightly.
Here is what I would suggest.
$110 per month for a gym membership feels expensive. Personally, I bought a chin-up bar and a few kettlebells and have worked out at home for the past 10 years.
Chin-up bars are cheap, and kettlebells are basically indestructible and will probably last longer than I will. That would be an easy $110 to cut out of the budget. If he really didn’t want to work out at home, he could easily find a gym that will charge less than half what he’s currently paying.
$152 per month for car insurance feels like a lot, but then I remembered he is a 23-year-old male, his insurance premiums will be high. If he keeps a clean driving record that monthly premium should go down significantly over the years.
He also mentioned one of his short-term goals is to buy a house. Given his age, this is the perfect opportunity to pull off a house-hack.
I recommend this to basically anybody under the age of 30 who wants to buy their first house. Rent the extra rooms out to your friends and have them pay your housing costs for you.
A well-executed house hack would save him about $1,500 per month. More than enough money for him to put an additional $1,000 per month into investments.
Combine that with the equity he would build in the house, and his continued contributions into his 401(k) and he should have no problem hitting his $2 million savings goal by the time he is 50.
What do you think, is there anything you would recommend to this individual to help them reach their FIRE goal? Let me know in the comments.
This article is for informational purposes only not all information will be accurate. This should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.