Early Retirement at 33: An Overview
One of the most popular page at Root of Good is the “I Retired at 33!” page where I introduce myself and talk a little about Root of Good.
I assume that means people are interested in the story of how I retired at 33. In this post, I’ll give a quick summary of how I managed to pull off retirement at a very early age.
I started finding ways to make money at an early age. Buying candy in bulk and selling individual pieces for a quarter each at school. A newspaper route. Mowing the neighbor’s yard. Tutoring kids after school.
Of the money I earned, I saved a large proportion of it. I was a self-made thousandaire before I even left high school!
I decided to go to the nearby state university. It was a very good school for engineering, and very inexpensive ($3000 per year back in 1998). My SAT scores could have gotten me into a more prestigious school somewhere else, but in hindsight the local state university was the best choice.
I took more than the normal 15 credit hours each semester and graduated in three years. Not only did I save a year of tuition, I also made working and earning a (hopefully) good salary one year closer.
During my three years in undergraduate, I had a series of jobs that were interesting, paid well, and/or provided useful experience for my career – civil engineering. I also managed to win 11 academic scholarships, and a few research grants.
By the time I finished undergrad, I had a nice bit of savings accumulated.
Instead of heading into the difficult job market of 2001, I went to law school.
Lucky for me, the law school was also in-state, which made tuition relatively affordable. Around this time my wife and I bought a condo together where we lived during my law school days.
I worked a few summers at law firms and various governmental legal employers. Eventually I figured out I didn’t really want to practice law for a living. The hours sucked big time if you wanted to make the big six figure salaries! I was all about making some money, but not at the expense of a life outside work.
At one of these summer jobs, there was very little actual work to do, so I decided to start my own business. I ended up making over $30,000 in the next couple years with relatively little effort.
Figuring a Juris Doctor might come in handy one day (or at least look cool on my office wall), I finished up law school and immediately started a great job at an engineering consulting firm in Raleigh.
We tried (but failed) to sell our condo when we moved back to Raleigh, so we rented it out to some PhD students at the university. A year or two later the California property boom sloshed some excess money our way when a nice couple from Santa Clara bought our condo sight unseen for a third more than we paid for it. More money for our portfolio!
Optimal Spouse Selection
Mrs. RootofGood and I married right before I finished law school. She is obviously perfect in every regard. She also obviously reads this blog, so I have to say that. Our similar outlooks on personal finances have been a huge wealth generator.
It may come as no surprise that we are both very frugal about virtually everything. We agree on saving a large part of our incomes. We take vacations off season because crowds are thinner and our wallets get fatter (er, less thin). Our furniture might be uncharitably described as dorm room chic. Our kids wear hand me downs alongside inexpensively purchased new clothes. We live in a modest neighborhood and drive modest cars.
We made these frugal choices so that one day we can retire early and not have the stress and time demands from a regular job burdening our daily lives. There is more to life.
Good Job With Benefits
Mrs. RootofGood found a job at a great company with even better benefits, although the pay wasn’t the highest at first. Her 401k plan was better than mine and had an even larger matching contribution! The health insurance plans offered at her firm were excellent and almost free, even for family coverage.
During our careers, we both focused on expanding our skill sets and increasing our responsibilities in the hopes that our salaries would rise over time. My salary jumped big time once I earned my Professional Engineer’s license. Mrs. RootofGood earned a number of promotions and raises.
This is almost certainly un-American, but we dumped raises into investments instead of buying more crap.
Maxing Your Savings
As soon as we started working right after college, we immediately started contributing the maximum to our 401k’s and IRA’s. It made our paychecks artificially tiny. Puny. But maxing out savings options is like putting your net worth on steroids. There’s muscles popping out all over the place!
Eventually we had to seek out more places to stash money. Enter the Health Savings Account, the 457, and after the kids were born, 529 college savings plans. After filling up those accounts, brokerage accounts held the rest of our investment contributions each year.
Don’t Pay Taxes
That’s a typo. Pay as little as possible! Contributing to 401k’s, traditional IRA’s, health savings account, 457, and a 529 college savings account kept our taxable income low. We also paid for child care through the Childcare Flexible Spending Account offered by Mrs. RootofGood’s employer.
Our tax strategies have been so successful that we ended up with a federal tax bill in 2012 of $600 in spite of gross earnings over $140,000. I consider an average tax rate under 0.5% to be pretty good! 2013 is even better. Our tax rate is 0.1% ($150 tax on $150,000 income).
We didn’t do anything sneaky or illegal. In fact, I do our tax returns on paper and one of my rules of investing is to keep it simple enough so it doesn’t make our tax returns insanely difficult.
A Permanent Starter Home
Right as I was finishing law school, we took our cash from student loans, summer jobs, and profits from business ventures and dumped them into a house (along with a small loan from my parents that helped us both out).
We investigated buying land and building a house, and eventually rejected that option as it would be very expensive to custom build a house compared to buying a “used” house. Plots of land close to town were more expensive than whole houses (and the land underneath them!).
We bought the house thinking it would be a starter home. Ten years later, and after ample fix ups, we are still here. Now it is a permanent home, since it meets our needs well. It still needs work, but what house doesn’t?
Houses can be expensive. Of course, we weren’t silly enough to pay full price for the house! The City put the house up for auction and we were the winning bidder at a price 20-30% below similar houses. There was a little more research, due diligence, and risk taking on our part, but it has worked out well with no surprises. Except the lake the City rebuilt for $2 million right behind our house soon after we moved in. Somehow I concealed this awesome fact from Mrs. RootofGood.
We have been lucky to refinance the house more times than I can remember, pushing the mortgage rate down to 5%, 4%, 3%, 2.5%, and now 1.99% (for 3 more years until it is paid in full). Each time we refinanced, we tended to make the loan term shorter to help pay off the house quicker.
I started out investing with Edward Jones, a full service brokerage firm. They “fully serviced” me by providing expensive investment products. I’m lazy, so I stuck with them for a couple years and paid high fees. Eventually Mrs. RootofGood’s compliance department gave me the kick in the butt I needed, and made me switch to an approved brokerage firm, so I had to leave Edward Jones.
Switching brokerage firms to Fidelity and Vanguard cut our investment costs and hidden fees (expense ratios) to almost nothing. In addition, the online access was far superior at both firms. Now I could manage and automate my investments from the comfort of my own couch. In the middle of the night.
We have saved close to $40,000 on investment expenses by switching to a low cost provider like Vanguard and Fidelity. That’s a year or two of living expenses!
Yeah, we had them. Lots of them. Three to be exact.
Recent really scary news reports indicate it costs like $300,000 to raise each kid. I can’t figure out how they spend so much money on little creatures whose favorite things to play with are cardboard boxes and shiny pieces of plastic up until age 7or so. And that $300,000 figure didn’t even include college!
The truth is, you don’t have to spend a ton of money on your kids, and they will still love you at least 94% as much as if you had spent $300,000 on them.
Moral of the story: don’t spend excessive money on them. Spend time with them.
Know What You Spend, Budget If Necessary
Until four years ago I never closely tracked what we spent. We have never had a budget. “Save money on everything” is a reflex, and keeping expenses low comes automatically for us. Apparently this is not true for everyone, so budgets could be a good thing if you have a spending problem.
I started out with a simple spreadsheet where I copy/paste all credit card and checking account transactions for each month. The spreadsheet automatically summarizes the expenses for each quarter and each year.
I have recently transitioned to using Personal Capital to track all spending as well as all investments. It provides a summary of all income, expenses, and investments in one screen. Incredibly easy to set up and even easier to use.
This is a great tool for figuring out exactly where your money is going. Knowing how you spend lets you determine whether you get value for your dollars, and where you might be able to focus efforts to reduce expenses further.
After I started tracking expenses in very fine detail, I realized we weren’t spending as much as I had assumed. Core expenses were around $24,000 per year. This meant we were even closer to early retirement (lower annual expenses = smaller investment portfolio required to fund those expenses).
Almost Free Vacations
We like to travel, but we don’t like to spend a lot of money. This is one category of spending where we have paid very little over the years, yet enjoyed some pretty amazing vacations. I have never sat down and figured out how many countries we have visited exactly.
Ok, a quick mental count says about ten, but all the Caribbean islands quickly blend together with their white sandy beaches and crystal clear blue water.
How did we save money?
- Research destinations and exchange rates
- Plan carefully (but leave plenty open ended)
- Be patient and watch for good deals and low season prices
- Get off the tourist path (save money and get a little more authentic)
- Free or cheap hotels and flights using air miles and rewards points from credit cards
Weathering the Great Recession
Boy howdy, some people lost a freaking ton of money during that little economic blip called “The Great Recession”. We lost a boat load too. And then made it all back. In fact, I switched up the investments to a more aggressive allocation in the middle of the 2008-2009 crash and it has paid off well (I’m retired after all).
It truly hurts to hear stories of people who lost half their investments in the Great Recession, then sold everything and stayed out of the market during the recovery in 2010-2013. We basically did the exact opposite and piled money into risky investments during the 2008-2009 market crash.
Sure, it was a little scary seeing the market crash 7% in a day. But I call those “buying opportunities”. The money we were “losing” was long term investments, so why did I care if one day it went down 7%? I care what these mutual funds will be worth in 10 or 20 years.
We made an early retirement plan right after I started my post-college job. We had all this money coming in the door. Way more money than we had before. I knew back then that this was a powerful force that, if harnessed, could lead to something big one day.
Over the years the plan changed and our ideal amount of investments changed numerous times. These changes are unavoidable, since knowledge of finances and investments increases over time, and your interests and desires also change. We kept fine tuning the plan as our investments and our family grew.
Embracing the Unknown
I would be lying if I said we have a 100% certain plan to be retired early forever and there is no chance we will ever have to work again. There is always uncertainty. The best you can do is plan for it, and understand that flexibility will get you a lot further in uncertain times than rigidly holding to a plan.
Securing Affordable Health Insurance In Early Retirement
Everyone (in the US at least) worries about finding and keeping affordable health insurance in retirement. With the Affordable Care Act, those concerns are largely moot.
Our family obtained insurance coverage with $0 deductibles through the Healthcare.gov exchange for $125 per month. Though heavily politicized, the Affordable Care Act is hugely beneficial for early retirees because it provides guaranteed issue health insurance for everyone. Those with incomes under 400% of the poverty level will most likely qualify for tax subsidies to help pay for monthly insurance premiums. In our case, because our income is much lower while retired, we qualify for subsidies over $900 per month.
Reaching Our Goals
Over the last six years the stock market produced a lot of wealth. We went from having “lots of money” to having “enough”. Having enough money to live comfortably for the indefinite future is a big deal.
After my job ended, I pulled out The Plan and quickly figured out we have “enough”. Now my days are free and I can do (or not do) whatever I want. Mrs. Root of Good tried (but failed) to retire in 2015. She switched to part time work (for full time pay) and eventually joined me in early retirement in early 2016. The last two years she worked, she had two paid summers off so we could travel to Canada for two and a half weeks and to Mexico for over seven weeks.
Accessing our 401k’s and IRA’s without penalty
We have approximately 70% of our investment portfolio in traditional 401k’s and IRA’s. Withdrawals from these types of accounts usually incur a 10% early withdrawal penalty. However, there are two methods that allow early retirees to withdraw significant sums from these tax deferred accounts without paying the 10% early withdrawal penalty.
The first is the “72t rule” that requires “substantially equal periodic payments” from the commencement of early withdrawals until age 59.5. Not wanting to lock myself into a fixed series of withdrawals for the next 25 years, I chose to go a different route.
The second method of accessing tax deferred accounts without paying a 10% early withdrawal penalty is the Roth IRA Conversion Ladder. Through this method, I am converting small parts of my traditional 401k and IRA accounts to Roth IRA each year. After a five year waiting period, I’m able to withdraw those amounts converted penalty free.
In a nutshell, this is the story of how I went from a thousandaire to a millionaire in about ten years. The rest of our early retirement story continues to be written every day.
If you want to find out more about any particular area of our lives or finances, please share with me below!