As more people look to retire early (<60), more people are looking for shortcuts in order to get to early retirement quicker. Some hate their jobs so much they are willing to retire early and live in poverty!
One shortcut to retiring early is the concept of Coast FIRE. Coast FIRE is a type of financial independence where you have invested enough money so that by the time you hit traditional retirement age (>60), based on historical returns, your investments will have grown large enough to cover your retirement.
It’s understandable that in this day and age of instant gratification, some folks aren’t willing to grind it out for decades like previous generations. However, believing you are financially independent at age 30 because you’ve invested $100,000 is dangerous.
Yes, your $100,000 will grow to $1.75 million in 30 years at a 10% compound annual return. But your $100,000 portfolio might also be worth only $432,000 in 30 years if it compounds at only 5%. Then there’s weakened purchasing power thanks to inflation to consider.
If you decide to retire early on $100,000, your portfolio will generate $4,000 a year in risk-free income today. Living off $4,000 a year in America is abject poverty.
If you decide to keep working after Coast FIRE, are you really financially independent? Most people would say there’s no difference between Coast FIRE and a regular working person who saves and invests for retirement.
Changing definitions of financial independence to give you a psychological boost can keep you motivated. However, just be careful about the lie you tell yourself. If you don’t have enough passive income to cover your living expenses, you are not financially independent yet.
Retiring Early To Live In Poverty Doesn’t Make Sense
Instead of retiring early to live in poverty, wouldn’t it be better to find a different job to live a more comfortable life? I think so.
My goal for this article is to help you think about early retirement in a more healthy and balanced way. FIRE FOMO is real. Instead of feeling an intense rush to try and retire as early as possible, consider the alternatives.
- Find a more enjoyable job with better hours that pays less
- Start a side hustle or side business that brings in supplemental income
- Encourage your spouse to work longer or harder so you can take things down
- Take a sabbatical to recharge and rethink what you want to do with your life.
- Go back to school to change careers and take a break
My Original Desire To Retire At 25 And Live A Simple Life
When I was 25, the September 11, 2011 terrorist attacks happened. This terrible event ignited my quarter-life crisis after only three years of working in finance.
I seriously thought about retiring with ~$400,000 and moving to Hawaii to be a fruit farmer on my grandparent’s under-maintained farm. Due to a couple of lucky investments during the 2000 dot comb bubble and aggressive saving, I was able to amass a healthy net worth quickly for my age.
In exchange for clearing brush, watering trees, and doing general upkeep on the house, I could live for free in my grandparent’s old house. Then I could make some extra income selling mangos, papayas, and pomelos down the street. The farm was only about eight acres in Waianae, a rougher part of town in Oahu.
For three months, I daydreamed about living this simple early retirement lifestyle. Then one day I slapped myself silly and told myself to buck up.
Throwing away a perfectly good career in finance so young was incredibly stupid. So I gutted it out for another 10 years until my investments could generate about $80,000 a year and cover my desired living expenses in San Francisco.
Defining Poverty By Household Size
Back in 2001, my $400,000 could have generated about $20,000 a year in risk-free passive income. If I sold $10,000 worth of mangos a year, I could have led a relatively comfortable life in Hawaii given I didn’t have dependents or rent to pay.
Although having a nice tan and washboard abs would be nice due to surfing every day, I wanted more. I wanted to one day start a family with my girlfriend.
Giving this post is about figuring out how much money is required to retire early and live in poverty, let’s look at what the government’s definition of poverty is.
The Federal Poverty Level Limits
Below is the official 2023 Federal Poverty Level (FPL). The baseline federal poverty level is under the 100% column.
In other words, if you make $13,590 or less as an individual, you are considered the most impoverished. If you make $27,750 as a household of four, you are also considered the most impoverished and so forth.
The more impoverished you are, the more you are eligible for federal government subsidies, such as healthcare subsidies. So long as your household income earns less than 400% of the baseline federal poverty level, you will receive subsidies. Once your household income by size makes over 400% of the baseline federal poverty level, you’re on your own.
The household income levels between 300% to 400% of FPL seem comfortable as long as the household doesn’t live in an expensive coastal city like New York or Los Angeles.
For example, a couple with two kids making between $83,250 and $111,000 should be able to live a decent lifestyle in the heartland of America where I’ve been investing in real estate.
In 2020, the University of Texas, Austin, announced families earning less than $65,000 would not have to pay tuition. Meanwhile, families making up to $125,000 would also receive some type of tuition subsidy. Not bad!
Related: The Ideal Income Is The Student Loan Forgiveness Income Threshold
However, earning less than $111,000 for a family of four living in San Francisco is going to be very tight. Rent for a three-bedroom house could easily cost over $4,500 a month in an average neighborhood. If you want to buy such a home, we’re talking $1.5 – $1.8 million.
I’m not here to argue which household income levels should receive extra assistance from the government. The government, with all its data and wisdom, is the decider of who is poor enough to receive assistance.
I’m here to highlight how big of a retirement portfolio you need to retire early in order to live in or near poverty, which the government and I define as 200% of FPL or less.
Any household income under 200% of FPL seems really tight, no matter where you live in America. I’m confident all of you agree.
How Much Money You Need To Retire To Live In Poverty
Below is a chart I put together that shows how big of an after-tax retirement portfolio you need by household size and percentage return if your household income is 100%, 150%, and 200% of the Federal Poverty Level limits.
In order to retire early and live on a household income equal to 200% of FPL and a 4% rate of return or withdrawal rate, you will need to amass $679,500 as an individual.
If you are a household of six and want to earn retirement income equal to 100% of FPL, then you will need to amass a $929,750 portfolio at a 4% rate of return or withdrawal rate.
If a couple wants to have two children and earn up to 150% of FPL in early retirement, they need to amass between $832,500 and $2,081,250 in their after-tax portfolio based on a 5% to 2% withdrawal rate or return rate.
Personally, I like to match my withdrawal rate to the risk-free rate of return so I never run out of money. Once you achieve financial independence, you never want to go back to the salt mines.
The Inconsistency Of Accumulating A Lot Of Money
The chart above shows the objective numbers required to retire early and live in or near poverty. However, it is highly unlikely a household would be willing to accumulate so much capital just so they can stop working to live so poorly.
Would you be willing to live in or near poverty while working, accumulate a large amount of capital, and then retire early with no hope of improving their living standards?
In fact, one Financial Samurai reader who experienced money trauma did something similar. As an individual, she retired early with about $600,000 right before the bear market and relocated to Taipei from Seattle.
Something really has to be wrong with your job, your life, your physical health, or your mental health in order to make such an abrupt change in lifestyle. But that is life. Eventually, we all face hardships where we must make difficult choices.
Is It Worth Living In Poverty To Retire Early?
For the first 13 years of my life, I grew up in emerging countries like Zambia and Malaysia where I was surrounded by poverty. Some of my best friends in Kuala Lumpur would share one room and a bathroom with three other family members.
Seeing so much poverty for so many years made me focus on school because I was afraid of becoming poor. When I came to America in 1991, I decided not to take my good fortune for granted. I hit the books, studied hard, got really lucky, and saved and invested as much of my luck as possible.
Even though money doesn’t buy happiness, money has to at least cover all our basic living expenses before we can really believe in such an ideology. I personally would not be willing to retire early if I had to live in or near poverty.
Although my work was extremely stressful for 13 years out of college, it enabled my wife and me to own a comfortable home in San Francisco, take 5-6 weeks of vacation a year, drive a safe vehicle, and raise a family.
For the now four of us to live off only $55,500 a year (200% of FPL) would require sacrifice. First, we may have to leave San Francisco. Second, we may have to start living with my parents in Hawaii to save on rent.
Although plenty of readers have stated they have no problem living at home with their parents as adults, we do. Our parents value their privacy. After decades of living apart, we’re all set in our ways.
Of course we would send our kids to public grade school. Then we’d apply aggressively for need-based scholarships if they attend college.
Ways To Improve Early Retirement Life
One alternative to living a more comfortable early retirement is increasing our withdrawal rate. But this is very difficult to do because we’ve been in the habit of saving and investing for so many years.
The proper safe withdrawal rate in retirement is dynamic. With a bear market and a deepening recession potentially on the horizon, we wouldn’t want to withdraw more aggressively.
The other alternative, which is what I think most early retirees do nowadays is freelance or take on side hustles to make up for the earnings shortfall. It’s alway nice to make supplemental retirement income doing something enjoyable.
Although we’ve lived entirely off our investments since 2012, I’ve been accused of not really being a retiree because of Financial Samurai. That’s totally understandable, which is why since 2013, I haven’t told anybody in real life that I’m retired. In 2022, I introduced the term, “fake retirement” to embrace the criticism.
If Financial Samurai was smaller, I’d get more approval from the Internet Retirement Police. The lesson is to never stick out because a hammer will try to bang you down.
Retiring With Poverty Income For A Family Of Four
If I we didn’t move in with my parents, here’s what I think our budget would look like in early retirement. It is based off a household of four living off $55,500 a year, or 200% of FPL. We would be unwilling to retire early and live off $27,750, or 100% of FPL with two kids.
Looking at this 200% of FPL budget actually makes retiring near poverty more doable. Although a two-bedroom apartment is smaller than our current house, we could make it work with the kids sharing a room.
Although we wouldn’t have money to pay for sports, music, and art lessons after school, my wife and I would teach these activities to our kids. The pandemic gave us almost two years of homeschool experience. Further, I was a tennis coach and my wife knows how to play piano and the violin.
Staycations or roadtrips are fine for now since our kids are still young. Once our daughter turns five we will get on a plane and see the country and maybe even the world.
If we were to try to live off $55,500 a year in early retirement, we would try to pay off our primary residence mortgage first. Once the property is paid off, living off 200% of the Federal Poverty Level would be much easier. We could spend more on food, entertainment, and travel.
Retiring Early To Live Near Poverty Is Feasible
After going through this exercise, I’ve concluded retiring early off an income equal to 200% of FPL is possible! Having a taxable investment portfolio worth near $1,400,000 provides a nice cushion.
However, $1,400,000 also shows how much you actually need to retire early to live near poverty with a family of four. Would you be willing to live super frugally if you had $1,400,000? Again, it depends on how much you hate your job and your life circumstances.
Ideally, my family of four would need to earn at least 300% of FPL ($83,250) in early retirement to feel reasonably comfortable. At a 3% safe withdrawal rate, we’d need a portfolio of $2,774,000.
But man, having $2,774,000 is a lot of money! At this level, I would think I’d want to live it up more than what a 3% to 4% withdrawal rate lifestyle would enable.
Be Patient With Early Retirement
Instead of rushing to retire as soon as possible, go through the numbers and see if everything makes sense. To give up a well-paying job to live like a pauper is probably not ideal.
One of my early retirement regrets is retiring too soon. I would have been financially better off if I had accumulated several more years of income. It’s only after you’ve permanently left the workforce for a while that you realize how truly long post-work life is.
For those people willing to live in or near poverty to retire early, I say more power to you. Living a simple life without much desire or possessions is the key to enlightenment according to the Buddha. Just know there’s a chance your expenses will increase as you age, especially the earlier you retire. Worst case, you can always just go back to work.
The math really doesn’t lie, no matter how our emotions make us feel. If you can survive off poverty wages until Social Security kicks in, you’re golden! At the end of the day, it’s up to each of you to figure out what works best for you and your family.
Related posts about retirement:
Living Paycheck To Paycheck Off A $5 Million Retirement Portfolio
The Ideal Age To Retire Early To Minimize Regret And Maximize Happiness
Preparing For A 50-Year Retirement With Vanguard’s New Return Assumptions
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Readers, would you be willing to retire early to live in or near poverty? Why or why not? What is the lowest FPL level you’d be willing to accept to retire early? How much money are you trying to accumulate to retire early? Do you think young folks retiring with the amounts in my chart are making a mistake?
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The Amount Of Money Needed To Retire Early And Live In Poverty is written by Financial Samurai for www.financialsamurai.com