My name is JP Livingston, and I retired in New York City at age 28 with $2.25 million. When Investor Junkie asked me to write a story about how I did it, I was delighted.
The average retirement age in the United States is 63, and the median total net worth accumulated by a retiree after working for over 40 years is $175,000. I think in this age of opportunity, many of us can do better than that, and I’d like to share the framework I personally used to get there.
My parents grew up poor, by which I mean the eight people living in a one-room apartment kind of poor. As a child, my mother’s “rich friend” was the one whose father would buy her McDonald’s once a week.
My father graduated from college, but my mother didn’t. My father marked the first generation in his family to graduate from college. He became a software engineer back before the tech boom hit. My mother stayed home for a few years before eventually landing a position as a secretary at a headhunting firm.
When I was older and started thinking about what I wanted to do in life, my parents’ refrain to me was that I could do anything I wanted, as long as I found a way to support myself financially.
What I wanted to do was write. But I found out quickly that writers made a very unsteady living. It was then that I started reading personal finance books. I decided if I couldn’t do what I loved and make a living, I would be retired, because retired people could do whatever they wanted to do. I wanted to write, so I would need to retire first.
Early retirement became a goal of mine well before I became an adult, and I spent hours reading personal finance books at the local Barnes and Noble. I noticed that while every author had a slightly different path to the finish line, there were several universal factors which determined their success.
Two Universal Equations
There are two universal equations that govern our progress toward retirement.
As you can see, there are four main levers to pull when it comes to your nest egg.
- Portfolio Growth Rate
- Tax Rate
Furthermore, the output from the first two factors — savings — is what feeds into the next equation to ultimately build your nest egg. That means there is a sequential relationship between the factors that contribute to achieving retirement escape velocity, and mastering them in the right order maximizes your speed to the finish line.
People who retire extremely early have very high savings rates, typically 50%+ and most certainly over 25%.
I started by optimizing the largest line items first. College tuition was tens of thousands of dollars, and even more importantly, every extra year in school was a missed opportunity for a year of income. So I graduated in three years, a move that saved me $150,000 between the cost of tuition and the potential missed income.
Just that one decision bought back at least a decade of retirement. Leaving $150,000 to grow at historical market rates would yield $1.5 million in 30 years. That is a cushy retirement at just over 50 years old, based on one decision.
I found the opportunities to save came in unexpected places. No one had mentioned the financial implications of an extra year of college.
After I graduated, I continued to focus on the next largest line items: housing and food.
My first job was in New York City. NYC is one of the most expensive areas in the world. I took a roommate to keep costs reasonable. And while we picked a safe neighborhood (Upper East Side), we picked a crappy apartment that was a multi-flight walk up. There was only one set of windows in the entire space, and it had bars on it. There was no natural light in the living room.
Luckily, I was too young and too used to living in crappy dorm rooms for it to bother me. That one decision probably helped me put away $15,000 more per year than my peers. Five years of that is $75,000. But deployed in the stock market over those years, the true amount it has created for me is about $90k.
That’s enough to send me on a $2,700 vacation every year for the rest of my life.
Or I can set that aside now and have it pay for private college for two kids. One decision I made for a few years while I was too young to be bothered by it has set up my future kids for life.
The thing that kept me motivated was realizing the cuts I was making could be temporary, but the benefits they gave me lasted forever by giving me savings that would continue to grow.
Focusing on the big-ticket items got me to a 20%–30% savings rate, but the rest of my progress toward a high savings rate was due to small incremental improvements. By making one improvement to my spending system each week, I quickly got my savings rate to over 70% of my income.
The job I took out of college was at an investment firm. It was the lower-paying of the offers I had at the time, but it had more upside, as well as the opportunity to interact with really interesting people. The starting salary was just over $60,000 with the promise that if you stuck it out for the year, that could get a bonus of an almost equal amount.
I ended up staying at that firm, investing effort into trying to achieve the fastest promotions and highest raises. For example, I found that interviewing and exploring opportunities in the job market every 2–3 years gave me leverage for commanding the highest raises among my colleagues.
Lateral hires can make 20%–30% more than employees who have climbed internally for years. This is because companies need to compete in an open market for a lateral hire, and that competition makes the new hire’s demand for pay and title more urgently heard.
This doesn’t mean you need to actually leave your firm every two to three years. While I stayed at the same firm for all 7 years of my career, at one point I approached them, ready to leave for a different position. That year I was told I had received the highest bonus of anyone in my position.
Portfolio Growth: Good Places to Grow Your Money
I spent quite a bit of time trying to learn more about investing. When I retired, about 60% of my nest egg could be attributed to savings and about 40% could be attributed to investing.
I have been reading books about retirement and investing since I was 12. I branched out into online communities to learn more as I got into specific investing strategies.
I’ve used individual stock picking, leveraged bond funds, low-cost index funds, options, and dividend-producing preferred stocks depending on the macro-environment and my needs as an investor.
As your nest egg gets bigger, your focus usually switches to tax efficiency.
Say you have $150,000 in savings. Avoid taxes on all your gains by contributing to tax-advantaged accounts rather than taxable accounts. If you do this and the accounts are growing by 10% per year, that can be a difference of as much as $4,000 per year that stays in your pocket.
This is also when you start thinking hard about what sort of investments go in your taxable accounts and what goes into tax-advantaged accounts like 401(k)s and IRAs. Ideally, the investments that realize the most gains and income should go in the tax-advantaged accounts. These include selling options and getting dividends that aren’t tax exempt.
While none of us have the exact same circumstances, the exact same lucky breaks, or the exact same goals, it is a surety that there exist universal strategies that can cut years off anyone’s retirement timeline. By employing the best strategies on the four main levers of retirement, you can retire decades earlier than your peers.
JP writes about investing and other strategies that helped her retire early at Investor Junkie and at her blog The Money Habit.