As I said last time in Part 1, by and large, we are a typical Midwestern family. Full disclosure however, I have a career in STEM. So while I don’t make nearly as much as my counterparts on the east or west coasts, I do make an above average salary for the Midwest. I want to acknowledge that for all that my journey isn’t going to look like Mr. Money Mustache’s, your journey may very well not look like mine. How does a typical family like mine retire early on a single income?
And yet while not unimportant, your annual salary doesn’t determine when you can retire. The length of your working career is determined by your savings rate, or the ratio of your savings to your earnings. For example, if you earn $50,000/year and save $10,000/year your savings rate is 20%. The higher your savings rate, the quicker you can retire. Let’s see how this works by taking a look at two examples.
A Doctor and a Plumber
Exhibit A: A high-earning doctor who makes $300,000/year. He’s doing pretty good financially, but let’s say he spends $280,000/year. Divide 280,000/300,000 and you get a spending rate of 94% and a savings rate of 6%. He may make 5X’s the national average salary but he will have to work for 50 years to be able to retire because of his lavish lifestyle.
Exhibit B: A plumber who makes $50,000/year, but only spends $35,000. His savings rate is 30%, and he will only need to work for 24 years before being able to retire. The plumber may only make 1/6 the salary of the doctor, but he can quit the workforce in half the time by merely keeping his spending under control.
Exhibit A Exhibit B
To reach a 30% savings rate the doctor would only have to cut his spending by 25%. That means a 25% decrease in spending leads to a 52% decrease in the amount of time you need to work. This is an exponential decline in the amount of time needed to retire because boosting your savings rate has the double effect of both increasing the money you put into your nest egg and decreasing the amount you spend, thus decreasing the amount you’ll need for retirement.
Early Retirement in the Midwest
In 2018 the median household income in the Midwest was $64,069/year (source), and the average consumer spending was $59,909 (source). If we divide spending by income we get a spending rate of 93.5% and a savings rate of 6.5%. If we assume that everything not spent is put into a retirement account that returns 7% (the market average accounting for inflation), we come to the conclusion that the average Midwesterner can retire in 48 years 4months. Almost 50 years is a long time to work.
Now let’s do the math using the spending that I calculated in Part 1 of this post. I estimated our family’s spending to be about $43,200/year. If we divide $43,200 by $64,069 (the average Midwestern income, not our actual income), we get a spending rate of 67.4% and a savings rate of 32.6%. If that $20,869 is put into a retirement account returning 7%, it will only take 23 years to be able to have enough to retire. And if I adjust the median income for inflation to 2020 dollars I get less than 21 years!
That being said, I’m not planning to retire in 20 years, at least not at this moment. We’ll see what God brings in the future, but I’m content to keep working. One of the reasons for that is that we plan to have more kids so expenses will increase, and we also still plan to give money to church and other charities. We donated about $10,000 last year so if I add that to the $43,200 budget, the time calculates to a little over 30 years. That’s not retiring super early, but it’s quite a bit less than the average.
Anyone Can Retire Early on a Single Income
The current average retirement age is 65 for men and 63 for women. If you were born after 1960, the full retirement age is 67 if you want to receive full benefits from Social Security. That means if you started working at 18 the government expects you to work for 49 years. That is a long time to be slaving away for the Man. Retiring in 20, 30, or even 40 years is still retiring early.
A 25% decrease in spending leads to a 52% decrease in the amount of time you need to work.
Be responsible with your money, be frugal, but don’t feel like you need to scrimp and save every cent you make. It may mean you retire later than other FIRE followers, but so what? It’s your money and your life. Make your money work for you in a way that allows you to live the lifestyle you want. If you can do that, you’ve won.
Not everyone has a large salary, but by following some of the tips I laid out in Part 1 of this post and being diligent about only spending your money on what’s important, even a typical family with children can save for early retirement on a modest income.
What do you think? What’s a major expense for you? Or what have you sacrificed to reach financial independence? Let us know in the comments below!
