Strategy for retiring young
February 16, 2012 7:57 AM   Subscribe

Strange and fortuitous circumstance: Where should I retire to at age 30 with a $2.5 million nest egg, an adventurous girlfriend, no job and no obligations? How much should I spend/mortgage on a house vs. invest?

Assume the following: You are a 30 years old. Through good fortune and arguably above average skill you stumble into $2.5 million (net of taxes) gained through a couple good years at work and a couple great but risky bullish years in the stock market since 2009. Your very lumpy job for which you hold no real professional credentials (ie, which can't be easily replicated elsewhere) falls apart and you decide to cash out of the market and retire. You live in an expensive rental apartment in Manhattan where you have lived most of your post-college life and have no obligations but an adventurous girlfriend willing to quit her job and relocate with you. You are stressed out and looking to try something completely different, enjoying your new-found wealth while not blowing it all.

Where do you move to and how much do you spend on a house? What kind of downpayment vs mortgage do you consider? The idea would be to continue to invest the remainder of your wealth albeit in a much less risky diversified strategy. You hope to possibly not work again but you are not sure.

You have no real hobbies or passions but are partial to warm weather, good food and liberal marijuana policy. Southern/middle California immediately comes to mind.

Any anecdotes about retiring young or general advice are also welcome.
posted by anonymous to Work & Money (44 answers total) 30 users marked this as a favorite
Costa rica or morocco
posted by spicynuts at 8:02 AM on February 16, 2012 [1 favorite]

Retire for how long? If you are 30, 2.5 m is not a huge cap base.

One warning I would have - and this is nothing against you or the adventurous gf who is about to quit a job -is that you are clear about financially reaponsibilties and legally document the relationship.
posted by Lesser Shrew at 8:02 AM on February 16, 2012 [18 favorites]

Interest rates are so low right now that you're probably better off making the smallest down payment you can get away with and investing what's left over in something that will give you decent returns. I just bought a house on an FHA loan and put down 3.5%, you can too if you haven't owned one recently.
posted by contraption at 8:04 AM on February 16, 2012 [2 favorites]

Ask a fee-only financial advisor to help analyze if the nest egg is large enough to retire indefinitely.
posted by dgran at 8:07 AM on February 16, 2012 [2 favorites]

There's a pretty interesting book called "Hide it all and Disappear." Used to be popular at retirement parties and may be out of date, now.
posted by Lesser Shrew at 8:07 AM on February 16, 2012 [1 favorite]

You need to talk to a competent financial advisor, for sure.

I think probably Northern California (Mendocino County -- the pot capital of California) might be a better idea, because it's cheaper. If you don't want to work, you can move someplace cheap where there aren't a lot of good jobs and stretch your money a lot further.

If you don't come from old money, I think the biggest pitfall is going to be friends and family hitting you up for money constantly. Try to avoid letting people know how much money you have. I had a friend who made well north of $10 million (from a couple of dotcom-era IPOs) by the age of 22 and surrounded himself with a bunch of suck-ups and blew a big chunk of his money on drugs and parties, to the point where had to move back home with his parents after a few years. You might want to budget a certain amount of money to spend on 'favors' for friends and family during the year and try really hard not to go above that.

2.5 million is easily enough money that you never have to work again if you live reasonably frugally, and the less you spend on your living expenses, the more that nest egg is going to grow.
posted by empath at 8:08 AM on February 16, 2012

Having $2.5M all at once at 30 is close-but-not-quite the situation of lottery winners. It's a great deal of money that can be set up to last, but you have to do so.

You should greatly consider the combination of: a lawyer, an accountant, a financial planner, and another accountant. Inquire with them to see if the $2.5M is enough to retire now or not. And get the money locked up into a trust so you can't screw things up?
posted by Mister Fabulous at 8:09 AM on February 16, 2012 [1 favorite]

Assuming you have all the money you need then the next problem becomes what to do with your time for the next 50 years. A great home somewhere where it is sunny and the food is fine is a great start accompaniment to a life spent doing whatever you please - but you need to consider how your days are going to be filled.

One problem you might have is that your contemporaries will tend to be working 9-5. The people who have more time on their hands to do what they want are going to either be younger than you or those over the standard retirement age.

To help with these sorts of considerations I would recommend Philip Greenspun's essay on early retirement - and specifically on where to live.
posted by rongorongo at 8:26 AM on February 16, 2012 [1 favorite]

So you wont have kids or marry? If that is the case, retire in Puerto Rico, great place.
posted by pakora1 at 8:29 AM on February 16, 2012

Proceed with caution. Decisions about how much to spend on a house and where to live should be based on solid information about how much income your money will generate for you annually and how long you want your money to last. First step: see a fee-only financial planner who can outline a several scenarios for you. This is the only way to get a clear picture of what kind of lifestyle you will be able to afford. The numbers might be sobering, but the key to making your nest egg last is to come up with a solid plan.
posted by MelissaSimon at 8:30 AM on February 16, 2012 [2 favorites]

It used to be an axiom that in retirement you should spend no more than five percent of principal per year if you want to live off your investment earnings (I think this would be especially true for someone so young). However, given the flatness of the market in the last decade I think I personally would want to take this down to 3 percent. This means you need to find a place where two people can live on between $75,000 and $125,000 a year. I would also say that a place without a state income tax would be preferable. I would look at Florida because it's warm and doesn't have a state income tax. They're probably not that cool with pot though. I would also think seriously about inflation will erode your money if you live another 70 years.
posted by bananafish at 8:31 AM on February 16, 2012

One of the islands in the Grenadines. I love Bequia and Carriacou but the large islands, St. Vincent and Grenada will have a wider range of housing choices. Living on the economy there is very inexpensive and there is no place on earth more beautiful.
posted by txmon at 8:32 AM on February 16, 2012 [2 favorites]

My biggest concern would be lifetime healthcare expenses, which could easily kill that amount of money and force me back into the work world. That may or may not be a sane concern, but it's the first thing I would want to address.

One wise course of action would be to speak with someone knowledgable about creating some sort of tax shelter for the money and then leaving America for a country with single-payer healthcare that will take you in.
posted by jsturgill at 8:33 AM on February 16, 2012 [5 favorites]

Keep in mine, if you get a 6% return on that 2.5 million, that's like $150,000k a year. That's a lot of money, depending on where you live, but it's not really enough money to live like royalty. If you get married and have a couple of kids, that's a solidly Upper Middle class living. But after inflation, that starts to shrink a bit, and if you eat into the principle, it shrinks a lot more.

I'd seriously look at finding a job you enjoy, without thinking too much about how much the salary is. As long as you get health insurance, etc, it should be good enough.
posted by empath at 8:34 AM on February 16, 2012 [1 favorite]

(uh-- $150k a year, obviously)
posted by empath at 8:35 AM on February 16, 2012

...course of action might be to speak with...
posted by jsturgill at 8:35 AM on February 16, 2012

Given how long you have to live on that money, I wouldn't plan on more than 4% a year, or $100K. So where can you live like you want, without spending more than $100K a year total? Obviously if you want to pick up some part time work you can have more cash available. But as mentioned above, you probably won't be living like royalty.
posted by COD at 8:44 AM on February 16, 2012

I think you aren't ready to decide on where to home yet. Do like empath says, get it earning 150k/year. Pack your bags and start travelling around. Check out every nook and cranny, in the States and abroad, for a place you might want to be for the long term.
If you are up for frugal backpack type experience, you could easily spend a year having a wonderful adventure and saving a good chunk of that 150k.

30 is too young to be sure about the love of your life! PLEASE get an iron clad contract, making sure that in a couple years you will not be planning for life with 1.25million because your ex has screwed you.

If you like the itinerant lifestyle you might carry on this way indefinitely, stretch it to a few years.

If you find a place you like, you want to get some decent chunk of land. Don't be a sucker buying a small lot or apartment in the city, please?

A financial planner might run numbers and tell you it makes more sense to get a mortgage. Me, I hate debt and would gain a lot from the peace of mind of owning outright. Yours forever, not the bank's to snatch away if things go wrong.

Sounds excellent, good on you! Enjoy!
posted by Meatbomb at 8:48 AM on February 16, 2012 [1 favorite]

Be careful. If suddenly you find yourself needed to work any of the following reasons and you haven't worked in many years, by your own choice, you will have a terrible time finding work

*you have kids
*woman leaves you and takes a ton of money
*how you have your money tied up suddenly tanks
*you find out you've been spending too much and need an income


good luck
posted by zombieApoc at 8:48 AM on February 16, 2012

Also, I've known a few people that have come into a lot of money (+1mill) and were told to get a mortgage and invest the rest, because you could make more on the investments than you would lose on the interest of the mortgage. It didn't end up well for any of them.

If you have the cash to buy a house outright then buy it outright so you're not paying 700k instead of the original 400k that you could have bought it for.
posted by zombieApoc at 8:53 AM on February 16, 2012 [6 favorites]

I know a guy who retired (at a super young age) in Panama. He built a traditional Panamanian-style home, instead of an American-style McMandsion, which saved him a lot of money. He went from being a successful welder to a successful beach bum. He took his girlfriend with him, but knowing him, he's probably got a new woman.

Anyway, South/Central America seems to be the way to go if you're trying to retire young on a healthy-but-not-huge nest egg.
posted by asnider at 9:00 AM on February 16, 2012 [1 favorite]

I've considered this situation many times. I'm admittedly a recent graduate, but I work on a multi-billion dollar mutual fund investments team at the top end of the investments ladder (not client facing).

It can be a paradox (not sure if that word is technically right). 2.5 million is enough to generate between 100-150k/year for the rest of your life (conservative range) ONLY if you do not make large capital investments. You might also consider buying a 500k-1million house and withdrawing money against it on margin to reinvest in the market. I believe you will need to be more conservative in your investments than most because you will be relying on this money entirely. As a result I would consider sacrificing 150-300 basis points off of the quintessential '7% return on equity a year' for a safer dividend/fixed income strategy. Of course fixed income rates are shit and dividend equities are very expensive now--but let's hope that this is just a 2-7 year phase that the market will grow out of.

What you will want to do is for the first 1-2 decades reinvest some of your money you make off of capital appreciation. Then you will pass a 'peak' and at that point you will want to withdraw more money than you make (what's the point of dying with millions of dollars in the bank?) This can all be mapped out by smart financial advisers. Don't get one who has some fancy program that he runs. Get a real quant with a PhD who can help custom make you a model for you to use as a guide.

Also consider the following: If you make 100-150k/year for the next decade you could increase your 'spending money' by 1/3rd with a job that just makes 50k/year. Could you make that type of money with some type of part time job that you enjoy? I would generally assume a person who made as much money as you could--but you did mention you don't have any salient money making talents. It seems as though it could be win-win. I know many people grow bored. If you can make 50k/year over two decades with meaningful work at some sort of part-time/low-stress level that would boost your capital by a very rough 1/3rd.

Be careful though. If you take a decade off and something happens to your capital you will have nothing, as your skills will have withered (unless you are super naturally talented).

Best of luck. Feel free to send me a message if you have any more questions.
posted by jjmoney at 9:07 AM on February 16, 2012 [2 favorites]

30 is too young to be sure about the love of your life! PLEASE get an iron clad contract, making sure that in a couple years you will not be planning for life with 1.25million because your ex has screwed you.

Also, please don't screw (so to speak!) your ex - if she's giving up her career on the assumption that she will stay with you and be supported for the rest of her natural life, well, geez, what are things going to look like for her if she spends seven years with you, your character is ruined by too much money and no work, and you ditch her for a younger model? She'll have a giant gap in her resume and literally nothing to call her own but the clothes on her back.

In fact, I've idly fantasized about this kind of thing and have always felt that I would prefer to settle a sum of money on someone (there's a term out of an old-fashioned novel) as a gift so that they were not dependent on me in screwed up ways. I would not want the pressure on my relationship that absolute financial dependence would create. How will she choose her clothes? How will she choose to travel to see family? What control will she really have over all this if you are supporting both people on a giant chunk of your money to which she has no legal claim? This is, to my mind, not a recipe for a health relationship - too much control for you, too little power for her.
posted by Frowner at 9:09 AM on February 16, 2012 [12 favorites]

In the circles I grew up in and went to school with, a 10 million trust fund was considered the minimum for never working again. 2.5 million is great, but I would not think of it as life-time retirement. Taking a few years off, taking the time to find (and, if necessary, train for) work you love, getting settled in a home that you will enjoy for the rest of your life are all possiblities. Have a great adventure, but the figure seems low for life-time retirement.
posted by hworth at 9:12 AM on February 16, 2012 [2 favorites]

This article is geared toward older folks but has some useful info about retiring overseas.
posted by hoppytoad at 9:16 AM on February 16, 2012

This seems to be highly, highly dependent on your personal preference.

Yes, agree with this. You say you have no real hobbies or interests - maybe your new found financial freedom will allow you to develop some after years of, presumably, working very very hard. As others have said, it's not retire forever money, but it's enough for you to change your life on your own terms and find something you can't think of not doing.

PS - you lucky bastard
posted by mippy at 9:26 AM on February 16, 2012

2nding Costa Rica- you could live like a king there, health insurance is really good- may not mean much to you now, but it will be very much more important later... and the people are great!
posted by drhydro at 9:58 AM on February 16, 2012

If you have the cash to buy a house outright then buy it outright so you're not paying 700k instead of the original 400k that you could have bought it for.

This sounds reasonable at first, but with rates with the way they are now you may find that the opportunity cost of tying that $400k up in the house is greater than the extra money you'd be spending on interest over the course of a 30 year mortgage. If the house goes up in value, you still end up with that equity whether you put down $14k or $400k.
posted by contraption at 10:40 AM on February 16, 2012

I know $2.5 million seems like an immense amount of money (because it is--congratulations!) but do you guys want to have kids? The income from your $2.5 mil isn't going to enable you to live a middle-class lifestyle and send your kids through a US college comfortably (unless something about how people pay for college in the US changes drastically, which is possible).

If that isn't an issue, I think Costa Rica sounds like a great fit for you. Or Belize. I know people in roughly your situation who have moved to Thailand and love it. I know people in roughly your situation who have moved to Baja Mexico and hate it.
posted by Sidhedevil at 10:53 AM on February 16, 2012

This sounds a bit risky to me. Especially with an "adventurous" girlfriend ($$$) in the mix. 30 is young. You could get bored. And then you might start spending more money to fix the boredom. Or you have kids. And then you wake up one day. You are 55 years old. You are broke. And you have absolutely no skills and no prospect for a job. You could end up homeless and high. So some advice: use all that money as the most awesome security net ever (Mitt Romney style). Live your life as if you have very little money. Find a passion. Find a career that you find fulfilling. Then when you are older, and presumably even richer, you can think about an extra early retirement. Don't be a bum at 30. Contribute.
posted by Seymour Zamboni at 11:32 AM on February 16, 2012 [7 favorites]

As far as what to do with your time; if I were in your position, I would be chafing at the bit to take classes. Get whatever professional credentials exist for your very lumpy job if you might be interested in doing it again sometime, get some liberal arts degrees in whatever strikes your fancy, start pursuing other career-oriented education if you might like to try something new as a hobby/job. Getting education will fill your time, keep you from becoming bored (or boring) and leave you employable if the money dries up.
posted by contraption at 11:46 AM on February 16, 2012 [1 favorite]

Leave work and take a vacation for three to six months. Rent a modest house in a warm friendly place. You can easily live on less than $100,000 almost anywhere in the world if you are willing to pay minimal attention to a budget. Take some time off while living within your means. Sit on the beach and eat good food and so forth. After a few weeks you will probably want to do something, whether that means taking classes or starting a business or getting a low-stress part time job or volunteer work or a return to aggressive investing or adventure travel or learning to surf or whatever. Then follow your passions.

If you are serious about moving overseas but you're not sure where you might consider getting a "round the world" ticket. I've done this with Star Alliance- there are a couple of airline conglomerates that offer these deals. They are very flexible. Then you can go basically anywhere you want over the course of a year for a flat couple of thousand dollars.

I would not buy a house before living in a location for at least a year just in case you don't feel like you fit in there.

When you do buy a house I would also recommend buying the cheapest structurally sound house you can stand to live in. A lot of wealthy people have lost a lot of money building dream houses. This is an investment that you will be emotional about. Do not plan to make any money on your personal residence (if you buy rental properties as an investment that is a different matter.)

In many places in the US, for example most of the midwest and florida, you can find perfectly nice houses with plenty of space for two people for under $100K. Consider paying cash. If you are looking for peace and freedom, do not compromise those goals for a mansion.
posted by steinwald at 12:28 PM on February 16, 2012

Personally, I would move to some rural place and take up non stress full subsistence farming. I would not do this without such a nestegg however, since stressfull subsistence farming means you starve if you screw up. A small piece of so-so land in a prime ag area can be had with a house for under 300k. This is just me though, it is a LOT of work and time (which you will have an abundance of) and the outdoor/rural life is not for everyone.

My areas would be Ozarks, Western Oregon, Washington or way northern California. I am sure there are great areas in the south as well and some in the southwest, but farming there takes a lot of irrigation and is much harder than the other areas. I would also get a piece of land that is either adjacent to or very close to public lands for a huge backyard to play in (national forest or BLM land would be ideal here).

Just what I would do-call it Green Acres (great old sitcom btw if you don't get the reference).
posted by bartonlong at 1:14 PM on February 16, 2012 [1 favorite]

Safe rate of withdrawal is an open research topic, but the consensus is that under the present circumstances (stocks are highly valued and interest rates are low) your probable long term SROW is about 2%.

2% of 2.5M (assuming you *do not burn any money buying a house*) is only $62500 per year ***pre tax*** with the amount changing each year (some years down, some years up) over time.

That's enough to live .. ok .. in parts of the country. Claims of it producing $150k a year are completely delusional.

Note again that this is pre-tax; you will at least be paying capital gains going forward (and depending on the current disposition of the assets, may already owe a significant amount of capital gains when you liquidate the current portfolio). As a retiree you will also need to pay for medical insurance which can be inordinately expensive.

Think long and hard about this. IMHO you are far from having enough to retire at 30 if you have an expected lifespan of around 80. Even if you were 40 you'd be significantly off -- even if you were 40 and had another half million dollars (total $3M) you'd be making a rather serious and significant bet.
posted by rr at 1:25 PM on February 16, 2012 [2 favorites]

If you really don't want to work again, you need to leave the united states and live in a place where you can be happy and comfortable on much much less than you'd spend to live in the usa. (In order for this to work if you stay in the states, you'd have to invest so much and live on so little that it wouldn't really be fun.)

There's lots of places in asia or africa where you can bum around for $10-15k a year while your nest egg accumulates wealth.
posted by Kololo at 2:35 PM on February 16, 2012 [1 favorite]

Aw man, I'm jealous. My partner and I are trying to accumulate the same amount of money so we can retire young, too.

That said: retiring for us really would mean living off of a portion of the interest (the rest would be saved/invested), to give us some breathing room so we can pursue a work arrangement that would allow us greater flexibility. It would give us the opportunity to have a normal, boring middle class income, but to only work part-time, or to allow me to switch over to freelance work, or let us work on some pro-bono/volunteer projects. We would still be bringing in an income through our jobs, but we wouldn't feel beholden to the 60-hour work week we're both mired in currently.

I think some of the suggestions above that you continue to work or pursue supplementary income are good ones. Also, as rr pointed out, $150k probably isn't realistic right now. So...maybe you shouldn't think in terms of Never Having to Work Again! but in Now I Can Pursue My Passion! Or something.
posted by vivid postcard at 3:11 PM on February 16, 2012

The idea of never having to work again at the age of 30 is, I think, the wrong one. The better one is: being able to work at what you want to do rather than what you have to do.
posted by megatherium at 3:54 PM on February 16, 2012 [2 favorites]

Man, I've been hanging out in the wrong parts of the internet I guess ... check out Early Retirement Extreme and Mr. Money Moustache. Both guys that have retired in their 30s on far less than 2.5 million. For those of you saying that 100k or even 75k/year isn't enough to retire on .. are you making that much money now? Surviving? Saving? Um, because, most people live on far less than that, considering the average income is ~50k. Unless your idea of retirement is burning money everyday, then it's completely doable in many parts of the US, even.
posted by theRussian at 5:14 PM on February 16, 2012 [2 favorites]

Pretty sure that there are few people who want the lifestyle the MMM and ERE embrace.

The average income depends on area.
posted by rr at 7:01 PM on February 16, 2012

First, you need to decide what your salary should be- you are now an employee of your money. Make damn sure- no matter what- that you stick to that salary and live within those means.

Second, what ever you decide to live in- buy it. You will find very few people saying, "I wish I would not of paid for my house". If things go to shit you will always have a place to live free and clear.

Third, learn the investment world, if possible, be your own broker- invest your with your head first and heart second.

I have been there, did all of it and have seen the right moves and the wrong ones. I have watched new found wealth blow up (over spent in the beginning) and new found wealth grow (lived comfortably on a set budget and stuck to it month after month).

If you do things right that budget will increase and your "set salary" will follow. Establish your "Oh shit" number where you know to scale things back and your "I get a raise" number when it is merited.

Then, have fun but have a purpose; retirement is the most boring thing I have ever done and found myself returning to work to have something meaningful to do.
posted by bkeene12 at 8:37 PM on February 16, 2012 [1 favorite]

theRussian, you are positing that their income from investments will rise faster than inflation. I don't think that's sound.

Yes, $100K is plenty to live on now. But will it be plenty to live on in 2040? I wouldn't want to bet on it. In 2060?
posted by Sidhedevil at 9:51 PM on February 16, 2012 [2 favorites]

Retire Early is a good resource for a straight-forward rule of thumb to make your money last, based on historical data. (Slightly out of date, though) That suggest that a withdrawal rate between 3% and 4% is probably reasonable (allowing for adjustment for inflation).

Note that 3.5% would give you $87.5k per year (less taxes, I think) to live on.
posted by metahawk at 10:09 PM on February 16, 2012

Mod note: comment removed - if you can't answer this question without calling people insane, please don't. Thanks.
posted by jessamyn (staff) at 8:14 AM on February 17, 2012

This thread seems to have taken a major deviation from your original question. For the people who said $2.5 million isn't enough, I'd point out that if he was to draw $50,000 per year (inflation-adjusted), his money will last for fifty years if he can find an investment that just keeps pace with inflation. That shouldn't be to hard assuming our financial system doesn't go to complete ruin in that time. And if it does, I think I would have preferred to have spent my time skipping the rat race. And if he can live on $40,000/year (what my, my wife, and son are living comfortably on in large city in the midwest), the money lasts over 62 years.

Now, to your actual question on where to live: If you want to stay in the US, I'd agree California is probably the best fit for your criteria. You will have to live a bit lower on the hog though. With interest rate so low right now, I pay the minimum downpayment to avoid PMI and get a mortgage. Then you have less money at risk if the real estate market continues to fall.

If you're willing to go international, then you can live like a prince on that type of income. I'd suggest checking out Tim Leffel's book World's Cheapest Destinations. It does a good job talking about costs of visting and living in 21 different countries. He also has blog that's quite good.
posted by John Frum at 1:29 PM on February 17, 2012 [1 favorite]

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