Monday, November 26, 2018

40 Thousand to Freedom

There's a question that gets thrown around in the FIRE community: is achieving financial independence and early retirement possible for everyone? And I keep getting surprised that the correct answer is hardly ever uttered. I'm not sure I've heard it more than once. Which is crazy. It's such a softball question.

But no, achieving financial independence and enjoying an early retirement is clearly not possible for everyone.

Why is this even a question? Do people not understand what a lot of people make in the US?  Have they not read my excellent posts on the middle class and income quintiles? Do they feel appropriately guilty for not having read them?

I have a feeling things are really going to change for a lot of people in the FIRE community when they discover the interesting and diverse group of people sometimes described as "not us".

So let's take some time today to introduce some of these new and exciting people, using the wonder of publicly available income statistics.

To start any discussion of what it takes to achieve financial independence, we need to talk about expenses. For this post, let's keep the discussion focused on the United States: I couldn't begin to address costs for other countries.

What's a reasonable assumption for what it costs to live in this country?

It's a trick question: the answer depends on what part of the US you live in. Luckily, the Economic Policy Institute has a calculator for determining the cost of living in every city and county in the United States, and it is pretty amazing.

Let's see what it determines the costs would be for a family of three (two adults, one child) in my county of Maricopa, Arizona. It's the fourth most populous county in the entire country as of the last census, and contains the cities of Phoenix, Scottsdale, Mesa, and Tempe.

Here's what the Economic Policy Institute calculator estimated it would cost two adults with one child to live in our county:

I can already hear the indignant gasps from frugal FIRE enthusiasts.

"Where on earth do they get these numbers? Seventy five thousand dollars a year? I can live on half of that!"

"Right? Are they even biking to get their groceries? I bet they use their dryer!"

"I heard they eat at restaurants. And they drive there in a car."

And, scene.

In the case of our family, these salty, hypothetical frugalists aren't that far off. Our 2017 spending was about $48,000, with some low hanging fruit that could reduce the figure further. (The post shows our spending was in the $30k - $34k range in some earlier years, but that's entirely due to the fact we had a paid-off home back then. It's not a reasonable benchmark.)

Of course, there's the pesky fact that our healthcare is subsidized by our employers. And Mrs. Done by Forty and I both work from home, with a paid-off car. And we adjust our work schedules so we can watch Baby AF ourselves, avoiding day care. So those huge health care, transportation, and child care costs are tiny in our budget.

Still, frugality is a thing. I think the FIRE community has shown that to be true: costs can be hacked in a lot of cases. So how much from that $48k budget could we trim if we were trying our best?

I think our 2017 budget of $48k could be cut all the way down to $40k if we got down to a tight, no-bullshit budget. There is some low hanging fruit, for sure: new furniture and plantation shutters for our new house, and over $4k in travel. But then there's the fact that we only paid our new, bigger mortgage for half the year, and in 2018 we will spend nearly $18,000 on PITI. Plus, Baby AF didn't exist in 2017, and dude costs money. I think $40k would be feasible for us, and it's a pretty common number in FIRE circles as well.

For the sake of this exercise, which is hopelessly facile and inductive, let's assume that total level of annual expenses: forty thousand. In some areas, with some families, they could never get down to that level of spending. For others, they could go a good bit lower. Still, I'm running with that as a benchmark.

So how feasible is achieving financial independence at that $40k spending level? Is it still achievable for anyone and everyone?

The good people at the Census Bureau produces a treasure trove of reports on income. Let's take a look at how the data breaks down.

Here's a view of all US households, broken down by quintile.
Link to full report
I'm having a hard time understanding how people in the lowest quintile all earning less than $25,000 a year, a full 20% of all US households, are going to even make progress towards FIRE, let alone achieve it.

Some of the families in the second quintile, earning between $24,639 and $47,110, would initially seem to be able to cover a $40,000 annual budget, and then make some progress towards financial independence.

But then there are those pesky taxes to consider.

Right off the bat, they are going to owe 6.2% for Social Security and 1.45% for Medicare. Even for the family that's at the top of that quintile earning $47,110, right at the fortieth percentile, they're paying $3,600 in FICA taxes. That only leaves $3,500 to cover all federal and state income taxes, along with whatever they can contribute to financial independence.

This is unfortunately where a lot of the tactics of FIRE fall flat. With only $3,500 of wiggle room after FICA taxes, this family can't max out one or two different 401ks, or even a single IRA, to reduce their income tax burden, getting that double-win of tax avoidance and investment gains.

Still, let's see what can be done if we make some generous assumptions. Let's assume this family at the very top of this second income quintile is married (to give them the larger standard deduction) and has a child (to give them the child tax credit). Even after deducting the $24,000 standard deduction and getting a $2,000 child tax credit, the family has $23k in taxable income, owing $582 in federal taxes.

State taxes vary so much that it's hard to make many assumptions. But since we're using an Arizona county in this hypothetical, we can look at the state's figures. With an income of $47,110, the family would owe around $1,185. Let's help them out and round down to an even $1,000.

This leaves the family around $2,000 of their income to apply to financial independence per year. Maybe $2,240 if they avoid some federal taxes at their 12% marginal rate via a 401k. And let's say they are lucky and their employer matches all of these 401k contributions, roughly doubling their annual savings to $4,480.

That's a 9.5% savings rate. Let's round it up to 10%. Assuming this family's conditions remain the same, adjusting for inflation, this family will reach financial independence in...51 years. They're not retiring early or reaching financial independence during a typical working career. Even a traditional retirement is in doubt.

And this is a family is at the very top of the second income quintile. Meaning a full 40% of families in the United States, four out of every ten, would have a worse situation for achieving financial independence.

Of course, other factors impact household income. Like race. Or gender. The Census Bureau thankfully breaks down their data to an amazing level of detail.

What if we looked at the income quintiles for Black households?
Link to full report
Or households of Hispanic origin?
Link to full report
And then compared those figures to those of White households?
Link to full report
Would that change the idea that anyone, or everyone, can achieve financial independence?

Or what if we took married household incomes, and compared them to the household income of male and female head of households who did not have a spouse present (i.e. - single parent households)?
Link to full report
Since these are median figures, another way of thinking that is that half of the nation's households in this group earn more, which is great. But half of that group earns less, too.

The Census Bureau has so much good data on income, and I'm not even scratching the surface here. But looking at the figures it's clear to me that there are many US households who simply don't have sufficient income to work towards financial independence. 

And when we take the time to look at how the income data breaks down across different groups, it's clear that financial independence is a much more attainable goal for some groups, and some families, than for others. 

While there is surely room for debate on where the income cutoff is when a household or individual can reasonably work towards financial independence, there is a cutoff. Take a look at some of the figures for the upper limits of the first quintile, and ponder the reality that people in twenty percent of households make less than that figure. 

Then come back and tell me how they're going to retire early, because I can't figure it out.

The counterpoint I imagine many readers have, especially those who believe in the power of individuals to do and be anything they set their minds to, is the fact that just because your family earns $47k or $30k today, that doesn't mean you'll stay in that income quintile your entire life. Your household's workers might earn near the minimum wage today, but in a few years or decades, you might be earning six figures. 

It's certainly possible.

Income mobility is a thing. People can, and do, move up (and down) the income quintiles. 

But as this amazing breakdown from the New York Times Upshot blog shows, race matters a lot for whether you're more likely to move up or down the income scale. Gender matters a lot, too. 

And, sure, while the median income does increase for workers as they age, there are some problems with this working as a broad solution for retiring early. For one, is the median income doesn't rise high enough, and it doesn't keep rising as workers age. Median incomes plateau for workers reaching their mid thirties, stays there through their mid sixties, then actually drops significantly for workers older than sixty five. The second problem is fairly obvious: waiting until you get older to earn enough to save for financial independence cannibalizes the goal of retiring early. 

We'll try to tackle income mobility another day, but I want to close with a question. 

Why does it seem so important in certain circles of the FIRE community that this goal is accessible to anyone and everyone? Retiring very early is, undeniably, a very rare goal. The vast majority of people will never attain it. Why is it uncomfortable to consider the fact that many, many people will not attain that goal, simply because we do not pay workers enough to broadly pursue that goal?

*Photo is from micaeltatoo at Flickr Creative Commons.


  1. Ouch, that's rough. You're right. The vast majority will never achieve FI or RE. That's the truth. However, I still think FIRE is still possible for everyone under 40. It's not easy to increase income, but it's possible. I guess I'm bias. My family immigrated to the US when I was young and we struggled financially for years. Things improved, though. You don't have to be stuck in the lower quintile.

    1. My mother immigrated here as well, Joe. Something interesting in the NY Times Upshot article linked above was that children of Asian immigrants to especially well when it comes to income mobility: better than almost anyone in their analysis.

      "Both Asian-Americans and whites are likelier to move up the income ladder than down it. One reason Asian-Americans appear to have higher upward mobility rates than whites is that the children of Asian immigrants do particularly well in this data. If we look only at children whose mothers were born in the United States, Asian-Americans and whites fare about equally well."

      So you and I might both have a very unique sort of advantages when it comes to increasing income.

      Would love to hear more of your thoughts on this too.

    2. The graphics are really neat in that NY Times article. You're probably right about the unique advantage. That advantage colored my outlook. I feel like anyone can make it if they work to improve their income. Some people might be stuck in low income jobs, but they can help their children improve. You have to think generationally. I think that's where Asian has the advantage.

    3. I agree that, for a lot of people, the hope might really be in your kids moving up the income ladder.

      But that Upshot story also tells a pretty rough story for children of other races: one in which they're more likely to move down than up.

    4. I've had similar thoughts as a fellow Asian of immigrant parents, I grew up believing that income mobility was possible. How could it not if my parents came here with nothing and with hard work moved up in life. And for my sister and I, growing up working class and moving up even further. I'm not sure what the advantages are? Maybe it's work ethic and focus on education...maybe it's less discrimination/racism as we are supposedly the "model minority." Probably a combination of those among other factors.
      However, as much as I believe in the ability of most people's ability to move up economically through hard work and smart decisions, it's hard to discount the obstacles that many who live in poverty face. While I grew up working class, I cannot claim to have ever lived in poverty. Just found this article recently about why poor people's bad decisions make perfect sense:
      Very complex issue and I look forward to you tackling income mobility in an upcoming post.

    5. Hi Andrew!

      It seems we three have some similarities in our backgrounds. I always struggle with how to interpret the data on Asian Americans, especially those children of immigrants. Do we outperform others simply due to effort or skill? I really don't love where that narrative goes, though effort and skill are always going to play a pretty large role.

      And as you note, there are also some obstacles that don't seem to be doled out all that equally. It's not about just hard work or skill; as Annie Duke notes, all of our outcomes are a combination of those things along with how lucky or unlucky we are.

      I'm going to take a look at that article...see if I can use it in that future post. Cheers!

    6. This is a great post, lots of food for thought. I just want to chime in and say as a child of Asian immigrants as well, color has definitely played a part in where I and my family fall with economic opportunities. Living in the NYC area, I can't tell you how many times I was mistaken into the Latino/African American category rather than the Asian category, simply because of the color my skin (though with all the advantages of education since this was stressed in my household). In my mind, I grew up closer in thinking to other Asian children though. I do think economic opportunity comes with the interpretation of how others perceive you for job opportunities. My mom and dad grew up not thinking once about skin color and speech patterns but education in and of itself as a way of economic mobility. I wonder often what kind of identification my son will grow up and call himself-and if this will impact his economic/social mobility.

    7. Hi there! Sorry for the delayed response, and always happy to meet another child of an Asian immigrant.

      I have a lot of the same thoughts with my son. I'm half white, half Asian and deal with identification issues. It's easy to think you're not really part of either group. I wonder what Baby AF will grow up feeling like...will it be easier for him?

      But yes, I think it's fairly undeniable that race plays such a huge factor in finances. The numbers are too stark to argue. And like you noted, it's really about how others perceive that group. Are they hard working? Are they going to be a good employee? A good student? Someone who will lead a team? Economic opportunity and race go hand in hand in this country...and that's pretty shitty.

  2. You are right for some people at certain income levels it is extremely hard to save, especially compared to high earners.

    However, I think financial education is still extremely important at any level of the socioeconomic scale.

    I believe teaching about living within your means is an extremely important message.

    1. Hi there SFL!

      Yeah, I agree that financial education is important (though I am not optimistic on the gains we'll see from financial literacy education programs in their current format). And yeah, figuring out a way to live within your means is definitely critical.

      But I think there's a pretty wide gap between those things, and the too-present narrative that anyone or everyone can reach FI.

  3. Living within your means is difficult when your means don't cover any healthcare! Therefore when you finally get sick enough to go to the doctor, you have a much more serious condition. It's expensive to be poor.

    1. Healthcare costs alone are often enough for a lot of families to be pushed right out of the "FI range".

      And yes, it's very expensive to be poor. I talked a reporter recently about this in the context of FI -- hopefully it'll make the cut. :)

  4. I think you are TOTALLY right - FIRE is a privilege of the 'relative' rich. Particularly in the US where tertiary education costs can be so high (I'm Aussie, and they are lower and paid off through compulsory % out of your salary once you reach a threshold - or paid upfront for a discounted date). I also acknowledge that studying and working in Engineering is VASTLY different to other education and employment paths I could have taken - but also, this isn't 'do what you love and you'll never work a day in your life' but 'do what you can do well, and is well rewarded by society'. (I skipped med cause bad at memorizing and don't love cadavers, nor old bodies if I'm honest, law, back to memorising, good with number = engineering. Clearly I wanted a direct line from degree to job title!).

    I appreciate the research you do for these posts, and that you reply to every comment. You really are one of so few FIRE bloggers I continue to read and follow with interest.

    1. Hi Sarah!

      My dad was an engineer and I think he was disappointed that I didn't go that direction. Like you, I was good at math and bad at memorizing, but I instead majored in English and got my teaching credential...only to decide I didn't like teaching like 3 months into it.

      I really appreciate the kind words and that you still read my blog! I, too, have some conflicted feelings about FIRE. I think at the very least we need to better understand how accessible this goal is to every day families. Once we see that it's not actually all that achievable for something like 40 or 50% of the nation, my hope is that people in our community start supporting policies and politicians who would try to enact broader based opportunities, & better wages/benefits for those on the bottom half of the income scale.

  5. It's a question that keeps coming up recently in my "FI Blog circles" funnily enough.

    E.g. here:

    There is such variation in personal circumstances its really hard to tease out any general conclusions from the data, but you've done a fair crack of it here!

    And I totally agree with the assertion that, clearly, early FI is not achievable by everyone, and even saving anything or just not going into debt is going to be hard for the lowest 20%. However the large majority of households that are above that level can surely do something to improve their situation, I think? (If a household earning 25K/year can survive on that then why can't a household earning 40K/Year for example?)

    Having said that, as you hopefully already know I fully support your view that we need to do something about income inequality and I have great sympathy for those stuck in the poverty cycle.

    1. Hi there FIREstarter!

      Agree 100% that the bottom quintile is just not in a position to address FIRE. But hopefully my article made clear that even the next quintile cannot either, under the assumptions of my analysis. So it's quite a large percentage of our country's families.

      While this post didn't end on this note (it really should have), I think the takeaway is that we need broader based growth, and policies that specifically help families in the bottom two quintiles earn more. Unions could play a big role, increasing minimum wages, using the tax incentives to spur companies to pay workers rather than performing stock buybacks, etc.

  6. The biggest problem with the majority of the FIRE movement is how it's stuck on frugality. As you know, there are two variables to the equation and that is to make Passive Income (I) - Expenses (E) >= 0.

    Most in the FIRE community focus on reducing their income really low, saving the rest (and generally putting it into a low cost index fund) and waiting.

    This issue is that the variable E can technically never go below 0 (and realistically is much higher than 0). But, I both passive or active sources of income, have unlimited upward potential.

    This is really a mindset issue. It reminds me of this Chinese restaurant in my home city. 3 decades ago it was one of the most popular places in the city (or so I'm told by those older than me). In recent years it was a shell of its former self and recently had to shut down.

    The issue was the owner had this frugal, always cutting, mentality. As sales dropped, he cut expenses. Sales dropped more and he cut more.

    He didn't realize that as he cut, the quality got lower causing sales to drop further. This went on slowly for decades.

    FIRE is the same thing. If you focus on GROWTH and income, you'll do far better than if you focus on cutting expenses. While, of course, never forget that E is part of the equation so always be mindful of expenses.

    1. Hi there, Eric.

      While I agree that a focus on increasing income is certainly a far better approach for lower income families, especially, I think we deviate on whether this is simply an issue of mindset, or an issue that is far more systemic.

      Based on your comment on my other post, I think it's fair to say we disagree pretty fundamentally on this.

    2. Perhaps, but I guess we can only speak from our experience. I come from a very low income and low education family, terrible childhood, you name it. I was the first person in my family to get a degree for example.

      I discovered passive income when I barely earned $20,000 per year and it changed my life. So, perhaps focusing on positive growth and improvement is a mindset the poor need. It worked for me after all.

      Perhaps wealthier people need to focus on keep their 'wants' in check and need to focus differently. I wouldn't know, I wasn't raised in that sort of family, though I've grown very well off over the last decade but of course my upbringing keeps me grounded.

      I don't think anyone has the 100% answer to anything in this world, but I think mindset is the most important first step to everything positive in life. Perhaps, what the mindset should be is open for debate.

    3. Of course it's open for debate, Eric. What I said is that you and I disagree on whether it's really an issue of mindset at all, regardless of what mindset it is. That is to say, I don't agree that the problem of poverty is 'between the ears' so to speak, nor do I think that's the solution.

      I also disagree with taking your personal experience and making sweeping generalizations about "what the poor need". That's inductive reasoning, and can often lead to some pretty incorrect conclusions.

      Regardless, I've debated this issue enough times to have learned not to get sucked in when I see the tell tale signs. That's my mindset. ;)

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  8. Your stuff always makes me think. And thinking is sometimes hard work for Cubert. Seriously - Your numbers are realistic, and I think the FIRE crew could stand to take a step back and fully appreciate the disparities. Part of me wishes we could transplant a bit more of the welfare state approach Scandinavia employs. Wouldn't it be great to wipe out homelessness and blight (saving FI and RE as first world problems to solve...)

    1. Cubert! Sorry for the delayed response, friend.

      I find myself writing a lot about the context of FIRE (who is this stuff possible for, what are the limiting factors, are we more or less diverse than the population at large). And yes, the Scandanavian approach would be amazing for a whole lot of reasons. When I step back, as you note, and think about the disparities, I feel like an asshole sometimes. So many bigger issues out there.

  9. Nice blog! I started a blog 6 months ago at 67 and am looking for blogs that I can learn from. I know it is hard work and often frustrating. I will give a good try even though I know I don’t have as much ‘time’.

    1. Hi Trippe! Good luck with the blog. I've been somehow doing this for six years and I find it comes in waves for me. Sometimes I have a lot of energy for writing, sometimes life gets busy and I have to scale back. I hope you just keep at it!

  10. Well, I think it comes down too a lot of the cultural logics we buy into. I mean the myth of the American Dream is alive and well in America. We want to believe that if you just pull yourself up by your boot straps everything will be fine. Personally, I want to believe that. But my academic training and just looking around says something different. If "democratize" the idea of FI then we can perpetuate the idea that everyone can achieve it without having to look at larger structural problems in the economy (e.g. wealth inequality). It also gives us an out from actually getting involved with larger societal issues. That is something I struggle with. What kind of responsibility does the FI community have in solving larger societal issues? I think we have a lot of responsibility, but we don't talk about it much.

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