Tuesday, March 11, 2008

Thirtysomething Retirement: My Plan So Far

I’ve blogged several times about my short-term goals and my frugal rules, but I haven’t talked much so far about my long-range plan. Since I’m not Tim Ferris, how exactly do I intend to be able to retire in my thirties?

First, let me define what I mean when I talk about “early retirement.” By my midthirties (or, in the back-up “Leah” scenario, my early forties), I want to have enough reliable income from my nest egg to be able to cover my basic needs for the rest of my life. I will continue to add money to my investments after that point, but I would like to be able to take on only the amount and type of work that I want to do. I don’t want to have to work full-time or go into an office on a regular schedule (I hate getting up in the mornings, and I currently “sleep in” until 7:15).

Right now, I can cover my basic needs (food, shelter, utilities, healthcare) with about $1000-$1300 a month. Last month I spent just over $1600 total. I didn’t feel deprived. With my all-time lows challenge, I plan to decrease my spending to the point where I do feel deprived, and then go back up one level so I’m at the level of “just enough.”

My savings goal is $2650 a month, which is about 75% of my net salary. I also make some money from freelance editing, which varies a lot by month. Since I’m busy enough at my day job, I’m not currently pursuing new freelance gigs, but am simply taking the ones that are offered to me.

So far, so good. But what about the variables?

There are a huge number of variables. I don’t know 100% if R. and I will be getting married. I don’t know if I’ll have a child (though I know I wouldn’t want more than two) and I don’t know how much it will cost if I do. I don’t know if I’ll buy a place—probably, eventually, but I have no idea when it will become financially wise and I don’t know if we’ll choose to move somewhere cheaper in order to make our real estate money go further.

And then there’s this recession. I believe the market will rebound eventually, but who knows how long that will take? My estimates are based on very conservative returns of 3–7%, but it’s always possible that even those returns won’t happen in the next eight years. Even if they do, inflation may very well increase my basic expenses pre-retirement.

I’ve read Your Money or Your Life and The Tightwad Gazette* enough times that I think the dangers of inflation are greatly exaggerated, or at the very least avoidable by making more frugal lifestyle choices. But when the price of a dozen eggs at Aldi doubles in just over a year, even I have to pay attention.

My Inflation Plan

I’m hoping my salary will keep pace with inflation—my current employer gives cost-of-living increases of about 4% a year. This is lower than the CPI rate of inflation, but probably pretty close to my personal rate of inflation, since I’m not directly affected by changes in oil prices. (Rising oil prices affect everyone through increased costs of transporting goods and increased costs of running public transportation. But I do think the rate of inflation of my personal expenses will be a bit lower than the norm since I don’t have a car to fill up.)

If it doesn’t, I have three options:

  1. Increase my income by looking for a more lucrative job. It’s probably possible. I’m underpaid for the job I’m doing. This is fair, since I’m also underqualified, but in a couple of years I’ll be “experienced” and could probably command a higher salary elsewhere, especially at a larger company.
  2. Seek out more freelance work. Again, I think this is pretty plausible. I have a good resume for my freelance work, there are thousands of possible clients, and the work isn’t dependent on my finding local clients.
  3. Decrease my savings. Last resort!
I've started thinking of my spending as "the money I don't save," which is sort of an interesting change in mindset. If inflation goes crazy, I will cut every corner I can to preserve my savings goals. I will be the woman recycling tinfoil and discovering the joys of lentils and unplugging my phone charger when not in use to save two cents per month. Heck, I'm already that woman, but I can go further. Pray that inflation stays at its current rate or lower so you don't have to watch me try.

There are three other variables that are on my mind when I think about my future:
  1. Health insurance and healthcare expenses
  2. Marriage and family
  3. Buying a house or condo

Each of these deserves its own post, so I’ll save them for…da da...the future! (that was terrible, I know). Look for posts on my concerns and predictions in each of these areas sometime in the next few weeks. Subscribe to my RSS feed to make sure you don't miss out!

*If I don't mention these two books at least once an entry, my personal finance blogger license gets revoked. If you haven't read these two books already, you must do so immediately.


Sam said...

One big way I can save more is by moving to a more inexpensive place - at a cost. I plan on signing a temporary lease or taking over someone else's lease and my options are no good: I can get a real cheap place in the middle of nowhere with unreliable public transit or, I can get a real cheap place in the middle of a dodgy neighborhood (more dodgy than I'm used to), but with reliable access to transit or, I could get a teeny place for the same amount I'm currently playing with crappy landlords and/or mice infestations but in the middle of the most gorgeous part of the city. I am seriously considering all options and weighing them against how badly I want to have a decent savings account when I move across the country. I'm really tired of living in the ghetto and would love (LOVE!) to live in a well maintained place for once in my life.

I guess this is one of those types of decisions one can make for early retirement as well - retire with small nest egg and live with a very tight budget, or wait to retire with a giant nest egg to have a fancy pants lifestyle or have some other sort of plan.

Scarlett said...

"retire with small nest egg and live with a very tight budget, or wait to retire with a giant nest egg to have a fancy pants lifestyle or have some other sort of plan."

Yeah, there always seems to be a tradeoff. So far I definitely prefer the former!

If you didn't have to deal with mice infestations or crappy landlords, I would go for the teeny place. But I've dealt with the pain of a landlord who puts a rubber band around a broken toilet seat and considers it "fixed." When I was planning to move to New York, I got a tiny place in an "ethnic" neighborhood that wasn't dangerous, but was less popular with affluent renters. It was a month-to-month, which was what I needed at the time. Hope you can find a compromise that works for you!

Hope you can find a compromise that works for you...

Dana Seilhan said...

Oil prices affect everybody, no matter what. If nothing else, they affect food prices, not only because of the fuel needed to drive farm machinery but because conventional pesticides and fertilizers are made from petroleum. (The Green Revolution occurred on the backs of dead dinosaurs.) Oil is also used to make our most commonly-used plastics and several varieties of chemical feedstocks. So no matter what, if the prices keep going up, we'll all feel the pinch.

I don't know why the press treats oil prices only in the sense of how they affect prices at the pump. The public deserves to know the whole story, but nobody seems to be telling it. I suppose there are a few good reasons, like avoiding panic.

Dana Seilhan said...

@beany: I know just what you mean. Moving out of the "ghetto" isn't really an option unless I can get into Section 8 in a better community (it's possible--I'm on a waiting list now). On the other hand, knock on wood, I seem to be in one of the safer residences in this neighborhood simply by virtue of my apartment being too much of a pain in the neck to break into, and the university is working on revitalizing this neighborhood. So if I don't get priced out, there may be merit in me staying here. But man... I hate it. I want to fix this place up sooo badly. I just don't have the cash.

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Fermina Dazey said...

I think you are already halfway there, Scarlett. Now that you've identified the variables, it would be easy for you to plan the next step. Knowing the problem is half of the solution, and by determining these factors, you will know the appropriate actions to do. Hoping to read your other posts about this!