You are on part 3/9 in the Level 1 – The Basics Series. Next up: Savings
• Why Retire Early?
• The Basics – Overview
• Withdrawal Stage
• Your Life In Retirement
Pushing your income as high as possible, in my opinion, is the most important tactic to achieving financial freedom and early retirement.
Let’s dive right in with a Bob example:
Bob makes $35,000 a year, and is very comfortable and happy with his job. He has no plans to make a move, despite the low pay rate, and lack of opportunities to advance. Here is Bob’s story:
Age: 21 (right out of college)
Take Home Pay: $29,750
Savings per Year: $9,750
While spending $20,000/yr., Bob lives a decently comfortable life for someone right out of school, but over time he might want to grow his quality of life just a bit by spending more money. However, if he maintained his quality of life (spending), salary and savings rate, by the time he hits 40 he will have saved $549,000 (assumes a 10% investment return)!
Let’s be honest, for someone that only makes $35k a year, saving >$550,000 before 40 is a major accomplishment. With this sort of savings in hand, 27.5 times his average spending rate ($549,000 / $20,000 per year), he is financially independent and is ready to retire early. Fantastic! Any savings above 25 times your average spending rate generally puts you in the financially independent club. More on this later in sections 7 and 8.
However, here’s the rub, although Bob HAS gained his freedom, he is still living the same quality of life he had right out of college. This might be ok for some folks, but most people prefer to upgrade there life just a bit over time. Nothing crazy, no big house or luxury cars, but he might prefer craft beer over PBR.
Now let’s consider a few more scenarios. Let ‘s assume Bob decided to make a career move, take his skills elsewhere and grow his salary to $50,000 per year. This isn’t an outlandish or unreasonable salary upgrade. His new stats:
Take Home Pay: $42,500
Savings per Year: $22,500
After the same 19 year time period, he will amassed $1,266,000! His savings stash will amount to 63 times his average spending of $20,000 a year! Bob is obviously financially independent and can pull the plug anytime. Along the way he will have had several choices. A) Retire even earlier, as in mid 30s. B) Raise his spending and quality of life along the way and still retire by 40. C) Keep his spending rate the same until age 40 and early retirement, then spend more in retirement for travel, leisure, and treating himself a bit for all that hard work! He could spend up to $50,640 ($1,266,000 savings x 4% withdrawal rate) a year in retirement with those kind of savings! Regardless of the route he picks, not too shabby.
Take Home Pay: $55,250
Savings per Year: $25,250
What if Bob juiced his salary right off the bat and also kicked up his spending and quality of life by 50% right out of school and bumped his spending to $30,000 per year? He still would have saved $1.43 mm before age 40, and would be all set.
I like the example above because it really highlights the power of pushing your salary higher, but also incorporates how critical saving is, which is why it is next up in the series. You can achieve similar results by reducing your spending even further, but then you start depriving yourself of all joy in life pretty quickly.
The entire point of financial independence and early retirement is to enjoy life as much as possible, and scrimping for 19 years to get there just doesn’t seem like the right approach to me. Everything in moderation, and you will still get to where you want before age 40.
For those of you just finding this page in your late 30s, 40s or even 50’s, no worries! The good news is that your salary is already likely much higher due to all the years of hard work, and with some minor tweaks to your spending and savings rate, you too can be free in no time. More about your situation in the Case Study Series.
Push your income as high as possible, as soon as possible. Keep spending moderate and ensure you spend much less than you make!
Now that you see how important it is to achieve a higher income, let’s talk about what you can do to make progress.
Here are three areas of focus to drive your salary higher:
· Education and training
· Don’t settle for a job
· Don’t be afraid to try new things
Education and training
Obtaining a solid education seems to be a given by now, but I’ll emphasize it even further. Go to college, get a desirable degree and skill set in high demand, and then utilize it to drive your salary as high as possible. Pretty straightforward, right? Yeah, not really. If most people are like me, they have no clue what they want to do when they start college. I floundered around for a few years, stuck with math and science and eventually grabbed a degree that worked out. Not everyone is so lucky. If you are a reader in high school or college currently, do migrate yourself towards something in high demand that pays wells. Engineering and computer science are home runs. Jobs are plentiful, and pay is great. Some other solid choices? Graduates holding an accounting degree start at $58k, and an MBA can get you $62k. Both solid.
Degrees such as History, English, Psychology and Early Education all start below $38,000 per year (Data). If you went this route, it’s not the end of the world, and really not that big of a deal at all. You just have to take some extra steps after graduation. Let’s use a teacher as an example:
Option 1: Move to a higher paying state! New York ($76k), New Jersey ($73k), and Alaska ($72k) all sound pretty good (Data)!
Option 2: Work a summer job. This should be pretty obvious, but if you only work 9 months out of the year and make $38k as stated above, you could surely find a part time position with an equivalent hourly rate. This would push your yearly income to $50,600 just by working a full year. If you want to retire early, you can’t be lazy. Go find that part time job.
Option 3: Additional Education. Go back to school and get your Master’s degree. Teachers with a master’s degree earn on average $20,000 more than their peers without an advanced degree (Data).
Option 4: Go back to school and pick up another degree. How about a two-year degree? A two-year degree for an Air Traffic Controller lines you up to make $122,000 per year! Radiation Therapist and Nuclear Technician? $79-$80k a year. Ok, not everyone wants to be a Nuclear Tech, how about a Dental Hygienist or a Registered Nurse? Both put you in the $70k range with a tremendous number of jobs available (Data).
I like the teacher example above because my mother was a teacher. She loved what she did and was spectacular at helping people. But she also saw that the money wasn’t great. She went back to school and got her Master’s degree and also picked up a number of other certifications along the way to ensure she was maximizing her income. In the end, she did quite well, and was able to comfortably retire in her early 50’s. Not bad.
I know not everyone wants to go back to school right after graduating college, but keep in mind that these are only two-year degrees and will really help your income and path towards early retirement. The effort now is absolutely worth the future results. Do it now, don’t wait.
Don’t settle for a job. Ever.
I am not advocating that you job hop and bail on your employer every few months, but do continually fight for the best outcome possible.
Let me share a personal story. After I graduated college and started my full time job with a Fortune 500 company, I worked my butt off. I did everything I could to learn, produce quality work, and make as big an impact as possible. At my first performance review, I let my boss know that I wanted to work towards a leadership position and a higher salary. I was six months into my job. This may seem crazy for some, but through hard work, honest and genuine interaction with my co-workers, I had gained their trust in a short period of time. My boss wasn’t surprised by this request, as he saw my efforts and desire to advance. From then on out, I requested a promotion at each and every review. Most were denied, but those that were approved were at a rate 2-3 times faster than my peers. I attributed this to two things. 1) I worked harder than anyone else and made a bigger impact than anyone else. 2) More importantly, I was a squeaky wheel and never settled. I always spoke up for myself in a polite and respectful manner, and made sure good things came my way.
No one will look out for your career and earnings potential like you will. Don’t let these opportunities slip by.
I also continually talked with recruiters and other employers, and made a point to expand my network. I kept a pulse on industry compensation and made sure that I was on the leading edge at all points in time. I haven’t run the numbers, but I believe this approach alone allowed me to earn, save, and invest an additional $500,000 by itself over the past decade.
Can you do this too? Absolutely. First and foremost, work hard, give it your all every day and gain the full respect and trust of your bosses and co-workers. If they aren’t willing to stand up for you, you’ll have a hard time maximizing your earning potential, so focus on the work product and impact first. Second, always discuss compensation with your boss. Drop hints frequently. Say things like “One of my goals this year is to provide top notch results and work towards a promotion and pay increase”. Let your goals be known and set the expectation clearly and discuss it often. Quite literally make them say no, you can’t have that promotion. When they do say no, smile, thank them, and then start the process again next week. It may seem uncomfortable and aggravating, but the squeaky wheel always gets the oil. If you are working your butt off, fight for what you deserve, you’ll eventually get it. Some tips here (Forbes article).
Another point to consider is that if you ask this time around and don’t get the raise, you’re much more likely to get it next time. If you do your job well and help the company, they don’t want to lose you. Not getting a raise when you ask is one thing, but not getting it the second year in a row will worry your boss. He doesn’t want to lose a strong performer…
Don’t be afraid to try new things.
The last thought on this subject is to change employers. Stay close to the market and find out what market rate is. Are you being underpaid? Does your employer refuse to give you a raise you deserve? Don’t hesitate, start investigating other jobs ASAP. Employment is an agreement where BOTH sides must be satisfied. Most times, you have a choice, and if your needs aren’t met, you should go somewhere else.
On the other hand, don’t be afraid to try new things with your current employer. If your current employer asks you to take something new on, or you see a new job you have an interest in, don’t hesitate. Tackling new tasks and learning new skills almost always leads to higher salary long term.
Let’s say you are specialized in making widgets and have been doing it for 10 years. Your boss asks if you would mind back-filling a co-worker for six months and make trinkets instead. You’ve never made a trinket! You stumble through it a bit, but after the six months, you have a new skill under your belt. Next time that promotion comes along, if it is between your peer that also specializes in widgets or you, who is also a widget aficionado but also has experience with trinkets, you’ll stand out and likely get the nod.
Even if it scares you, try something new. Life is too short to do the same thing forever.
This also goes for changing your career entirely. If an opportunity pops up for something that makes you uncomfortable but pays well, why not give it a go? Worst case scenario is that you quit, find a job similar to your old one, and have a cool story to tell. Best case scenario, and most likely, you try something new, love it, and now have a whole new world of opportunities open for you.
Find something new that scares you, and give it a go. You’ll likely be thankful from both the life experience it provides as well the financial benefits.
· Driving your income as high as possible, as early as possible is key to reach early retirement.
· A high income gives you options around retirement timing and desired quality of life in retirement.
Three ways to push your salary higher:
· Obtain an adequate education and appropriate training
· Don’t settle for a job – ask for that raise!
· Don’t be afraid to try new things
Your Next Steps
· Evaluate your income. Is it where you want to be? Are you at or above fair market rate?
· Do you have the education and training needed to maximize your income? If no, find that backpack, and go back to school!
· When was the last time your asked for a raise? Start planning that conversation immediately and practice/role play that conversation with a friend – get it right!
· Are you stagnant, do you need a new opportunity? Find something that challenges you. Don’t be afraid to say yes when something new comes along.