Is financial independence impossible until I'm old?

[sethmachine]

I'm in my mid twenties (24-26 years old). I have been working for almost two years, and my before tax income is in the range of $100K - $130K.

I also max out on employer retirement contributions.

The median income in the U.S. is apparently $53,657 for 2014, and the median income for a post grad is $50,556 according to a Google search.

By those measurements, I should be doing amazingly well--making twice the median income of all U.S. citizens, which is not just new graduates. It does not feel that way though.

I also live very frugally. I have several roommates, so my rent is much lower than most people. I go out to eat maybe 1-2 a week on average, and otherwise rarely buy things I don't immediately need (e.g. clothes, new computer, etc.).

My roommates barely make double digits but have much nicer stuff than I do (go figure right?).

With all that, I find I only have around $1000 - $2000 left over every month after all my expenses.

I'm stressed out because even if my income would grow 3% each year, it would still take me another ~20-30 years of working to be financially independent--that is my passive income is enough to pay for my retirement and life style.

If I'm making twice the median, should I not be able to retire twice as fast? Otherwise, if people are really make 50K a year, how on earth can they expect to retire when they hit 60, if I'm barely making it on twice that much while living a very frugal lifestyle?

So, basically, I need to take some risk, like start a company in order to get where I want sooner?

Or is the system broken?

[Jluke]

my before tax income is in the range of $100K - $130K.

I also max out on employer retirement contributions.

I bet you are losing a lot of money on taxes. you probably only see a net of ~55k of that gross income, right?

[Singuy]

You are retiring twice as fast...actually you are reaching financial independence infinitely faster than most Americans. News flash..a lot of Americans are NEVER financially independent. Most cannot be financially independent ever if we have no social security in place.

[disneysteve]

my before tax income is in the range of $100K - $130K.

I also max out on employer retirement contributions.

I also live very frugally. I have several roommates, so my rent is much lower than most people. I go out to eat maybe 1-2 a week on average, and otherwise rarely buy things I don't immediately need (e.g. clothes, new computer, etc.).

My roommates barely make double digits but have much nicer stuff than I do (go figure right?).

With all that, I find I only have around $1000 - $2000 left over every month after all my expenses.

If I'm making twice the median, should I not be able to retire twice as fast?

I think you're lumping a bunch of stuff together.

1. You gave a pretty wide income range. There's a big difference between 100K and 130K. Which is it?
2. How much is actually going into the retirement account? If it's a 401k and you are maxing it out, that's $18,000. Is that correct?
3. What else comes out of your check besides 401k and taxes? How much are you paying for health insurance? Any professional fees/dues/certifications?
4. How much are you actually bringing home?
5. Do you have any debt - car loan, student loans, credit card balances?
6. You say you're very frugal but without seeing your budget, we can't really know if that's true or not.
7. Should you be able to retire twice as fast if you make twice as much? It doesn't quite work that way because of taxes and other issues, plus you're assuming the people making half as much will ever be able to retire. Many of them will not.
8. If you live as if you earned 50K, then yes, you would be able to retire much quicker than another person who lives on the 100K, but again, without seeing your actual numbers, it's hard to say more than that.

[LivingAlmostLarge]

If you read Mr Money Mustache he lays out the math for financial independence. It's not what you make it's what you spend. If you spend now $12k/year you can retire with way less than $1m. In fact many of his followers are retiring on $500k or less. They have just very small living expenses.

So think about it? How hard is it to save $500k? If that generates $20k/year income at 4% withdrawal rate and if you were living on $20k and making $100k? Well that would put financial independence within a 10 year time frame right?

[Tabs]

OMG Dude, FI is totally possible! Just set yourself on FIRE! (That's short for a movement called Financially Independent, Retiring Early.)

Now, uh, comes some fine prints and legaleses caveats: It's all about what and how much you are willing to sacrifice.

For example, if you are willing to live in a van (maybe or maybe not legal depending on where you live), you can totally forego that pesky cost of owning and maintaining a house. I mean talk about shaving so much money off your budget.

Or maybe you are willing to sacrifice your citizenship? Being an ex-pat in a Latin American or Southeast Asian country where your dollars can go much further can easily put you well ahead of the rat race.

Or maybe you just need to bring in way more income who knows? Definitely want to find (legal) ways to be as tax-efficient as possible....

Seriously for a second though, your friends, who are making less than you, most likely are not maxing out their retirements like you are. You've made some sacrifice to achieve that, but short of a paper statement, that particular achievement is fairly intangible compared to their material toys.

First rule of the FIRE Club is never keep up with the Joneses. Because the Joneses are chumps.

Well I shouldn't say that. To be perfectly fair, we all make decisions on what matters more in our lives. Maybe for them, that new iPhone 7 really matters more than maxing out their 401(k). Who knows?

Anyways, I'm totally rambling, and the others have given you good feedback. I just wanted to add that you indeed can be FI. Feel free to share a detailed budget if you want some help streaminling your spending.

[MonkeyMama]

I'd be curious what your expenses are.

Good points were brought up by others. You are in the worst tax situation as a single renter (I am presuming single/renter from your post).

Your options are really to out-earn your taxes/expenses OR find ways to be more efficient with your expenses. Just as a couple of example (YMMV) we chose home ownership very early on because it was significantly more cost efficient. I mean literally our total household expenses were $30k to own an apartment. It would have been a $55k lifestyle to rent the exact same apartment. Seriously! For us, it's stuff like this. Another thing we did was move to a significantly cheaper city, later on. When I Was first out of college I had an employer paying for a lot of my meals, paying for all my auto expenses and paying for my education (grad school). These kind of expenses were structured as tax-free reimbursements, so stretches a lot further than income that is taxed. These are just a few ideas from my personal experience. I am not saying that any of these specific ideas are helpful to you, but it's seeking out these kind of efficiencies that will put you on the path to early retirement.

[rennigade]

if people are really make 50K a year, how on earth can they expect to retire when they hit 60, if I'm barely making it on twice that much while living a very frugal lifestyle?

Its called compounding interest, look it up. Thats how people making $50k/year can easily retire as millionaires.

[Outdoorsygal]

I'm in my mid twenties (24-26 years old). I have been working for almost two years, and my before tax income is in the range of $100K - $130K.

I also max out on employer retirement contributions.

The median income in the U.S. is apparently $53,657 for 2014, and the median income for a post grad is $50,556 according to a Google search.

By those measurements, I should be doing amazingly well--making twice the median income of all U.S. citizens, which is not just new graduates. It does not feel that way though.

I also live very frugally. I have several roommates, so my rent is much lower than most people. I go out to eat maybe 1-2 a week on average, and otherwise rarely buy things I don't immediately need (e.g. clothes, new computer, etc.).

My roommates barely make double digits but have much nicer stuff than I do (go figure right?).

With all that, I find I only have around $1000 - $2000 left over every month after all my expenses.

I'm stressed out because even if my income would grow 3% each year, it would still take me another ~20-30 years of working to be financially independent--that is my passive income is enough to pay for my retirement and life style.

If I'm making twice the median, should I not be able to retire twice as fast? Otherwise, if people are really make 50K a year, how on earth can they expect to retire when they hit 60, if I'm barely making it on twice that much while living a very frugal lifestyle?

So, basically, I need to take some risk, like start a company in order to get where I want sooner?

Or is the system broken?

Look to Real Estate. Save your money so you can live free of roomates in your own purchased abode. Having roommates is just one way to lower housing costs

[clatoden99]

I think it depends on what you define as "being financially independent".

Different people have different ideas to financial independence. Do you know yours?

Here are some ideas:
1) $1 Million in assets
2) $XX,XXX passive income

Depends on your lifestyle, needs, and... wants. Try out this Retirement Calculator - The New Savvy to find out what and how much you need. http://thenewsavvy.com/retirementcalculator/

[kork13]

Seth, you're in your mid-20's and already maxing your 401k. Are you doing the same with an IRA ($5500/yr)? With those two instruments alone, you can easily save enough to retire in 25-30 years with complete FI (assumes a typical 7-9% real return), with $2.5M generating $100K income every year (again, this is all 2016 dollars... amounts would all be larger if you factor inflation). And if you're planning to retire early (before age 59.5), you're going to need some money in taxable accounts as well... Say you invest an additional $12K/yr in a taxable account, which would build to $1M over 25 years, which you could draw down for 10-15 years at $100k/yr while you wait for your retirement accounts to be accessible.

In that very plausible scenario, you're able to retire at age 50 with FI. Most people DREAM of retiring around age 60, and that requires reliance on Social Security. If you factor in eventually drawing SS, and accept slowly eating into your principle, you could easily push your retirement date forward to 45 y/o (20 yrs from now), with as little as $1.5M.

In the end, the exact timing all comes down to returns... the difference between earning 6-7% on your money vs. 8-9% is 5+ years in your timeline. I only point this out so you understand the scope of the large unknown variable that is your rate of return.

You're in a fantastic position right now. Don't squander it, and don't fret about having to wait 20-25-30 years to get there. You'd still be able to retire when you're (relatively) quite young, and you'd have the financial freedom to do whatever suited you. Investing for the long term is a matter of patience. Give the patience, get the reward.

[autoxer]

The system isn't broken, but the way you are measuring your progress might be. It doesn't really matter how many multiples your income is over the median. The only thing that matters is your savings rate. The higher your savings rate, the quicker you can reach financial independence.

You claim to be frugal, but what are you comparing yourself to? You certainly have some frugal habits, but do you really know how much you are spending? If you earn $130k, pay $26k federal tax, $10k FICA, $4k state tax, put $18k in 401k, save $2k/month ($24k total), then you are spending $48k/year. If that is all true, then you take home $90k save $42k & spend $48k. According to MMM, that 46% savings rate, could reach financial independence in 19 years.

Don't just save what is left over at the end of the month. Invest how much you need to reach your goals first and then spend what is left over.

[scfr]

44 is old?

[sv2007]

So, basically, I need to take some risk, like start a company in order to get where I want sooner?

Or is the system broken?

You get the basic idea. If you always do the safe thing and everybody else is also doing the same thing, then you won't get ahead. Without getting ahead, then plan on average retiremetn age/income/whatever.

In order to have above average outcome, you must do better than average.

[TexasHusker]

I'm in my mid twenties (24-26 years old). I have been working for almost two years, and my before tax income is in the range of $100K - $130K.

I also max out on employer retirement contributions.

The median income in the U.S. is apparently $53,657 for 2014, and the median income for a post grad is $50,556 according to a Google search.

By those measurements, I should be doing amazingly well--making twice the median income of all U.S. citizens, which is not just new graduates. It does not feel that way though.

I also live very frugally. I have several roommates, so my rent is much lower than most people. I go out to eat maybe 1-2 a week on average, and otherwise rarely buy things I don't immediately need (e.g. clothes, new computer, etc.).

My roommates barely make double digits but have much nicer stuff than I do (go figure right?).

With all that, I find I only have around $1000 - $2000 left over every month after all my expenses.

I'm stressed out because even if my income would grow 3% each year, it would still take me another ~20-30 years of working to be financially independent--that is my passive income is enough to pay for my retirement and life style.

If I'm making twice the median, should I not be able to retire twice as fast? Otherwise, if people are really make 50K a year, how on earth can they expect to retire when they hit 60, if I'm barely making it on twice that much while living a very frugal lifestyle?

So, basically, I need to take some risk, like start a company in order to get where I want sooner?

Or is the system broken?

You have reason to be concerned. If you follow the road of the masses - IRAs, 401Ks, stocks, and bonds - you will have to save a TON and be one lucky fellow in order to achieve financial independence before you're an old man.

You will have to be a risk taker to make it happen by your 40s. Most people aren't willing to take it. Only you can decide.