22 Year Old Retires On Just $200,000: Could This Be True?

by: Bruins on the Trade Floor
Summary

Individuals should consider their own circumstances when coming up with a retirement figure.

Someone else's circumstances are not your own.

The only criterion to retirement is you handing in your notice.

I see a lot of articles on SA about early retirement, most of which involve bombastic claims that it can be done on meager sums of less than a million dollars.

Well, my parents just gave me my tuition money for graduate school and in addition to what I had, I am now staring at a balance of somewhere around two hundred thousand dollars (which I will sadly watch go down as each semester passes). But I had this wonderful thought. If these other authors are claiming you can do it on 1M, 500K, even less - why not shoot for 200K retirement?

Let's break this down for a minute. To answer the question of whether or not it's possible to retire on 200K, we must first answer two equally important questions:

1. How much money can a 200K portfolio actually generate?

The average annual return for the S&P 500 since its inception in 1928 has been around 10%, if we adjust this for inflation slightly over 7%, if we leave some room for error, lets say 6%. So at 6%, we can sustain and maybe even grow the portfolio a little.

$200,000 * 0.06 = $12,000 per year.

2. How much money do I need to sustain myself through life?

Well let's see, I'm single, no kids, so really I just need a place to stay, food to eat, basic necessities of life, and some savings for medical expense.

I currently work in Wisconsin. If you don't live in any of the big cities, you can rent a place in one of the far-off counties for as little as $400 a month, all expenses included. Sure, it might be rough living, but to not have to answer to the boss for the next 40 years it definitely seems worth it.

I think a budget of $300 a month for food should suffice. Assuming one requires around 2500 calories a day, that's a budget of 0.4 cents per calorie. McDonald's (NYSE:MCD) fits that bill with the new McPick 2 combos (Big Mac + 10 piece McNugget only $5), so do Hot Pockets, frozen pizza, most delivery pizza if you use coupons, just about anything canned, the options are plenty.

Medical expenditure, if I put aside $100 a month, that should leave us with a $1200 emergency fund after a year. More than enough for a healthy 22 year old.

Everything else, from toothpaste, to clothing, $100 a month. If you don't believe you can cloth yourself for that, you haven't been to eBay (NASDAQ:EBAY) (and I'm not even talking used - brand new unbranded shirts from China - $1.99 ea).

So let's add it up

$400 + $300 + $100 + $100 = $900

$900 * 12 = $10800 per year

And so, I conclude that I can indeed retire on $200K.

But what have I proven? Absolutely nothing.

In fact, I could have concluded the same on $100K, or even 50 cents. The only real criterion to retirement is you handing in your notice.

Let's face it, even the homeless can live to a ripe old age. That said, we should all understand that the answer to "can I retire on x dollars" rests upon the answer to "how much money will I need to sustain myself and live the way I want to live" and that answer is different for each individual. Too many of you are making the mistake of trying to find some magic number which doesn't exist. You're being baited by articles with catchy titles such as "Retirement: How I Did It On Just One Million" and using these as a basis for your retirement goals. But hey, I just showed you 200K is enough didn't I? Would you even consider retiring on just that?

In summary, calculating a good figure for retirement should always involve asking yourself the two fundamental questions

1. How much do I need to live (the way you really want to)?

2. How much do I need to generate that amount?

And the answers to these questions will vary for each individual. Even the expected return on investment is not the same. We cannot blanketly assume that we will generate a 7% inflation-adjusted return as we must also consider individual risk tolerances as well as factor in unpredictability of the markets. If you're in your sixties and betting on a 7% return and suddenly the market turns to that of the 2000's, you're pretty much screwed. Perhaps then you would need a larger sum so that you can generate the same amount at a lower risk.

Retirement is a discussion you need to have with yourself, your family, and your financial advisor. It is not a hunt for some magic number and anyone claiming to have to magic number is full of it and reading about someone else's number is entirely irrelevant to you.

Disclaimer: This article was written for humor in addition to making a point. Please do not take everything I have written in this article at 100% face value, i.e. I am well aware it is not healthy to live on a diet of nothing but McD's and Hot Pockets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.