A Simple Way to Retire 15 Years Earlier

I wanted to further explain how low expenses lead to early retirement by taking a look at a case study.

Be a Super Saver

Let’s explore the lives of two fraternal twins, tragically torn apart at birth (not in the separating conjoined twins sense, but rather in the figurative sense).  To protect their true identities, I have carefully crafted cover identities.  Each sibling led similar lives.  They went to college, studied engineering and obtained good jobs right out of college at age 21 earning $60,000 per year.

The young man, Saver Sam, is a financially responsible individual.  He tithes each paycheck, piously placing 10% of each pay period’s payment into his 401k’s collection plate.  That amounts to $6,000 per year contributed to his 401k.  Not a bad way to go about saving for retirement.

Saver Sam’s fraternal twin Super Saver Samantha, sharing only 50% of her genetic makeup with Saver Sam, is a slightly more frugal individual.  She is a really good saver.  Some say she’s a super saver (hence her name).  To appease the retirement gods, Super Saver Sam sacrifices 30% of her hard earned paycheck on the alter of savings.  To be more exact, she puts $18,000 per year into her 401k and IRA.

Super Saver Overview

After taking out investment contributions, Saver Sam is left with $54,000 per year which he spends diligently.  Super Saver Samantha only has $42,000 left each year, which she gladly spends in a more frugal manner.

Sam and Samantha both envision retiring early, and both keep saving toward their goals.  Since Sam spends $54,000 per year, he must save around $1,543,000 to be able to withdraw $54,000 per year to cover his lifestyle (at a 3.5% withdrawal rate).  Samantha on the other hand, only needs $1,200,000 to fund her $42,000 per year spending habit.

Let’s take a look at when Sam and Samantha can reach their retirement goals.  Remember Samantha is saving more than Sam each year, so you expect her to save more money and reach her retirement goal sooner.

super saver lifetime investments

Sam does alright.  He is on track to meet his savings goal at age 59 with $1,548,339 in his investment portfolio.  Then Sam can retire and live happily ever after to a ripe old age.

Samantha does even better!  At the young age of 44, Super Saver Samantha passes the $1.2 million mark and grows her investment portfolio to almost $1.3 million!  She reached her retirement goal a full 15 years before Saver Sam will reach his goal.

Tropical Beach

Around age 46 or 47, Sam is cruising the internet, looking for his long lost twin sister.  Eventually he finds her online profile and the travel blog she started when she retired at 44.  What?  She spends a month or two each winter snorkeling and surfing in a low key (but warm) Latin American beachfront community, and lives a generally awesome life.  Without working ever again.  But that’s unpossible for someone her age!

Sam gets a little jealous at this point, but figures Samantha might be able to give him some tips to get to early retirement.  Sam and Samantha start comparing notes of their lifestyles over the last couple decades.  They found out they both lived comfortable middle class lifestyles in different parts of the US.  Sam and Samantha both have decent houses and good cars, but Samantha is just a little more savvy and manages to spend a little less.

Her mortgage and housing costs were around $400 less per month because she bought a slightly smaller house in a slightly less swanky neighborhood.  Compared to Saver Sam, Super Saver Samantha saves on average $300 per month (more some months, less other months) by buying reasonably priced sedans instead of the latest luxury models.  Samantha also keeps her cars for seven to ten years before replacing them with a new or new-ish car.  Sam lives it up and leases beautiful luxury cars and manages to score a new one every three years when the lease expires.

Samantha also managed to save an additional $300 per month in taxes by contributing $18,000 per year to her 401k and IRA instead of the $6,000 that Sam saved.  Add up Samantha’s savings each month: $400 on housing, $300 on cars, and $300 on taxes.  That’s $1,000 per month or $12,000 per year that Samantha managed to save without making burdensome sacrifices.  The payoff was retiring 15 years earlier than Sam.

This is Samantha’s tip to Sam.  To be a Super Saver, all Samantha had to give up was a little bit of house, and drive a slightly less new, less flashy car.  She didn’t have to reuse dryer sheets, rinse and re-use her ziplock bags, or make her own laundry detergent to retire at 44.  Super Saver Samantha simply selected a few areas to be a little frugal where she could have spent a bunch of money and made some smart choices early on to set her on the path to a very early retirement.

I hope you all enjoyed Saver Sam and Super Saver Samantha’s journeys to retirement!  Just remember, spending less means saving more, and needing a smaller investment portfolio to retire or be financially independent.

Are you on the path to beat Super Saver Samantha by retiring at age 44 or earlier?  Can you come close?

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  1. Being a super save has one huge advantage and that’s keeping your cost of living low. After Samantha retired, she will be able to live the lifestyle she’s accustom to without having to make any big changes.
    For people who don’t save as much, it’s hard to resist spending money and it’s really difficult to cut expense.

    1. Joe, that is a good point – Super Saver Samantha can continue enjoying her standard of living during retirement without making any further reductions in her expenses. She won’t end up being much older and forced into retirement due to job loss or medical issues and simultaneously forced to drastically reduce spending.

  2. Hee hee, I love this, Justin! It also shows how spending just a little bit more will doom a person to a life of servitude. And spending a lot more dooms you to financial ruin. I was totally set to be done in my early 40s, but I made the unfortunate mistake of buying a little bit too much house. Not the end of the world, but definitely a dumb error looking back.

    1. Hopefully the house will mainly be a big one time expense, and the long term carrying costs like maintenance, insurance, and utilities won’t be a continuing big expense!

      It is funny how small changes in expenses snowball into huge changes in savings. When I started writing this article and arbitrarily picked the 10% vs 30% savings amounts for Sam and Samantha I figured it would make Samantha retire 5 years earlier or so. Never would have guessed 15 years less without running the numbers.

      1. It’s crazy to see the difference! Also, it might be interesting to note how much money they have after taxes…if Samantha fell into a lower tax bracket than Sam due to her possibly pre-tax retirement contributions.

  3. The main benefit of saving lots of money is that it allows you to build a sustainable lifestyle. When you can survive off little, you’ll always be good. You won’t have to stress about maintaining some unrealistic standard of living.

  4. Save as much as possible, as early as possible. No matter how boring it may seem, the person that does that will likely be in much better position when older. Those later years are when people generally wish they saved more money when younger. It sometimes just takes a paradigm shift, and not worrying what others are doing in their 20s. Ultimately, time and compounding are allies of the investor – and they work well together.

  5. Don’t know if we’ll retire too soon (not that I’d want to, since I love my web design business and working from home on my own schedule is really not a pain), but we’re doing our best to save money and have our retirement ‘covered’.

    1. It sounds like you have an awesome work environment! Hard to give that up.

      I doubt you’ll regret saving money, increasing your net worth and making retirement possible. Who knows, one day you may want to slow the pace down and have more leisure time. And you will have the financial resources to do so.

  6. There’s nothing like being able to live well on little to become financially free and have the option to retire at will.

    My personal experience is that its not really necessary to sacrifice on the housing front as long as you can wait to buy in a down turn or a distress sale and pay cash or negotiate good financing.Taxes might be more in such areas but the extra public facilities often are hidden savings.As far as cars go you hit the nail on the head.A person almost always pays a huge penalty for always pumping for the hottest car.A house just might even become an asset but its much less likely an old car ever will.

    Americans are luck in having access to retirement funds.In India, except for the minority of workers in government service or working for big private companies with employee benefits,people have to plan for their own retirements.I deal with the situation by acquiring or building income producing assets to fund living expenses.So if its $500 a year for clothes,I have at least $5000 in the bank,giving me $500 a year as interest.

    I operate a similar system for lifestyle expenses.So if financing a car I want costs $1000 a month,my rule for myself is to first get an asset that pays as much per month.This way I am sure of being able to permanently enjoy my more expensive lifestyle.

  7. You can’t draw on your 401k until you are 59 right? Where are Samantha’s savings for the first 15 years? She will have to pay some taxes on those taxable accounts. You can’t hide it all from Uncle Sam.

    1. Luckily, Samantha will be able to withdraw from her retirement accounts at any time she wants!

      There is a relatively unknown rule that allows early retirees to withdraw from their retirement accounts (IRAs) at any age. The rule is known as the “72(t) rule”. It may also be referred to as the SEPP or Substantially Equal Periodic Payments rule.

      The full explanation of how the rule works is relatively complicated, so I won’t get into it here. You can read more about the 72(t) rule at http://www.72t.net/

      In Samantha’s case, she can use the 72(t) rule to withdraw up to $47,000 per year from her retirement accounts (assuming she starts at age 44 and has the $1,297,000 in her account per my example). On her withdrawals, she will pay regular income tax.

      There is usually a 10% penalty for early withdrawals from IRA’s. Properly using the 72(t) rule allows you to bypass the 10% penalty and ONLY pay the regular income tax on IRA withdrawals.

      The amount you can withdraw using 72(t) is based on part on the current US Treasury interest rates, and the $47,000 per year withdrawal amount I cite is as of October 2013. Later fluctuations in interest rates will cause the amount that Samantha can withdraw to change.

      1. Hey Justin,

        There are a few other ways to get to money locked away in 401ks, mainly via a rollover to a Roth IRA. All Roth IRA contributions can be withdrawn, penalty free, 5 years after they were initially contributed (the investment gains cannot be withdrawn). This is my plan for the retirement to age 60 gap that I’ll have.

        I discuss this strategy as well as a few others here: http://www.williamsgodfrey.com/possible-put-much-401k/

        Keep up the good work and congrats on realizing the ER dream.

        1. Thanks for mentioning the Roth IRA conversion option. I learned about that option relatively recently and I think that is what I will do instead of the 72t SEPP’s. I had already planned big Roth conversions each year for the first 10-15 years of early retirement, so I’ll have quite a bit of funds in the Roths to fund the withdrawals for when I’m age 45-59. 72t’s could be a good back up plan if I need to access trad. IRAs at the last minute (at which point I’ll hopefully be in my 50’s anyway).

          1. But you’d only be able to convert $5,500 per year from your 401k, right? Just making sure that you would have a limit to what you can convert each year?

          2. I should have said that I got that $5,500 because that’s the annual limit to what you can contribute to an IRA, I believe.

          3. But I’m not talking about going from a traditional IRA to a Roth IRA. I’m talking about going from a 401k to a Roth IRA. In the original article Sam and Samantha are putting lots of $ into a 401k. I’m wondering how to unlock that in early retirement… if I’m reading right, you can only convert $5500 of that per year to a Roth (or any IRA)?

          4. You can roll the 401k into a Traditional IRA then convert any amounts you want from Trad IRA to Roth IRA. I’m not sure if you can convert straight from a traditional 401k to a Roth IRA.

          5. Nick, I agree with Justin. The way to go from 401k to Roth IRA without hitting any sort of contribution limit is 401k ->Traditional IRA -> Roth IRA. Then you can take that rollover money out of the Roth in 5 years.

            Some people choose to roll over 1 years worth of expenses every year. This sets of a nice “flow” or ladder or rollovers that “mature” each year and can be taken out of the Roth IRA. This is usually done if the 401k is exceptionally good in terms of funds available/expenses, etc.

            Also, you should note that you do not want to roll over your entire 401k because it is considered as income for that year and is a taxable event. Rolling over all at once will result in a higher marginal tax rate.

  8. An important subpoint to this post is to start saving as early as possible. Both of the twins were smart enough to start at age 21. Despite the fact that I am a “super saver” now, I did not start doing that until my early 30s. Saving more will change the length of the race, but you can’t go back and change when you got to the starting line.

  9. I couldn’t agree more with the idea that the easy way to save is to make smart choices with the big fixed expenses (often housing and cars). That’s been my strategy and it pays off. When your paying $500 less on housing each month than your peers, that creates an awful lot of breathing room in the budget.

    1. Exactly – saving money on the big expenses lets you be a little more free in other (smaller) spending categories if you want ($3 lattes anyone?). It also frees up huge chunks of money each month to put towards savings goals or investments.

  10. Very good analysis, however, I think the returns should be recalculated with a 4% return. Why? If you are assuming static wages, you should not utilize an investment return that historically has been increased due to inflation. Doing this would increase the amount of work time for both savers, however, the spread will probably increase in samantha’s favor.

    1. I was trying to keep it simple and not bring inflation into the analysis, but you caught me! 😉 I was presenting everything in “real” terms, or in today’s dollars. 8% might be a bit high for a real rate of return. 6-7% is probably more realistic with an equities heavy portfolio, and 4% if you have a significant bond allocation.

      Whether you use 4% or 8% rate of return, the results are similar (as you suggest). Super Saver Samantha retires way earlier.

  11. I like this type of plan and have a similar process going on for myself.

    As a note to bring up that certainly isn’t for everyone is… rental properties. They certainly aren’t 100% passive by any means (well unless you hire a PM to run the day-to-day) however the equivalence to a nest egg is amazing.

    For Example:

    I have 2 properties that will Cash Flow $30,000 per year (net income after all insurance, taxes, and setting a side a portion for repair reserves each and every year).

    I have put down a total of $20,000 on these two properties and at a cash flow of $30,000 a year it is valued at $1,000,000 at a 3% SWR. These properties will be paid off (with the rental income received, no extra money from “my” pocket) in about 6 more years. I have owned 1 for about 1.5 years and the other for 6 months.

    So in roughly 8 years that $20,000 invested will be generating income equivalent to a $1,000,000 nest egg. To compare, in the market that would take returns of 63.25% a year… for 8 years straight!!

    Certainly, the two investments aren’t directly comparable as rental properties do take more effort and attention than stocks, but at returns of 63.25% per year I personally am more than happy to put in the few extra hours a month.

    They aren’t for everyone, but I thought I’d mention the possibilities of owning rentals as well! I’m turning 30 next month and hope to be in a very solid position by age 40!

    1. Kurt, those rentals sound like quite a solid way to reach financial dependence! I dabbled in rental real estate for a couple of years but didn’t want to put forth the effort to manage the rental. Using the leverage of cheap financing, you can definitely get a great financially productive asset like you have.

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