18 and Need Help Starting [Classroom research assignment]

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Topic Author
DiogenesOfOakland
Posts: 6
Joined: Mon Aug 25, 2014 4:57 pm

18 and Need Help Starting [Classroom research assignment]

Post by DiogenesOfOakland »

[See new member posts below --admin LadyGeek]

I'm 18 and my insane college professor has asked me to write a research paper on financial independence. The parameters are as follows:

I can do school/work or whatever I like until I turn 33.
From 33-62 I have to live off of savings or investments.
I can not plan to inherit money or plan on marrying rich, winning the lottery, capturing a leprechaun, etc.
I need to show what education & job(s) I plan on obtaining (including average salary for that job, and debt accrued for that education), average monthly and annual expenses (estimated), how much I'm saving and where that savings are coming from & going to, how I plan to deal with debt, how much I can expect my investments to return.

My given Goal in the essay is to argue that it is possible for me to retire at 33 and to show how I will do it.

I'm super new to investing and I found this forum on a random google search. Is this even possible? Or, as I suspect, is the prof just a nutcase? I'm pretty sure I'm going to die in this scenario! LOL. The topic seems so out of left field. I mean, who even thinks about retiring until they are like in their sixties anyway. Right?

My Personals:
I am attending this class at a private College in CA.
I am majoring in Communications.
I plan to have around $30,000 in student loan debt by the end of school (should I even stay in school?).
I have no idea what I would want to do for a living.
I turn 19 just before the end of the 2014 year.
I was raised in CA and would like to stay there if possible.

Any advice or directions to other resources would be helpful. Thanks!
basspond
Posts: 1404
Joined: Wed Nov 27, 2013 4:01 am

Re: 18 and Need Help Starting

Post by basspond »

Interesting that the time frame is only 29 years. Could be an exercise to do real estate and or banking. Other options are to research high paying jobs with short careers ( professional sports, entertainment, etc).

Good luck!
madbrain
Posts: 5583
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: 18 and Need Help Starting

Post by madbrain »

DiogenesOfOakland wrote: I'm super new to investing and I found this forum on a random google search. Is this even possible? Or, as I suspect, is the prof just a nutcase? I'm pretty sure I'm going to die in this scenario! LOL. The topic seems so out of left field.
Investing requires capital. You can't invest money what you don't have.
At your age human capital, ie. earnings from work, is more important.

You could start a successful business, IPO, and then diversify your holdings. That would likely set you for life at 33. It's a good gig if you can get it. Not everyone is Mark Zuckerberg, though.

There, I just did your assignment!
DiogenesOfOakland wrote:I mean, who even thinks about retiring until they are like in their sixties anyway. Right?
Anyone who takes a long term view of things. I made my first 401k contribution when I was 19.
Slowmaha
Posts: 138
Joined: Fri Feb 21, 2014 7:00 pm

Re: 18 and Need Help Starting

Post by Slowmaha »

Personally I think this is a terrific exercise.. It forces you to look at vocation, income, expenses, and investing.

It looks scary at first but it really boils down to:
1. make more money sooner
2. make more money without having to spend money
3. Reduce lifestyle expenses (close to a Boglehead's heart, google "LBYM")
4. Invest aggressively

First off, download a Excel spreadsheet with a yearly budget (if it's monthly you can make it yearly pretty easy)
- use yourself as an example, figure out what it'll cost you to go to school for 4-5 years between the ages of 18-22 or 23.
- Figure out what is the typical industry a communications major gets in to and how much they make (bureau of labor statics/google/salary.com)
- Getting married? that's a reasonable life event, count that added income, I don't think that equates to "marrying rich", keep the income reasonable, stop that income at 32 as well
- You can maybe reasonably assume an after tax net of 5-6% return on your starting money (google "estimated stock market returns" or something like that)
- You are going to find your lifestyle will have to be dramatically inexpensive to survive from 33 until 62

If you REALLY want to impress your prof do a couple scenarios (once you have the spreadsheet set up it shouldn't be hard)
1. As-is (years of private school, debt, soft major, low starting wage)
2. Drop out of school and learn a skilled trade (plumbing/electrical), gain 3-4 years of lost income and overall higher average wage most likely
3. Something clever and dramatic like get married and live with your folks while hoarding money until your stop at 32
4. Consider other forms of income you can generate while <33 that will keep paying you after you stop working (real estate/Intellectual Property royalties/etc)

Good luck, keep us posted. I'm sure there are plenty of people here who can help.
chaz
Posts: 13604
Joined: Tue Feb 27, 2007 2:44 pm

Re: 18 and Need Help Starting

Post by chaz »

Become a hedge fund manager. Or do like Zuckerberg and come up with a great website.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
Gropes & Ray
Posts: 1094
Joined: Wed Jul 16, 2014 7:28 am

Re: 18 and Need Help Starting

Post by Gropes & Ray »

Someone already did your assignment. He retired early through badassity.

http://www.mrmoneymustache.com/
Topic Author
DiogenesOfOakland
Posts: 6
Joined: Mon Aug 25, 2014 4:57 pm

Re: 18 and Need Help Starting

Post by DiogenesOfOakland »

Thanks All! Some good ideas here.

Question though: Lots of folks have mentioned entertainment or IPO startups. I wonder, does anyone have any basic data on the average amount of money that is made in these fields? I'm not allowed, for the project, to assume that I'll be an outlier unless I can prove that I can expect to be. (for example if I was 8 feet tall and a capable member of the college basketball team I could assume I might have a professional basketball career, but I'm not so...)

I found Mr $ mustache helpful but it seems like he would recommend NOT going to college and taking out the debt. Or at least changing my major to something more lucrative. Thoughts?

Are there other websites or books that you all have found helpful to reduce lifestyle expenses?

Thanks! Keep it coming!
toto238
Posts: 1892
Joined: Wed Feb 05, 2014 2:39 am

Re: 18 and Need Help Starting

Post by toto238 »

Get your degree in Petroleum Engineering. Spend the next 10 years living on the drilling platform, earning 6 figures every year. Spend as damned close to nothing as possible. Save $100k a year. Have 1mil at age 32 if you don't bother investing. Have somewhere between 2-3mil if you invest aggressively. Retire.

http://www.forbes.com/pictures/efkk45eg ... gineering/
mhalley
Posts: 8777
Joined: Tue Nov 20, 2007 6:02 am

Re: 18 and Need Help Starting

Post by mhalley »

You will need to estimate your expenses, your income, your future social secuity, etc. You can use sites such as ESPlanner to calculate your budgeting/returns etc. There are a myriad of retirement calculators out there, check the wiki. Download the anypia program from ss to estimate your future social security. Note that esplanner will only let you retire at 50, so you may need to fudge your birthdate to allow for that.
Another vote to check out mr money mustache, also you may want to go to the retire early board.
http://earlyretirementextreme.com/can-i ... young.html
Mike
User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: 18 and Need Help Starting

Post by in_reality »

DiogenesOfOakland wrote:
My given Goal in the essay is to argue that it is possible for me to retire at 33 and to show how I will do it.

http://www.belizeretirementguide.com/co ... belize.htm

Retirees interested in simple living can budget about US$1,500 or less per month.

Looks beautiful!

Good luck!

Visa info is here http://www.belize.com/residency-and-ret ... -in-belize

PS wow a truly sensible assignment indeed! You've done well to find this site and college is preparing you for life very well!!!!
toto238
Posts: 1892
Joined: Wed Feb 05, 2014 2:39 am

Re: 18 and Need Help Starting

Post by toto238 »

Are you limited to legal endeavors? In theory, you could be the creative kid in the class and lay out a career in drug trafficking, organized crime, kidnappings, and the like. A hitman can make decent money. Or you could get a job in the defense department, steal sensitive data and sell it to North Korea. They would pay well.

Important note, do not ACTUALLY break the law. I do not recommend this in any way shape or form. I am not advising you to break the law at all.
User avatar
Zabar
Posts: 635
Joined: Thu Feb 27, 2014 9:05 pm
Location: San Francisco Bay Area

Re: 18 and Need Help Starting

Post by Zabar »

DiogenesOfOakland wrote:I'm 18 and my insane college professor has asked me to write a research paper on financial independence. The parameters are as follows:

I can do school/work or whatever I like until I turn 33.
From 33-62 I have to live off of savings or investments.
I can not plan to inherit money or plan on marrying rich, winning the lottery, capturing a leprechaun, etc.
I need to show what education & job(s) I plan on obtaining (including average salary for that job, and debt accrued for that education), average monthly and annual expenses (estimated), how much I'm saving and where that savings are coming from & going to, how I plan to deal with debt, how much I can expect my investments to return.

My given Goal in the essay is to argue that it is possible for me to retire at 33 and to show how I will do it.
First of all, it sounds like your professor is both smart and creative, not "insane." This is an excellent assignment that requires higher-order thinking. The real question is whether you're up to the task of doing the research, analysis and projections needed.

You state that your "given goal" is to show that you could retire at age 33. Do you mean that the professor gave you (and all the other students in your class) that goal? Or do you mean that you've arbitrarily selected it? That time frame is completely unrealistic for someone with a communications B.A., has no significant start-up capital, and who lives in a high-cost-of-living state like California.
DiogenesOfOakland wrote:Question though: Lots of folks have mentioned entertainment or IPO startups. I wonder, does anyone have any basic data on the average amount of money that is made in these fields? I'm not allowed, for the project, to assume that I'll be an outlier unless I can prove that I can expect to be. (for example if I was 8 feet tall and a capable member of the college basketball team I could assume I might have a professional basketball career, but I'm not so...)
The entertainment industry is extremely high-risk and requires a lot of up-front capital. Many if not most projects lose money. The median return for individual projects is probably close to zero. It's the same with companies that want to have IPOs. Most never make it to that point. Of those that do, the failure rate is significant. (For every Google and Facebook, there are dozens of companies like Pets.com and Webvan.) Of that small number of companies that make it through the IPO process and are financially successful, only a few do so quickly enough for your scenario.

Be wary of starting with your conclusion ("It is possible for me to retire at 33.") and then force-fitting data to show that it's true. In the real world, that's a highly efficient way of losing money.
User avatar
Watty
Posts: 21838
Joined: Wed Oct 10, 2007 3:55 pm

Re: 18 and Need Help Starting

Post by Watty »

basspond wrote:Interesting that the time frame is only 29 years.
DiogenesOfOakland wrote:I'm 18
....
I can do school/work or whatever I like until I turn 33.
That is 15 years.

Many people fail to plan for their retirement until they are about 50 and only have about the same fifteen years to save until they retire, and then may need to be able to provide for about 29 years in retirement.

Maybe the point of the odd dates in this assignment is that you need to start planning for your retirement well before you are 50 or you would stand little chance of being able to save up enough by the time you retire.

As for the math of what is needed for a modest income of $40,000 a year.

A safe withdrawl rate would be about 4% when you first retired

http://www.bogleheads.org/wiki/Safe_withdrawal_rates

So you would need to save up a million dollars(in todays non-inflation adjusted numbers)

I Googled a simple saving calculator

http://www.bankrate.com/calculators/sav ... lator.aspx

And it looks like you would need to save about $4,000 a month with the default earning real earnings rate of 6.5% which is likely optimistic.
toto238
Posts: 1892
Joined: Wed Feb 05, 2014 2:39 am

Re: 18 and Need Help Starting

Post by toto238 »

Have you seen the movie "Wolf of Wall Street"? The unethical things Belfort did in that movie were enough to make him millions. The illegal things sent him over the top. But if you're ok being unethical and not technically breaking the law, you can sell poor investments very aggressively to schmucks who don't know any better. He was in his 20s making tens of millions of dollars per year.
madbrain
Posts: 5583
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: 18 and Need Help Starting

Post by madbrain »

Watty wrote:
basspond wrote:Interesting that the time frame is only 29 years.
DiogenesOfOakland wrote:I'm 18
....
I can do school/work or whatever I like until I turn 33.
That is 15 years.
I think basspond meant that the retirement period is 29 years.
DiogenesOfOakland wrote: From 33-62 I have to live off of savings or investments.
Presumably, this is because one would be able to take Social Security at age 62 - but that is just a guess.
madbrain
Posts: 5583
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: 18 and Need Help Starting

Post by madbrain »

Many of the numbers on that list don't look all that low .

New home construction, condos, internet access, home phone service, cell phone, water, tooth cleaning are in the same range as they are in California.
Some of the numbers are just useless because quantities are omitted - electricity, groceries, milk, soda, beer, have no quantities.

The numbers for restaurants, housekeeper and gardener do look very cheap comparatively, though.

To me the big wildcard is the healthcare . "$25 for doctor visit" is really not very a useful measurement - what about prescriptions drugs, hospital stays, etc.
I have no idea what the healthcare / insurance situation is in Belize.

You might also consider this report : http://edition.channel5belize.com/archives/97772 .
UN Report says Belize is the third most dangerous country in the world
User avatar
plantingourpennies
Posts: 73
Joined: Sun Jun 24, 2012 6:28 pm
Location: Here and there
Contact:

Re: 18 and Need Help Starting

Post by plantingourpennies »

Zabar wrote:That time frame is completely unrealistic for someone with a communications B.A., has no significant start-up capital, and who lives in a high-cost-of-living state like California.
No, it isn't-see Jacob Fisker and Early Retirement Exreme-http://www.earlyretirementextreme.com

OP-Don't be such a cynic! There is an entire sub-culture of people who retire in their 30s or younger. Mr. Money Mustache (already linked to) is a good resource, Early Retirement Extreme (above) and http://www.early-retirement.org are worthwhile as well. It can be done, and has more to do with how much you spend than on how much you make.

Best,
Mr. PoP
User avatar
dratkinson
Posts: 5269
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: 18 and Need Help Starting

Post by dratkinson »

Kudos to teacher. He's using your class time to force you to think about things most people don't get around to until their late 40s-50s, when it is almost too late.


Retiring as a millionaire by 65 has been done by many on a modest income. Read The Millionaire Next Door for details. Live frugally. Save significant portion of your income. Invest wisely.

Retiring sooner only requires a significantly higher income career to fund a significantly higher savings/investing rate. For that suggest investigating STEM careers: science, technology, engineering, mathematics.

It's all based on the compound interest formulas you were exposed to in high school, but your teacher then didn't tell you what they were for. The key variable are: present value (PV), time periods (N), interest rate/period (I), payment/period (PMT), future value (FV). The important point is this, there are trade-offs among the variable: when one goes high, another goes low, when one goes positive, another goes negative.
  • In the beginning, your PV is zero. You must save/invest enough (PMT) each month (N), from graduation until age 33, to have enough money (FV), to live on.

    At age 33, you must begin withdrawing (PMT becomes negative) from your investments (FV becomes PV) to approach zero (FV) at the time of your death. The withdrawn PMTs must pay for your family and retirement.

    How much do you need at (FV)? Determine that (guesstimate your costs from 33 to death), drop the numbers into the compound interest formula and compute your required savings (PMT), based on number of periods (N) and 7-8% (I) conservative growth.
The petroleum-engineer-living-on-a-platform idea is good, but you will not have much of a social/family life. But if successful, you can start that after 33. Just be aware that for this assignment, your living expenses with a new family, *college for your kids, must be covered by your investments. (*It is acceptable to say your kids will work their way through college with minimal help from the parents. I did.)


Realistically, you must also consider tax policies. High income earners pay high *federal and **state taxes on income and investment income. So your investment vehicles must be chosen for ***tax efficiency.
  • *To make it easy, just assume 50% of your earnings and investment return will go to fed taxes: this means you must double the amount of your investments (FV) at 33.

    **To avoid state taxes, it is acceptable to say you will move to, work in a none-income tax state. An oil company in Texas, Florida, Wyoming or Alaska is an idea.

    ***See the Wiki topic on "Tax-efficient fund placement."
Current federal tax policies do not allow you to withdraw from tax-advantaged (retirement) accounts until after 65, so planning to tap investments at age 33 requires the use of taxable (non-retirement) accounts. (Fill your tax-advantaged account to the maximum each year, and the rest must go into a taxable account.)

Social security policy requires 40 quarters of earned income (you will have it) to qualify for retirement *benefits, but the earliest you can tap them is 62 (at greatly reduced rates), but best if you can delay until age 70. (*It is acceptable to say that benefit levels will be indexed for inflation, so current acceptable benefits today will be equally acceptable in the future: avoids the issue of having to compute that.)


So your savings/investing must carry you from age 33 to death and pay for a family, pay all taxes, pay for your education, using only taxable account withdrawals 33-65, while delaying tapping tax-advantaged (retirement) accounts until age 65, and delaying SS benefits until age 62 (70 if possible).

It can be done, but requires a short, high-income career, and high saving/investing rate.

What will you learn from this assignment? You will learn that you can trade high income (PMT) short investing time (N), for low income (PMT) long investing time (N). What does this mean? It means you can retire as a millionaire from a more modest career, just like in The Millionaire Next Door.

When where you going to figure this out on your own? Now? Or when you are in your 40s-50s, when most of your investing life (N) has been wasted?

Your teacher is brilliant! Take him a big box of chocolates.
Last edited by dratkinson on Sun Aug 31, 2014 3:52 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
User avatar
Zabar
Posts: 635
Joined: Thu Feb 27, 2014 9:05 pm
Location: San Francisco Bay Area

Re: 18 and Need Help Starting

Post by Zabar »

plantingourpennies wrote:
Zabar wrote:That time frame is completely unrealistic for someone with a communications B.A., has no significant start-up capital, and who lives in a high-cost-of-living state like California.
No, it isn't-see Jacob Fisker and Early Retirement Exreme-http://www.earlyretirementextreme.com
Extraordinary claims (e.g., It's realistic for someone with a communications B.A., no significant start-up capital, and who lives in a high-cost-of-living state like California to have enough money to retire by age 33.) require extraordinary evidence. Outliers, such as Mark Zukerberg or Mr. Money Moustache and his ilk are simply anecdotes showing that it's possible, not that it's a realistic expectation. As Damon Runyon succinctly put it, "The race is not always to the swift, nor the battle to the strong, but that's the way to bet."
tj
Posts: 3972
Joined: Thu Dec 24, 2009 12:10 am

Re: 18 and Need Help Starting

Post by tj »

plantingourpennies wrote:
Zabar wrote:That time frame is completely unrealistic for someone with a communications B.A., has no significant start-up capital, and who lives in a high-cost-of-living state like California.
No, it isn't-see Jacob Fisker and Early Retirement Exreme-http://www.earlyretirementextreme.com

OP-Don't be such a cynic! There is an entire sub-culture of people who retire in their 30s or younger. Mr. Money Mustache (already linked to) is a good resource, Early Retirement Extreme (above) and http://www.early-retirement.org are worthwhile as well. It can be done, and has more to do with how much you spend than on how much you make.

Best,
Mr. PoP
DIdn't it leak out that Jacob lives in a trailer and his wife works?
Topic Author
DiogenesOfOakland
Posts: 6
Joined: Mon Aug 25, 2014 4:57 pm

Re: 18 and Need Help Starting

Post by DiogenesOfOakland »

[/quote]


http://www.belizeretirementguide.com/co ... belize.htm

Retirees interested in simple living can budget about US$1,500 or less per month.

Looks beautiful!

Good luck!

Visa info is here http://www.belize.com/residency-and-ret ... -in-belize

PS wow a truly sensible assignment indeed! You've done well to find this site and college is preparing you for life very well!!!![/quote]

You think its great? Sensible? I think this guy is just flat out nuts. But then again that link you posted sounds pretty nuts too. Who ever heard of living off of 1,500 US/month!
Topic Author
DiogenesOfOakland
Posts: 6
Joined: Mon Aug 25, 2014 4:57 pm

Re: 18 and Need Help Starting

Post by DiogenesOfOakland »

tj wrote:
plantingourpennies wrote:
Zabar wrote:That time frame is completely unrealistic for someone with a communications B.A., has no significant start-up capital, and who lives in a high-cost-of-living state like California.
No, it isn't-see Jacob Fisker and Early Retirement Exreme-http://www.earlyretirementextreme.com

OP-Don't be such a cynic! There is an entire sub-culture of people who retire in their 30s or younger. Mr. Money Mustache (already linked to) is a good resource, Early Retirement Extreme (above) and http://www.early-retirement.org are worthwhile as well. It can be done, and has more to do with how much you spend than on how much you make.

Best,
Mr. PoP
DIdn't it leak out that Jacob lives in a trailer and his wife works?
I believe Mr Money Mustache would call you the "retirement police" he tells me to stay away from you ; )
Topic Author
DiogenesOfOakland
Posts: 6
Joined: Mon Aug 25, 2014 4:57 pm

Re: 18 and Need Help Starting

Post by DiogenesOfOakland »

Zabar wrote:
The entertainment industry is extremely high-risk and requires a lot of up-front capital. Many if not most projects lose money. The median return for individual projects is probably close to zero. It's the same with companies that want to have IPOs. Most never make it to that point. Of those that do, the failure rate is significant. (For every Google and Facebook, there are dozens of companies like Pets.com and Webvan.) Of that small number of companies that make it through the IPO process and are financially successful, only a few do so quickly enough for your scenario.

Be wary of starting with your conclusion ("It is possible for me to retire at 33.") and then force-fitting data to show that it's true. In the real world, that's a highly efficient way of losing money.
This is what I assumed about the entertainment industry.

Regarding the data, don't look at me. The prof came up with the assignment. But I assume the project is more about learning how to think about money and personal finance rather than the total execution, if that makes sense.
Topic Author
DiogenesOfOakland
Posts: 6
Joined: Mon Aug 25, 2014 4:57 pm

Re: 18 and Need Help Starting

Post by DiogenesOfOakland »

dratkinson wrote:
So your savings/investing must carry you from age 33 to death and pay for a family, pay all taxes, pay for your education, using only taxable account withdrawals 33-65, while delaying tapping tax-advantaged (retirement) accounts until age 65, and delaying SS benefits until age 62 (70 if possible).

It can be done, but requires a short, high-income career, and high saving/investing rate.

What will you learn from this assignment? You will learn that you can trade high income (PMT) short investing time (N), for low income (PMT) long investing time (N). What does this mean? It means you can retire as a millionaire from a more modest career, just like in The Millionaire Next Door.

When where you going to figure this out on your own? Now? Or when you are in your 40s-50s, when most of your investing life (N) has been wasted?

Your teacher is brilliant! Take him a big box of chocolates.
Wow this is super helpful. So how do I figure out how to weasel my way out of paying so many taxes? Do I have to move? Are there other ways?

I'm starting to think that perhaps my prof isn't entirely nuts. But I'm not ready to buy him chocolates just yet. =P
DTSC
Posts: 1194
Joined: Mon Oct 20, 2008 9:47 am
Location: Illinois

Re: 18 and Need Help Starting

Post by DTSC »

Deal dope until you're 33. You're either

1) Make a lot of money and be able to a low cost of living state or country afterwards
2) Be dead
or
3) Be in prison - but your meals and shelter will be covered - you'll have a boyfriend too!
Pizzasteve510
Posts: 635
Joined: Sun Jul 27, 2014 3:32 pm

Re: 18 and Need Help Starting

Post by Pizzasteve510 »

Removed...

Practical advice. Create a spreadsheet model using excel.

Make one row for income,another for expenses.
Make a row for savings/investments, equal row 1-2
Make a column for each year of expected life.
Document assumptions.
- Starting salary x, raise per year y%
- expenses to live e, inflation I
- investment rate of return, r
Income for Years up to 33 formula is x times y (expressed as 1.05 for 5%)
Similarly for expenses.
Investments are (previous year accumulated savings times return) plus new saving

Fiddle with assumed values and write about what works what doesn't .
User avatar
dratkinson
Posts: 5269
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: 18 and Need Help Starting

Post by dratkinson »

DiogenesOfOakland wrote:
dratkinson wrote: ...
When where you going to figure this out on your own? Now? Or when you are in your 40s-50s, when most of your investing life (N) has been wasted?

Your teacher is brilliant! Take him a big box of chocolates.
Wow this is super helpful. So how do I figure out how to weasel my way out of paying so many taxes? Do I have to move? Are there other ways?

I'm starting to think that perhaps my prof isn't entirely nuts. But I'm not ready to buy him chocolates just yet. =P
The savings rate until 33 must be funded by a high-income high-tax rate career while you are accumulating: no escaping that. However, after 33 while you are withdrawing, you can be in a lower tax rate... maybe only 25%---up to $148,850, married filing jointly for 2014. Surely you can raise a family comfortable on that? And you can stretch it further if you move to a lower-cost-of-living area. Research "low cost of living" areas.

See 2014 Tax Brackets: http://www.bankrate.com/finance/taxes/tax-brackets.aspx

Get into Excel and work backward. Assuming a conservative 7% growth rate and fed 25% taxes (add state tax if required), how much is required at 33 (PV for withdrawal calculations), to be able to withdraw $100K/year until age 100. (Actuarially, guys die at 81, gals at 83, so age 100 is being conservative. Any residual can be left for the kiddies.)

Once you know how much you must have at 33 (FV for accumulation phase calculations), then compute how much you must save (PMT) every year while working. Again assume 7% investment growth (I), but this time assume 50% fed tax rate on your salary. (The highest fed tax bracket is 39.6%, but high-income earners must consider the Alternative Minimum Tax and new 3% Obama tax on investment income. So I'm swagging 50% total fed tax rate.)

Once you know your savings rate and tax bite, then it's relatively easy to swag your living expenses and compute a required salary. Then find a job that pays that (starting low with quick raises) and its education cost. (Being a high-paid doctor is out of the question. Why? Because your eduction will take you to ~33.)

Finding the numbers is all based on working backwards. And Excel is your friend. Look up and learn the compound interest functions built into Excel.

One easy way to do it is to assume every column is one year: just add income and subtract expenses for each year.

Accumulation years. Enter expected salary (with expected raises), subtract fed/state taxes, cost of living, and savings. Accumulate savings for every accumulation year and add growth rate at end of year.

Withdrawal years. Subtract from savings for every withdrawal year and add growth rate at end of year. (*The magic of compound interest is that your investments are still growing while you are withdrawing.) Withdrawals must pay taxes and living expenses. And are offset by SS benefits when you take them.
  • *Just for grins.

    Assuming 7% growth rate, how much do you need to withdraw $100K/year, and never run out of money?
    Answer: $100,000/.07 = $1.43M.

    Assuming 7% growth rate, how much do you need to save every year from 25 (graduation) to 33 to have $1.5M at 33? N=8, I=7%, PV=$0, PMT=-$146,201.64, FV=$1,500,000, end-of-period compounding.
    Answer: ~$146,202.

    If you don't get a masters degree and start working two years sooner, the answer becomes:
    N=10, I=7%, PV=$0, PMT=-$108,566.25, FV=$1,500,000, end-of-period compounding.
    Answer: ~$108,567.

    Why? Because of the trade-off in the compound interest formulas: if you save for more years, then you don't need to save a much each year.


    Trick. I'm just working with the raw accumulation and withdrawal numbers. Omitted are the affects of taxes (higher in accumulation, low in withdrawal), your cost of living, inflation, and SS benefits. Also omitted is the salary that funds everything.

    Trick. Above assumes you end up with $1.5M at age 100. If you assume you end up with $0 at 100, then you don't need to save as much.

    I had to leave something for you.
So you need columns for age "graduation: 25?" to "100" and rows for all of your income/expense (including taxes: fed/state)/savings (tax-advantaged and taxable) categories. Tweak each year with your own assumptions.

For this exercise, getting the numbers shouldn't be that hard for a high-income, short career. In real life, getting the numbers for a lower-income, longer career will be just as easy.

As an exercise, this assignment doesn't really seem to be that difficult. It's just like eating an elephant, you cut it up into small pieces and eat it one bite at a time.

No plan survives contact with the enemy. --Moltke the Elder, German military strategist.

Everyone has a plan until they get punched in the face. -- Mike Tyson, boxer.
Life will surprise you, but at least your instructor is making you think about the issues surrounding funding your retirement. With that you can create your career/retirement-savings plan, and begin working toward that goal. So what if it take you until age 65 to save $1.5M?




Edit. Error correction and completeness.
Last edited by dratkinson on Thu Sep 04, 2014 5:40 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
tj
Posts: 3972
Joined: Thu Dec 24, 2009 12:10 am

Re: 18 and Need Help Starting

Post by tj »

DiogenesOfOakland wrote:
tj wrote:
plantingourpennies wrote:
Zabar wrote:That time frame is completely unrealistic for someone with a communications B.A., has no significant start-up capital, and who lives in a high-cost-of-living state like California.
No, it isn't-see Jacob Fisker and Early Retirement Exreme-http://www.earlyretirementextreme.com

OP-Don't be such a cynic! There is an entire sub-culture of people who retire in their 30s or younger. Mr. Money Mustache (already linked to) is a good resource, Early Retirement Extreme (above) and http://www.early-retirement.org are worthwhile as well. It can be done, and has more to do with how much you spend than on how much you make.

Best,
Mr. PoP
DIdn't it leak out that Jacob lives in a trailer and his wife works?
I believe Mr Money Mustache would call you the "retirement police" he tells me to stay away from you ; )
Hey - if I meet a woman who wants to live a mobile home lifestyle and support me in the process, I guess I can call myself retired too. :)
User avatar
FelixTheCat
Posts: 1993
Joined: Sat Sep 24, 2011 12:39 am

Re: 18 and Need Help Starting

Post by FelixTheCat »

You have short time span. My suggestion is work hard, live way below your means, invest all in a Total Stock Index fund and marry a wealthy person at 32 if you don't meet your goal. :happy
Felix is a wonderful, wonderful cat.
User avatar
dratkinson
Posts: 5269
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: 18 and Need Help Starting

Post by dratkinson »

My second-level thinking just kicked in. If you are having trouble with this personal-finance retirement-planning exercise, then you probably have problems with other real-life personal finance issues.

Suggest you read The Only Investment Guide You'll Every Need, by Andrew Tobias. It briefly covers most major personal finance issue. Anything it doesn't teach you in enough detail can become a topic for later research. E.g., estate planning is important, but you can safely delay it for a while.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
User avatar
dratkinson
Posts: 5269
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: 18 and Need Help Starting

Post by dratkinson »

Was reading another topic and thought of something to get you some brownie points on your paper.

Your high-income career will make you ineligible for a Roth IRA (income limits). However you will be eligible for a traditional IRA (no income limits), but at that income level your annual contribution will be non-deductible: you can't deduct it from your taxes. If you can't deduct your contribution from your taxes, then a Roth IRA would be much better for you, but this is not allowed by the IRS tax code. So, how to get there?

Simple. Contribute to a Back Door Roth IRA. Research this website's Wiki. Basically, you contribute to a traditional IRA (allowed and non-deductible in this case), then immediately convert it to a Roth IRA (allowed). The traditional IRA funding paperwork and Roth conversion paperwork (both allowed) will become part of your annual tax return.

A few short paragraphs with appropriate references should get you a few brownie points. Could make this technique description an appendix to your paper. Then just reference your Back Door Roth IRA appendix from your paper so as not to detract from your major point there.

Research the IRS website to find the income limits for each IRA type and the income deductibility phase out information on a traditional IRA, and the paperwork required: (1) to contribute to a traditional IRA, (2) to contribute to a Roth IRA, (3) to convert a traditional IRA to a Roth IRA, and (4) to re-characterize a Roth IRA to a traditional IRA. Could visit a local bank and get sample copies of the forms they use. The extra forms are for completeness, but you are only interested in (1) and (3) for your paper. Other institutions will use similar forms. Attach sample forms to your paper as appendices.



In real life you are learning valuable information about IRAs (contribution limits, income deductibility phase out limits, creation/conversion processes) which you will apply to your advantage after you graduate.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
wavegodz
Posts: 1
Joined: Mon Nov 17, 2014 1:42 pm

Re: 18 and Need Help Starting

Post by wavegodz »

So this post is perfect! I seem to have the same issues with how to start this project and it seems that I have a very similar professor to DiogenesofOakland. However, my personnel is a bit different bu the same issue of how to retire at the age of around 32-33 still remains. Here is what I will be experiencing when I am out of college:
-little to no debt
-working as a Special Education teacher in a school district in California
-have a Master's in Education so I should be starting off with a higher pay
-I will be guaranteed a job after 5 years in college

My question that is pose is this: Being on a teacher's salary, should I move out right after college? I know the expenses of living on your own or even with roommates can be pretty expensive so would it be a smart decision to move out? Also, if I plan to retire at the age of 32, how difficult would it be to try and have kids before that age given that kids can be quite expensive and may hinder your plan to an early retirement.

Thanks!
wavegodz
User avatar
Zabar
Posts: 635
Joined: Thu Feb 27, 2014 9:05 pm
Location: San Francisco Bay Area

Re: 18 and Need Help Starting

Post by Zabar »

wavegodz wrote: My question that is pose is this: Being on a teacher's salary, should I move out right after college? I know the expenses of living on your own or even with roommates can be pretty expensive so would it be a smart decision to move out? Also, if I plan to retire at the age of 32, how difficult would it be to try and have kids before that age given that kids can be quite expensive and may hinder your plan to an early retirement.
And you're going to be a teacher? Yikes! :oops:
User avatar
dratkinson
Posts: 5269
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: 18 and Need Help Starting

Post by dratkinson »

wavegodz,

Start from the beginning of this topic. Re-read suggestions as if they were directed toward you. They are. Only the numbers have changed.

What will be your annual income?

What will you invest annually?
--Assume 7% annual growth.

What will be your annual expenses?
--Assume moving out as one case. Assume not moving out as another case.
--Assume having children as one case. Assume not having children as another case.

What can you expect to have as a total investment at age 32?

Beginning at age 32, how much will you need annually in retirement?

How long will your taxable investments last in retirement if you begin withdrawing at age 32?
--You can't begin withdrawing from tax-advantaged investments at age 32.

Was that case feasible?

Repeat.



Why do we put investing before expenses? For you "to pay yourself first". It also makes you live in an "austere financial environment" for the rest of the month: you can't spend what you don't have. If you don't already have it, then this is to instill in you the discipline to live below your means. Why? Because the other way, living above your means, does not work.

Children can get a loan or work to pay for their college education. Retirees can not get a retirement loan. So if push comes to shove, plan to fully invest in your retirement before you fund your children's college education.

Writing everything in a spreadsheet helps to organize your thoughts and automate the math.

If you marry, expect to add your spouse's income/expenses to the calculations. But begin this experiment assuming you are single, and no children.



Welcome.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
vas
Posts: 178
Joined: Thu Mar 06, 2014 12:51 pm

Re: 18 and Need Help Starting

Post by vas »

Interesting thread and very creative assignment. For extra credit you could research a life path that allowed you to make a meaningful and lasting contribution to humanity while comfortably supporting your family, providing years intellectual stimulation and a wealth of meaningful personal relationships.
There is nothing you can't prove if your outlook is sufficiently limited
User avatar
dbCooperAir
Posts: 1107
Joined: Tue Jan 07, 2014 10:13 pm

Re: 18 and Need Help Starting

Post by dbCooperAir »

My kids need a teacher like this, would make a great Senior project!
Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him. | -Dwight D. Eisenhower-
auroraborealis
Posts: 1
Joined: Tue Nov 18, 2014 12:23 pm

Re: 18 and Need Help Starting

Post by auroraborealis »

Hello! I am also in a similar position as wavegodz and DiogenesOfOakland! My professor gave us this assignment and we must figure out how to retire by the age of 32. After these four years of college I will have a bachelor’s degree in health science and would like to become a high school athletic trainer. Once the four years are up I still must pass an examination by the Board of Certification Inc., then apply to the government for licensure so I can begin work as a certified, licensed trainer. I am not completely sure how to start this assignment though. However I know one important thing to keep in mind is cost of living. I plan on moving back to my small rural town, so that will be cheaper than most big cities, but during the time when I am a getting certified and licensed should I live at home to save money and then move to where my work takes me? Or start off in my own apartment that way I am used to not having and spending that money? Any suggestions regarding this topic in particular or any other aspect are welcome, thank you!
-auroraborealis xx
tj
Posts: 3972
Joined: Thu Dec 24, 2009 12:10 am

Re: 18 and Need Help Starting

Post by tj »

This seems like an unusual assignment! I would say that retiring at 32 seems overly optimistic for just about anyone.
KyleAAA
Posts: 8759
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: 18 and Need Help Starting

Post by KyleAAA »

Oh it's definitely possible and some people manage to do it, but it requires earning a solidly above-average income and cutting back expenses to the bare minimum. If you could average $80k per year in income and somehow manage to live on $12-15k, save the rest, and luck into 10% returns over that time, it might be doable.

Of course, then you'd have to continue living on $12k per year for the rest of your life.
tj
Posts: 3972
Joined: Thu Dec 24, 2009 12:10 am

Re: 18 and Need Help Starting

Post by tj »

KyleAAA wrote:Oh it's definitely possible and some people manage to do it, but it requires earning a solidly above-average income and cutting back expenses to the bare minimum. If you could average $80k per year in income and somehow manage to live on $12-15k, save the rest, and luck into 10% returns over that time, it might be doable.

Of course, then you'd have to continue living on $12k per year for the rest of your life.
You can't average 80k per year in any of the professions mentioned. I also would wonder what such people would do in retirement. How would they spend their time?
Xpe
Posts: 135
Joined: Wed Sep 17, 2014 7:24 am

Re: 18 and Need Help Starting

Post by Xpe »

DiogenesOfOakland wrote: I mean, who even thinks about retiring until they are like in their sixties
Spoken like someone who hasn't held a 9-5 yet. Guarantee you're planning your retirement two months into your first post-college full-time job.
Magycian
Posts: 1
Joined: Tue Nov 18, 2014 4:06 pm

18, Need advice!

Post by Magycian »

[Post moved into here, see below. --admin LadyGeek]

Hello all,

I need help with my research essay on personal financing that my college professor has assigned me. (I'm a friend of DiogenesOfOakland if you seen his post).
The requirements are that I hypothetically need to retire by the age of 32. And after that, I will need to live off of my savings and investments.

I will need to argue that I will be able to retire by the age of 32 and how.

My research essay will be based off of my personal information:
!. I am a double major in accounting and business administration, graduating when I am 21.
2. I am planning on doing the masters program for business (1 year more) so grad school done at the age of 22.
3. No debt after graduation.
4. I am planning on working for a company that supplies health insurance and all the good benefits (i.e. Google).
5. No, I am not planning on doing anything unethical, illegal, any entertainment,or professional sports. No hypothetical lottery winnings or any "cheap" ways to get rich, like inheritance or marrying rich. All has to be earned!
6. Living in California forever.

Please help! Any leads or advice will be super helpful! Thank you!

-M
User avatar
FreeAtLast
Posts: 718
Joined: Tue Nov 04, 2014 9:08 pm

Re: 18 and Need Help Starting

Post by FreeAtLast »

More important than this homework assignment: What I have learned from "in-reality" is that a bottle of superb rum costs only $10.00 in Belize.....therefore, I am cashing out all of my Vanguard index funds and relocating there immediately!
Illegitimi non carborundum.
User avatar
LadyGeek
Site Admin
Posts: 69963
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: 18 and Need Help Starting

Post by LadyGeek »

auroraborealis wrote:Hello! I am also in a similar position as wavegodz and DiogenesOfOakland! My professor gave us this assignment and we must figure out how to retire by the age of 32...
Magycian wrote:I need help with my research essay on personal financing that my college professor has assigned me. (I'm a friend of DiogenesOfOakland if you seen his post).
The requirements are that I hypothetically need to retire by the age of 32. And after that, I will need to live off of my savings and investments.
Magycian - I moved your post into this thread, as this appears to be the same homework assignment as auroraborealis, welcome to both!

Please keep your comments in this thread, so we can keep all of the information in one spot. Your situations are different, but the advice will be the same.

Let's setup the problem and state your assumptions:

- How much do you need to live on each year? Assume $50,000.
- How long will you live? Assume you will live to 100.

Multiply the above, you'll need $3.4 million = (100 - 32)* $50,000 to start.

Now, the problem is: How do you get $3.4 million in 15 years (18 years old now)?

I retitled the thread. Here's an important point about documenting your research: Always cite your references. Assume the prof sees this thread, which is easily found via google. :)
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
livesoft
Posts: 75145
Joined: Thu Mar 01, 2007 8:00 pm

Re: 18 and Need Help Starting

Post by livesoft »

tj wrote:
KyleAAA wrote:Oh it's definitely possible and some people manage to do it, but it requires earning a solidly above-average income and cutting back expenses to the bare minimum. If you could average $80k per year in income and somehow manage to live on $12-15k, save the rest, and luck into 10% returns over that time, it might be doable.

Of course, then you'd have to continue living on $12k per year for the rest of your life.
You can't average 80k per year in any of the professions mentioned. I also would wonder what such people would do in retirement. How would they spend their time?
Raise their children while their spouse continues working?
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
LadyGeek
Site Admin
Posts: 69963
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: 18 and Need Help Starting [Classroom research assignment

Post by LadyGeek »

Your professor might be interested to know about our wiki. Here's an article which is relevant to your assignment: Bogleheads® financial literacy project
If you want to be financially independent, follow the advice in the article.

Feel free to save the page as a PDF and pass it around (left-side menu, Print/export --> Download as PDF).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
RenoJay
Posts: 748
Joined: Tue Nov 17, 2009 11:20 am
Location: Nevada

Re: 18 and Need Help Starting [Classroom research assignment

Post by RenoJay »

How I'd go about this assignment (which I think is very creative. I like this Prof!):

Check out www.payscale.com for salary info.
Then pick a high paying profession (like engineering).
Start working right out of school, but live at home with mom and dad and get the student loan paid off asap.
Then around age 26 or so, move to a cheap apartment with low rent and a roommate.
Meet a nice person who also has good earnings, and marry young, before 30.
Continue to live on your old cheap apartment budget even as your career advances and you get raises. All raises go into your investments. Great if you and the spouse can live on one of your incomes and invest the rest.
Hope for a little bit of good luck with investment returns and that you have a good stretch (ala 1982 - 2000) and not a bad stretch (ala 1965 - 1981).

Not easy, but definitely possible to retire very young with this approach.

Again, I like this assignment. It gets young people thinking ahead about the consequences of their choices when, as you said yourself, most people don't think about this stuff until their 60's.

Good luck!
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: 18 and Need Help Starting [Classroom research assignment

Post by john94549 »

To: OP, aurora and Magycian, you have been presented what might be called an "issue-spotting" hypothetical. The point of the drill is to get the student to identify ("spot") as many economic, lifestyle, and financial issues as possible which might arise over a lifetime. By giving you a seemingly-impossible goal, it requires you to think backwards chronologically, which is what most folks should do, but probably don't.

As you peruse the many topics on Bogleheads, one recurring theme is "what do I need, and how do I get there?" What your professor has done is pose that exact question, with a few twists and turns. For example, when folks in their 50's find themselves coming up short in the retirement-savings department, the common advice is "work longer and save more." Your professor has eliminated that as an option. At the other end of the spectrum, recent graduates ask "how can I possibly save anything, I'm drowning in student loans." Your professor is forcing you to address that issue now, before you are.

I suspect your professor will accept any reasonably-plausible career and income that gets from point "a" to point "z". What the not-so-nutty professor is looking for is for you to spot all the issues (career, income, investments, portfolio management, consumption and spending, retirement planning* and anything else you can think of). Ever so much more interesting than listening to a series of lectures, doncha think?

*For example, assuming a (roughly) ten to twelve year "working" career, calculate (in today's dollars) your anticipated Social Security benefit, and your various options. Collect at 62, or at FRA, maybe take spousal, defer to 70? It gets interesting.
Last edited by john94549 on Tue Nov 18, 2014 10:10 pm, edited 1 time in total.
User avatar
LadyGeek
Site Admin
Posts: 69963
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: 18 and Need Help Starting [Classroom research assignment

Post by LadyGeek »

Bonus: Read this free download and pass it to everyone you know. This is not an example, it's real-life: If You Can: How Millennials Can Get Rich Slowly (lower section of page, 3rd paragraph contains download instructions)
The booklet is available for free in acrobat, mobi, and Kindle formats; feel free to upload and redistribute these three files at will.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
lollipops376
Posts: 1
Joined: Tue Nov 18, 2014 10:14 pm

retiring by age 32

Post by lollipops376 »

I am going to be a professional baseball player and I am wondering how I can retire by the age of 32 and what kind of money i need to make to do that.
Post Reply