Retire for life (or just become Financially Independent) in about 15 years.
We are going to show how to retire in about 15 years through the power of investing, without ever using more math than addition(+), subtraction(-), multiplication(*) and division(/). We will demonstrate this by doing an example based on the average salary of a woman in 2019 dollars.
Let's say we make the average salary of women in the us during 2019, women made a median annual salary of ... we don't know! they don't break it out except by quarter, so let us calculate it.
from table 1 of the PDF we can see the weekly income by quarter, so we can figure out how much this theoretical woman would have made in 2019.
Wait, eagle eyed viewers may have noticed in the PDF from the Bureau of Labor and Statistics that "Data represent earnings before taxes and other deductions".. So we need to take out taxes first. So 2019 taxes are here and we can see this single woman would be in the 22% tax bracket, but taxes are a bit weird. First we have to take 6.2% for Social Security and 1.45% for Medicare for 7.65% covers both(just the employee side is all we care about for this).
Then we have to calculate Federal IRS taxes(which are unique). Taxes are calculated on the dollars you earn on a graduated basis, in 2019, the first 9,699 dollars you make in a year are not taxed at all, from 9,700 through 39,474 dollars is taxed at 12% and over 39,475 dollars but less than 84,199 is taxed @ 22%.
For our purposes, we will assume you live in WA or one of the other states that do not have a state income tax(as every state is unique and I'm to lazy to calculate it all for you).
OK, $35,182/year,.. let us calculate that out by month, and figure out how much we get to live on.
OK, we now have $35,182 as the average salary for a woman in 2019 in take home pay. Now we are going to invest this money, we need to know how much we can make investing. We are going to invest in VTSAX, which is a specific TSM fund, by Vanguard, that from 1992 to today has returned 9.6% a year. Except for Inflation.. We have to deal with Inflation. The Federal Reserve aims for 2% inflation per year. To keep all of our math simple, we are putting this all in 2019 dollars, so we need to subtract inflation out from all future earnings, so 9.6% - 2% = 7.6% earnings a year (averaged over decades)
So the idea is, we live on 1/2 of our salary every month and the other 1/2 we invest. So we live on 1 paycheck, and we invest the 2nd paycheck, every month. It won't be the most glamourous life, but we are interested in getting "F-You" money so we can choose to work or not as soon as possible. The more you save, the faster you can tell your boss to fly a kite and take your time finding a new job.
I guess we should talk about that Safe Withdrawal Rate(SWR) of $18,509 I included in there... :) But first notice we are almost at 1/2 a million dollars! and in year 10 we were making every year about what we are living on!
Does this mean we could retire in year 11, with that $18,991 we made that year? Maybe.. But if you haven't figured it out yet, TSM funds like VTSAX are very volatile, they go up and down A LOT, but over time, they always go up by about 9.6%/year.
In fact, VTSAX can have some really long bad years where they lose money for a few years, or don't really make any money at all for a decade. This would be bad if we had a decade of no earnings starting in year 11 when we decided to cash out early.
There has been some academic research about this, and that is where the SWR of 4% came from.
Safe withdrawal rates
The Trinity Study and others since have determined that from an investment portfolio of X dollars, one could pull 4% year out the first year, and then for every year after that, pull out that amount + inflation and have a 98% chance of success. Obviously the future is unknown, and we aren't saying this is a guaranteed 4% forever, but it's a reasonable assumption. In the math above, we are using a 4% withdraw rate. But let us speak about reality here for a minute.
So 15 years ago in January you started down this path, and now it's January 15 years later and you instantly tell your boss to shove it, then you can start pulling $1,465/month from your portfolio to keep your standard of living, but chances are after a few months of laying on the couch and catching up on your Netflix, you will suddently get bored, and you will decide that maybe I should work after all.. So you go find a new job, or you create your own business or whatever. We are not suggesting you actually retire in 15 years, we are suggesting that in 15 years if you decide to take a break for a while, it won't affect your finances AT ALL.
If your boss gets stupid, you can tell them to shove it, quit on the spot, and take your time finding something else to do. That's the point of having F-You money. Or you decide you know what, living on $1,465/month kind of sucks.
That's fine also, go make more money. In fact chances are in those 15 years you would have gotten at least a few raises, and if you invested according to plan and lived on 1 paycheck and invested the next one, you would be even better off than above.
You now have the rest of your life to do whatever you want, which might(and probably would) include raising your standard of living, so you can afford the fancy new car, etc.
Asset Allocation, or adding in some safety to lower the craziness of VTSAX.
Whenever you do retire, you will probably want to buy some bonds to lower volatility and maybe some international investments if you feel so inclined. There is a 3 fund portfolio built just for that. My recommendation, while the US is still roughly 60% of the global economic market, there is little reason to get worked up about going crazy with international, but it's quite likely that over time the US dominance will slow down or diminish, and that is when you definitely want some International investments. Since we are talking about Vanguard funds , see VTIAX. Hold between 20% and market cap weight of your stocks in international.
Also around bond allocation, you don't really need any during your accumulation phase(here 15 years), but if during that 15 years you suddenly lost your job for a while, then moving a good healthy chunk of your investments into bonds makes sense.
I'd suggest when you get more than a few years of expenses imvested(so when you get around $100k in VTSAX) you then move a year or three worth of expenses into bonds, and you keep somewhere between 1 and 6 years back in bonds(or other safe investments)
Historically a TSM fund like VTSAX has dropped 50-80% on occasion, but has always made the money it lost back in about 5 years.
If you have won the game, or are old/disabled enough that you can't really work anymore, then you certainly want lots of safe assets, so 60/40 or even 30/70 makes some sense. But if you can work, or are still accumulating, then I'd worry less about AA and worry more about putting money into VTSAX. When you are accumulating you almost want the market to crash 50-80%, so that $1,465/month you are investing will earn you a lot more down the road(since you will get a nice 50-80% discount!)... provided you have a job :)
Keeping more than 6 years in bonds is totally pointless(while working) and really keeping more than 2 years is probably pointless.
While you still have human capital and could work, then there is little point in keeping more than a year or two in a safer asset. If the market crashes and after the first 6 months or year, if things are not starting to look better, then you should be working and cutting back your expenses to the bone, not spending more from your nest egg.
But really only you can figure out your risk tolerance, but I think you should approach your AA by worst-case scenario and how much human capital(how much you are able to work) you have. Once you have won the game, or you are old/disabled enough to not really work anymore, then focusing a lot more on a convservative 60/40 AA portfolio makes a lot more sense.
Until then, worry less about VTSAX drops and worry more about feeding VTSAX your earnings and keeping your expenses low.
Is this the end-all for investing and/or retiring, of course not. Bogleheads.org is a great resource and community for learning more about investing and retiring, and questions should probably be directed there, if the wiki can't answer it for you. If you are female identified, then I'd recommend the reddit group FireyFemmes.
How I implemented this
I am a govt/non-profit employee, so I have a 403b, but you corporate types would have a 401k. You almost certainly want a traditional IRA, not a Roth version, but either work. The Roth version is generally only great for people with large pensions or very high levels of income.
You set either one up through your employer. They likely are terrible at knowing what's available and how it all works, so you will have a lot of legwork probably. The good news is, you only need 1 TSM fund in your IRA account and can usually be found by lookng for the words "Total Market" or "Total Index" and the Expense Ratio(ER) will be the lowest possible number on the list(probably) If you can't find a TSM fund, then look for a S&P 500 fund, that is 98% correlated to the TSM fund and is close enough for our needs and is also usually very cheap.
If you have more than 1 403b/401k provider, find out what their fees are for having the account and find out what their fees are for the TSM/S&P 500 fund. Open an account with the cheapest total fees. Everything else will be equal, since this is all heavily regulated and your investments will be safe even if they go bankrupt, do not worry about buying from the cheapest vendor, YOU WANT THE CHEAPEST VENDOR
This will probably be one of the big 3, Vanguard, Fidelity or Charles Schwab, but there are a plethora of other vendors out to take a % of your money.
Open your account, direct 100% of your funding into your TSM fund. and send it as much of your paycheck as you can. If you can't afford 50%, it will just take a lot longer to get there. If you save just 20% it will take about 30 years to become financially independent and retire.
Then login once or twice a year, update a little spreadsheet you made that does the above math, showing how you are doing with your investments, and download all the statements since your last login and save them someplace safe.
Otherwise you can just ignore the market and how your investments are doing, you know you will do OK, so don't worry. Just keep making money and feeding your TSM fund.
Note, the percentage of income works for any income dollar amount, if you make $500k per year, invest $250k per year and live on $250k per year, you can also retire in about 15 years, just to a much higher standard of living.
Savings Rate vs time to retire:
60% -> 12 years 50% -> 15 years 20% -> 30 years 10% -> 40 years 5% -> 50 years
So you get to pick when you want to retire, based on how much income you save. Note, the above timelines are rough estimates, and are not a guarantee by any stretch of the imagination.
The funds that matter:
TSM fund: VTSAX (or VTI the ETF version) International Fund: VTIAX ( or VXUS the ETF version) Bond Fund: VBTLX (or BND the ETF version)
TSM fund: FSKAX International: FTIHX Bond Fund: FXNAX
TSM fund: SWTSX International: SWISX Bond fund: SCHZ
More fun financial experiments and information like this are done @ https://www.ziefi.com
Note, I did a part 2 about what it would look like actually doing this with a 401k/403b IRA.