Last time I wrote about how high our salaries can go into the information security field. Sure, you could spend it all on fancy cars, nice dinners, and a big house. But this week, I will discuss what to do with all that money so that you can retire in 10 years or less.
This list of ideas is pretty universal, but consistency is what matters most. To retire early takes the building of new habits and a lifestyle change. Keep reading my blogs, follow these practices, and I will guarantee that you retire earlier than you ever imagined.
Before we get started, let me remind you that I am a cyber security professional and not a finance professional. These are things that I have found that work for me based on advice from professionals and research. I encourage you to use these finance blogs as starting points for your strategies and go out to conduct your own research.
Without further ado, let’s get started with the list.
Many organizations in which employee cyber security professionals should have some sort of matching program. For instance, the company I work for uses the Safe Harbor matching. This basically means that for the first 3% of your income you contribute, the company matches 100% (3%+3% into 401k).
Sometimes the organization will match 50% of the next 2%. This would be 9% of your salary going into a 401K every year, with you only actually contributing 5% (5%+3%+1%) of your income. This itself can be a powerful tool, and I will use the below chart to demonstrate.
Say you contributed 5% every year with Safe Harbor Matching from your employer and you get a 10% raise every year, what would that look like after ten years? Let’s assume we used a Total Stock Market Fund with an 8% growth rate for our contributions. At the end of ten years, our investments would be.
First off, yes, this increase in salary is very possible. I managed close to a 20% raise each year for my first 4 years in the industry. Further, the growth in stocks is a pretty conservative estimate compared to the 9.38% seen by the Vanguard Total Stock Market Fund (VTSAX).
By doing this alone, you would have about $95,000 saved up after 10 years. Not bad.
After 20 years and capping the salary at $95,000, the average salary for a Senior Analyst in the United States, you end up with $340k. Even better.
Note that you can obviously make more than $95k, but I wanted to use a number with data backing it.
Unfortunately $340k, wouldn’t be enough for the average person to retire. Not even close.
The average American spends $5,102 per month, which equates to $61,224. To retire at this rate of expense, you would need to save up $1,530,600. This is the fire number, an estimate of how much you need to retire. To get your fire number, multiply your annual expenses by 25. Many other things could factor into a fully fleshed out retirement number, but this is an excellent estimate.
Obviously, you would be far away from retirement after 20 years. Even after 30 years, you wouldn’t break $1 Million based on these estimates. To me, that sounds a little depressing. Luckily there are more things you can do to help get you there.
Contribute More to a 401k
As a start, why not contribute more? This may not be possible at first with those with mounds of debt but, in time, aim for setting aside more funds.
Besides the money you will have at retirement, there are other monetary advantages in the meantime. One is that you can save tons of money in the U.S. by contributing to a Traditional 401k. Traditional varieties of 401ks can decrease your tax liability, possibly lowering the tax bracket you fall into, which ultimately reduces your tax bill.
Let’s play this scenario out.
By adding an extra $2,000 per year to your pot, you increase your 30-year total by $244k—a pretty significant difference.
Now, if you fall on the edge of tax brackets, increasing contributions could move you into a lower tax bracket. For instance, if you made enough contributions to get below a $40,126 income, your tax rate drops from 22% to 12%! For those in a higher bracket, if you go below $85,526, you drop from 24% to 22%! Absolutely incredible. Who knew you could save money on taxes by contributing more to a 401k?
Now note that this reduction in taxable income is only possible with the Traditional 401k. The Roth does not reduce your income because you get taxed on it now in lieu of being taxed when you make withdrawals.
Additionally, note that there is a max to the dollar amount of contributions you can make. In 2020, this number is $19,500. If you can max it, awesome! At the end of 10 years, you could have more than $300k saved and almost $1million in 20 years.
Clearly, this strategy helps. But if you could instead reduce your expenses, you could move the needle on the $1.5 Million goal to a lower amount? Let's now move to discussing ways to lower expenses.
Pay Off Debt
So, doing a little Googling, I attempted to find what percent of the average budget was consumed by debt payments. Instead, I saw a bunch of “experts” recommend spending no more than 20% of your income on debt. What if instead we got rid of that debt?
By removing debt and reducing your expenses by 20%, you now only have $49,979 in costs a year. This would reduce your FIRE number to $1,224,480 down from $1,530,600. Not bad.
Many figureheads in the personal finance space recommend clearing the board of debt, especially credit card debt. Based on Wallethub’s number, the average credit card interest rate is a whopping 17.89%. Ouch. I wish my investments paid that much. But interest rates change depending on the type of credit you are using. For perspective, right now, Mortgage interest rates are around 3%.
Now I am not in the Dave Ramsey camp that all debt is bad. I think some, like a mortgage, is ok depending on circumstances. Just be careful. The more you pay in interest, the less you have to invest.
You are probably wondering, well Silverbits, that sounds lovely, but I am kind of up to my eyeballs at the moment. All that cheerfulness isn’t helping.
Paying off the debt is the easiest of all strategies; just do it. However, budgeting to give you enough wiggle room to do so is the most uncomfortable thing you will do in the world of finance, especially if you have a spouse. But I promise budgeting is worth the effort because it is the biggest game-changer.
Set a budget. Start paying off your highest interest debts. Then start setting aside money to pay cash for things that come up. We will dig more into this in other blogs but know that you should start thinking about these things and look for ways to reduce your total debt.
Alright. This is the last suggestion but a goody. Learn to reduce your expenses. This goes hand and hand with budgeting. I have been on the personal finance train for a couple of years now, and I am still finding ways to save money.
Don’t worry, I will write a blog on things saving me money. Sounds like there are plenty of ideas in this article for me to explore further, back to this topic.
I am always asking the questions: Do I need this? Can I get it cheaper? Could I borrow it instead of buying it? Many times there are other options instead of purchasing something brand new, if at all.
For a quick idea of where you are spending the most money, take a look at your bank statements. There are free apps out there like Mint and Person Capitol if you want to connect a bank account. But if you are super security conscious, you can do it manually.
Chances are that after you look, you may notice you are spending a ton eating out and ordering drinks at the bar. Buying stuff you don’t need from Amazon. Splurging on things that bring you temporary happiness. Buying cheap things that break quickly. These are all things you can cut back on without interrupting the joy in your life.
Be aware of where your money is going.
I recently read a book, Your Money Or Your Life, that I have yet to write a review. Shame on me for slacking. I like the way the authors describe spending money as giving away your life energy. If you think about it, dollars really are your life energy. What did you give up earning that dollar? Could you have been doing something else more meaningful instead? Was that item you bought worth that little bit of your life you gave up to earn the money used to buy it?
Most of us are of the mindset, work now to live later. But what if later was sooner? You could plant that life energy in an investment account and let it grow to accomplish just that.
With some effort, you could find an early retirement in less than 10 years. Yea, I am not kidding. Since I turned around by lousy consumerism habits, I am looking at a retirement date of 2022! That’s four years from start to finish. If I was more aware of these golden nuggets, I would have already been off enjoying freedom from a 9 to 5 job.
Those of you who think of retirement as just stopping, the experience can be whatever you want it to be. For me, retirement means working on projects that are meaningful to me. Having enough money to say that this job isn’t worth the stress, I will find something else to do with my time. Hiking the Appalachian Trail. Traveling to conferences and giving back to the cyber security community without having to worry about the money.
Stop for a moment and ponder what you could do with unlimited vacation days.
For more ideas, I suggest reading The Simple Path to Wealth by JL Collins. It is by far the easiest and most informative personal finance book I have read to date. At some point, I will write a review on it.
Until next time.