The dirty little secret about early retirement


Here’s the dirty little secret you won’t hear too often in the early retirement community: income matters, A LOT.  A typical handling of the income conundrum goes something like this: “Yeah, it can be hard to retire early / save a lot with lower incomes, but it is still possible if you are determined.”  The sad reality that this attitude conceals is that, while it still may be *possible*, retiring early with a low-to-average income requires significantly more sacrifices.

Specifically, the average American household earning $50k per year probably won’t be able to retire in less than 30 years, even with a budget similar to Mr. Money Mustache, unless they are willing to give up some other basic necessities, which is asking a lot and living a life out somewhat out of balance in my humble opinion.

Part of the reason this harsh reality doesn’t really get highlighted too often is that it doesn’t sell; it doesn’t bring in page views.  I wish, however, that it would get discussed more frequently because there is an unsettling amount of victim-blaming in certain personal finance corners of the internet.  True, sometimes there are ways out of tough financial situations, but not acknowledging how much more difficult it can be for someone like Jannette Navarro, a working single mother, to escape the cycle of poverty (much less, retire early) does a true disservice to the struggles of average and low-income Americans.

The common thinking about people with low savings rates, even at lower end of the income spectrum, is that they should still be able to find some fat to trim in their budgets, which could theoretically lead them to financial independence.  The truth of the matter, however, is that a basic bare-bones budget is still really expensive, even without the supposed frilly indulgences like daily lattes and weekly hair salon trips (an unfortunate racist welfare queen trope).

The numbers:

1. Not surprisingly, rich households save a larger percentage of their incomes.

Do the Rich Save More Chart

Do the Rich Save More?… Yes, at least in the late 1980’s.

Take a look at the “Active (median)” line on the bottom right.  This is the active median savings rate (doesn’t account for passive increases in wealth).  It shows that the richest 20% of households save about 15% of their incomes, while the poorest 40% barely save anything.

Is it because the poor are lazy and overindulgent in luxury expenses like lattes, or is something else going on?  Something else, I would argue…

2. A basic needs budget is actually pretty expensive.

bare bones budget for family of 4


This table shows that, on average, a basic needs budget is about 200% higher than the federal poverty line.  This isn’t surprising, since the methodology for calculating the federal poverty line is completely outdated and doesn’t account for things like transportation or medical expenses.  In fact, it is calculated simply by multiplying the “subsistence food budget” by 3.

So looking at the specific numbers above, living in a single-adult, two-child household in a moderate-cost city requires a little over $40,000 per year to make ends meet(2009 dollars).

3. The average American household has about 2.5 people in it and makes about $50,000 per year (2013 dollars).

Remember the savings rates by income quintile chart above?  Here are how those household income quintiles looked in 2012:

By definition, overall median income is going to be pretty close to the mean of the third household income quintile, and it is.  So roughly 50% of U.S. households make more than $50,000 and roughly 50% make less.

4. The average 2.5-person household can realistically only save about $14,000 per year (28% savings rate on $50k income).

The average of federal poverty thresholds for 2 and 3 person households is about $18,000.  And since we’ve established that a bare-bones budget is about 200% of the federal poverty line, this means that the average 2.5-person household probably needs to spend about $36,000 a year strictly on necessities.  So on a $50,000 income, that leaves $14,000 left-over for savings (before taxes).

5. A 28% savings rate requires roughly 33 years of work to reach financial independence.

Remember this chart from my post on financial independence?

years until retirement vs. savings rate

The chart shows, it will take the average American household, living on a bare-bones budget, about 33 years to save enough money to become financially independent.  Not so easy, right?  And it takes even more time for the 49% of households earning less than $50k.

A Mr. Money Mustache reality check and comparison:

Okay, I can imagine someone being skeptical of the bare-bones budget figure, so I wanted to run a reality check against Mr. Money Mustache’s own spending numbers.  During his wealth accumulation phase, he and his wife averaged about $100,000 in combined annual income (twice the U.S. average) and $36,000 in annual spending for a rough 64% savings rate that allowed them to retire in 10 years.  Not bad… quite impressive actually.

But notice the connection in annual spending between the MMM 2-person household and the bare bones budget for a 2.5-person household.  They are EXACTLY THE SAME.  MMM is the first to admit that he still views their lifestyle as pretty luxurious (organic groceries, beer and wine, nice house, etc.), and that jives perfectly with the fact that they were a 2-person household living on what I’ve calculated to be a 2.5-person bare-bones budget.  They were living a little above their means (but not much).


a day in the life of the MMM family

The funny thing is that most people other than frugal personal finance nerds look at the MMM lifestyle as a huge sacrifice (no driving, even in crappy weather, very few restaurants, no international travel, limited travel in general, no cable, very little shopping, lots of DIY projects, skimping on heat and A/C, etc.).  In other words, most people would agree that $36,000 per year is a very reasonable bare-bones budget for a 2-person household, even more so for a 2.5-member household.

So with a $36,000 MMM-style household budget in mind.  Here is how long it would take to reach financial independence given different levels of income:

36k income retirement years chart

In other words, while the MMM household was able to retire in about 10 years because of their high salary (and frugal lifestyle), the typical U.S. household living the same frugal lifestyle would be required to work roughly 20 additional years simply to  accomplish the same thing.

Concluding thoughts:

I don’t mean to discourage anyone in the bottom half of the income spectrum from saving money.  Achieving financial independence in 33 years is still better than not achieving it at all, and is also better than achieving it in 40 or 50 years.  But this message is radically different from the get rich (pretty) quick promises that are normally discussed in the early retirement blogging community.

This is an important message to get across, because I have talked with low-income earners that are turned-off by the unrealistic advice they see on the internet (“Save a minimum of 50% of income!”) .  I’m guilty of this too.  I generally emphasize ways to cut costs rather than grow income, but I don’t mean to hide from the fact that this advice isn’t appropriate, nor realistic, for a large portion of the population.

There are some early retirement hall-of-famers, such as Jacob from Early Retirement Extreme who lived on $7,000 a year, that show how financial independence can actually be accomplished with much less.  But I think most would reject his lifestyle as too radical.  The more plausible path for a household with a low-to-average income is to look for ways to earn more.

red lentils

Eating a strict diet of lentils, rice, and beans might not be everybody’s thing.

In the future, I hope to write on the subject of bringing in more money.  In the meantime, though, Jay Money has a great Side Hustle Series at Budgets Are Sexy, and Mr. Money Mustache also has two posts dedicated to ways to bring in more than $50,000 without a degree.

So, in closing, saving money and achieving early retirement is much easier for high-income earners.  The realistic best case scenario for roughly half of Americans is to run on a bare-bones budget and still not reach financial independence for 30+ years.

Different situations call for different advice and understanding.  Let’s not forget nor diminish the challenges of making ends meet for less-fortunate segments of the population.

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  1. marvin mcdude says:

    Great stuff here, dude. This is a great reality check.

    After I took my big paycut this year, my wife and I now bring home only about 100K combined. Now, from hanging around in early retirement circles, we’ve got our current monthly costs pretty darn optimized (for example, only $320/month for food for 2 adults and 2 little kids)… and I tell you what, it is hard as hell to save 50% of your income when you are also paying for daycare. We do it, but only if you count our mortgage principal payments as savings… and even then it’s only 55% savings.

    God bless what MMM did… but it’s a totally different ballgame saving for early retirement when no one in the family is an engineer AND you’re paying for daycare. Not complaining since these were our life choices… but still gotta acknowledge that we’re living in a totally different reality.

  2. For sure, higher income always speeds up the process *as long* as you actually take action and save/save/save. That’s usually the hardest part for people regardless of income (and why so many high earners have nothing to show for it). The best would be to get in the FI habit now that way when you make millions down the line you’re not tempted to blow it all 🙂

  3. What a great article! Thank you for this analysis of the bare bones budget versus average income. There’s a lot more than a latte habit holding back workers from FI. Your point that income matters is essential. Great work!

  4. Meiguoren says:

    Thanks for the post, FG ROI. I enjoy reading your site.

    Obviously, you’re right that not having a high income makes achieving FI more challenging, but it’s still possible to do it within a reasonable period of time if people are willing to think outside the box.

    Why enable people to make excuses for themselves and rationalize that FI is impossible just because they don’t make $100,000+/year? In my opinion, it would be better to encourage lower income earners to be creative and not allow themselves to be confined within the boundaries of the charts you posted above that dictate how much “normal” people spend on housing, food, transportation, etc…

    Where I live rents are relatively high, but some people I know do “work exchanges” to pay part/all of their rent, i.e., they mow their landlords’ lawn, weedwack, do building maintenance, bookkeeping, cleaning, provide childcare, create websites, etc., instead of paying $$ for rent. To get healthy food, smart people I know fish, hunt and/or keep a few livestock on their landlords’ property where they’re living rent free. They also grow their own gardens to provide some fresh vegetables for their families.

    The examples above are, obviously, best suited to people living in the country, but I know people living in big cities who are creatively increasing their incomes by regularly renting out rooms in their homes/apartments to visitors using sites like A friend living in Reno tells me that, not only does he make a considerable amount of money renting out an extra bedroom in his house, but he also benefits by getting to meet tons of really nice, interesting people who rent from him.

    As far as I can tell, these “unusual” people I know are happy and they don’t seem to be sacrificing much of anything in order to live the way they do. If anything, their lifestyles make their lives more interesting and as a side benefit they become richer as well.

  5. Great article, and there really is a serious plight for the poor. But one thing I don’t fully agree with is that you’re looking at the most expensive years in a typical person’s life. That is, the early child rearing years. If you cut that $900 a month from the barebones budget, things start to look a lot more manageable.

    Also not factored is social security — although it isn’t available in early FI, so maybe it shouldn’t count.

    By no means am I saying it’s easy. It isn’t, and the poor and middle class do need help.

  6. No Nonsense Landlord says:

    You are 100% correct. Retiring early is tough. As you get older, riding a bicycle everywhere you go is not fun. There is a huge amount of risk the more years you need to support yourself.

    Save and work. There are no shortcuts.

  7. Well said. It’s so easy, as a high earner, to forget what a fortunate position you are in. You worry about your investments and watch your spending while forgetting you’re lucky to be able to invest anything and hardly notice that your frugal spending is still buying you a very comfortable existence!

  8. I could be wrong, but I think that personal finance bloggers tend not to highlight income because it’s already obvious that early retirement is easier to achieve for high earners. On the other hand it’s less obvious how much control one has over his or her spending. For example, the cost of basic necessities is probably more subjective than the numbers in this article suggest. Even if Mr. Money Mustache and his wife lived off the average budget of a 2.5 person household, I’d guess that they enjoyed a much more luxurious lifestyle than the average 2.5 person household (given that they (1) hardly drove and (2) maximized their energy efficiency, making more room to purchase other things). So from a reader’s standpoint, it’s much more interesting to learn how to make a budget like that so efficient, rather than to learn something that we already know – that making more money gets you to early retirement faster.

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