Surprisingly, I didn’t receive much pushback from my post, The Amount Of Money Needed To Retire Early And Live In Abject Poverty.
Almost everyone got the gist, which was to help you question whether the pursuit of early retirement is counterproductive if you have to live like a pauper. Instead, perhaps finding a job you actually enjoy doing would be a better use of your time.
Yes, a couple of readers jabbed at me using the words “coastal elite” as a pejorative term to say how out of touch I am that 200% of FPL is a near poverty wage. But come on, this isn’t politics. It wasn’t I who set the rules. If you find the FPL levels insulting, call your power-hungry Congressman or woman!
The government says that if you earn up to 400% of FPL, then you are considered poor enough to get healthcare subsidies versus paying extra to subsidize others. I acknowledge in the post that earning 300% to 400% of FPL seems totally fine in non-coastal cities.
In this post, I want to highlight some disconnects perhaps some of you who are thinking of living off 200% of FPL or less aren’t recognizing. Let me set the stage with one reader’s budget.
Frugal Your Way To Early Retirement
Here is reader Joe, a 23-year-old living in a rural town in Pennsylvania. He rents and has two roommates. He believes living on 200% of FPL is just fine and explains his budget below:
The “do-ability” of retiring at 200% of the poverty level is not so bad if you live in a poor area. Not all of us are coastal elites. Consider that $25,000 a year goes a long way when rent is $650 a month.
Here’s my monthly budget:
Car insurance: $ 48
Gas: $ 65
Phone: $ 30
Health: $ 72
Gaming: $ 65
Booze: $ 50
Obviously, healthcare would go up upon retirement, but miscellaneous and gas costs would go down. This budget is $1,250 a month of spending. If you earned $25,000 a year, that would net to about $22,500 which gives you $1,875 a month.
That’s $525 of fun money, which is pretty sweet. I mean, you can go to dinner at Applebees for like $25, go bowling for $5 an hour, etc. There’d be money for vacations too.
First of all, I commend Joe for living so frugally and appreciating his lifestyle. So many of us seem to not acknowledge how truly great we have it in America. Even with a 200% of FPL income, you will still live much better than millions of others across the world.
Joe reminds me of my situation when I first got a job in NYC. I shared a studio with a friend for two years before moving on to share a two bedroom, one bathroom apartment with two others.
For more details, see: Housing Expense Guideline For Financial Freedom
Living frugally from the beginning helped me save and invest aggressively for the rest of my life. Once you get your costs down, your wealth really begins to compound through consistent investing.
There are just several problems with Joe’s budget that needs to be addressed.
Frugal Budget Early Retirement Disconnect
Here’s where I think Joe and others who think living off 200% of FPL are mistaken when it comes to early retirement.
1) “Living in a poor area.” When there is more wealth, there is better infrastructure, better schools, better restaurants, more entertainment options, more free activities, and less crime.
Rational people will choose to live in better areas the older and wealthier they get, not poorer areas. At the extreme, you’re not going to want to continue living on a drug-infested block once you can afford to live in a gated community. Heck, some may want to travel the world.
It’s easy to slum it when you’re 23. By the time you’re 50, you’re going to find it harder to continue sleeping on a cold cement slab. I swear, Applebees will start tasting disgusting after your 1,000th visit.
2) Thinking you’ll only have yourself to take care of. When you’re 23 and single, it’s easy to think your budget won’t change because you’re only responsible for yourself. It’s also easy to feel invincible. But as we know, there are plenty of people in their 20s who can’t even take care of themselves because their parents still are.
But guess what? Life happens. Your parents may get sick and need financial assistance. They may also need your time, which would reduce your potential for making money. You could get sick as well. You might even find someone who you care about and want to start a family. Going from taking care of only yourself to taking care of two or more people can take a tremendous amount of financial resources.
Although 200% of FPL income increases with household size, the corresponding increase in income is often insufficient to match the increased stress of raising children. You will also want to give everything to your children, which could easily surpass the federal government’s increased FPL budget.
Life is not static, no matter how hard it is for you to see the future.
3) You can’t retire early because your income is too low. This is the biggest disconnect of them all. People who live super frugally today, mostly because they have a low income, think they can retire early because of their frugal budget. Let’s review the Retiring Early To Live In Or Near Poverty chart again.
Let’s say you really do end up retiring early with only yourself to take care of. To live off 200% of FPL ($24,280) as a single person, you need to have between $485,600 – $1,214,000 in your taxable investment portfolio based on a 5% to 2% return or withdrawal rate.
Now let’s say you’re Joe, who happily makes $25,000 a year in gross income and lives with two roommates in a poor area. He gets to spend $525 monthly on fun activities. However, what if Joe had no fun and instead invested 100% of his fun money in order to retire early. How long will it take for Joe to amass the needed $485,600 – $1,214,000 to retire?
Using a 4% withdrawal rate and a 7% compound return on his $6,300/year in savings, it would take Joe 30 years of no fun to retire early. For only then will he have enough to spend $525/month on himself.
But there is another problem which is that after 30 years, his $525 today will only have the buying power of $225 using a 3% inflation rate.
Sure, living off 200% of FPL is more doable once you no longer have to save for retirement or pay a mortgage. But it’s hard to ever get to retirement or own a paid off house on such a low income in the first place. No rational person is going to retire from a much higher income to then live so spartanly either.
The Better Early Retirement Strategy
Of course, Joe isn’t going to be stuck making only $25,000 a year for the next 30 years. In fact, he mentioned in a follow up comment he makes about $35,000. But if he’s already got the mindset that earning 200% of FPL is good enough, then chances are he won’t be taking further steps to try and supercharge his income.
The key is to make as much money as possible while also keeping expenses as fixed as possible. So long as your earnings are growing faster than the rate of your spending, you’re winning. And so long as you diligently invest more of your savings every month in a risk-appropriate manner, you’re really going to win out in the long-run.
I really want to encourage readers to develop an abundance mindset. Don’t settle for living on the minimum. Instead, strive to earn more so you can not only retire early but also have the optionality to live it up.
Know that the amount of money you can make out there is endless. There’s only so much cost you can cut. Instead of retiring early on a meager portfolio, find a job you enjoy. Keep on working until your portfolio can generate at least 300% of FPL in passive income.
Do not underestimate the cost of healthcare and family. Because they are your most important assets, you will spend any amount of money to keep them strong.
Readers, what other disconnects do you observe about the Financial Independence Retire Early movement? Do you think people are overly focused on saving and not enough on investing? Why not go for unlimited upside instead?