People can get to early retirement in many ways: predicting the bitcoin craze a few years early (and at 18), inheriting cousin Walter’s gold bullion collection, being a beneficiary (i.e., family member) of brother Donald’s Powerball persistence, acquiring a sustainable sugar daddy (sorry, no link… didn’t want to Google it/read about it 😛 ), etc. Unfortunately, stumbling upon luck is certainly not my forte and likely not yours. Retiring early requires income to cover your expenses. For the non-retired crew, that means having a job to provide income. The retired crew’s income comes from a few places. One place is a pension/annuity (e.g., defined benefit from prior employer, social security). However, pensions are dying out as employers shift the burden to employees. The other increasingly important source is an asset base that is later converted to income (e.g., 401k, savings, real estate, etc.). Building a sufficient asset base to feed your desire to follow Nickelback around in early retirement is dependent on how much time you have until your body is blasted by the sweet voice of Chad Kroeger (no relation to Freddy) and/or your magnitude of monthly savings. Since I, and I suspect many of you, am not wanting to wait until those golden locks turn grey, it’s important to focus on the magnitude of savings.
Our savings are derived from our active income (i.e., our W2 jobs). The greater income we have, the more we can potentially save. Achieving a high level of income is more easily said than done. If we’re looking at statistics, the lever that has a big effect on income is education. In the W2 world, education can be one of the biggest hidden contributors to early retirement, significantly increasing your chances to be able to Max Out and Retire Early. It has certainly contributed to my MORE situation. But you don’t have to take my word for it. Georgetown’s Center for Education and the Workforce looked at lifetime earnings over 40 years by educational attainment and they found just what you might expect. More nerd power = more earning power. The higher the educational attainment, the greater the lifetime earnings. In each case, it’s several hundred thousand dollars between each.
Now let’s look at this by annual earnings.
If you’re supposed to maxing out your 401k and IRA to get to early retirement that equates to $23,500 ($18K for 401k + $5.5K for IRA) and I didn’t even add in the HSA contributions. Maxing out seems possible only with a bachelor’s degree and beyond.
Understanding not everyone can max these two accounts out, let’s go through a thought experiment using a fixed savings percentage of 10% over 30 years across four educational attainment levels. I assume a typical 4% withdrawal rate in retirement.
Comparing the $20K in retirement with an HS diploma vs $56K in retirement with a professional degree shows a stark difference. It’s portrays the difference between poverty and middle class. But how many doctors (i.e., professional degree holders) do you know who retire with a middle class lifestyle? I suspect not many. That’s because living expenses are a smaller percentage of their income, leaving more discretionary income for spending or saving. My wife and I make ~$200K before taxes. She maxes out her 401k and I contribute 20% (which includes the 18,000 annual max plus after tax money). This doesn’t include the employer match either. Including our employer match takes us to ~30%. Higher savings rates today mean options for tomorrow: either greater income in retirement or the option to retire early.
Higher education also gives access to greater job opportunities and lowers unemployment rates. Certain employers screen candidates excluding all resumes who don’t meet the degree requirements. In some cases, even if you meet the requirements, you can be excluded from consideration if you don’t meet the preferred requirements – that’s how it works at my employer. Degree requiring jobs often have retirement/stock option benefits contributing even more to your net worth and retirement savings. Additionally, the Bureau of Labor Statistics found those without a degree have higher unemployment rates. As of August 2015, approximately one out of every 40 workers with a bachelor’s degree or higher level of education was unemployed compared with high school graduates with no college education at about one in every 20 workers unemployed.
Losing your job can have a detrimental effect on your life. If you haven’t built a solid foundation you can lose your savings, cars, home and even set back your retirement plans by several years. This underscores the importance and impact of education on employability.
I want to discuss are my life stages, education levels and respective income. I know I’m a sample size of one, but it’s proof the statistics bear out. And it’s greatly contributed to my net worth. FYI, I used mySocialSecurity to look up my taxed social security earnings to provide the income below.
- High School | no job | lived at parents house | annual income = $240 (mowed neighbors lawn a few times), 2001
- College Sophomore year | first job as an intern | lived on campus | annual income = $4K, 2003
- College Junior/Senior year | 2 internships, 1 part time job @ shoe store | annual income = $10K, 2005
- First Job out of College w/bachelors degree | Sales/COLD CALLING 🙁 | annual income = $5K (covered only half of the year), 2006
- First Job @ Second employer w/bachelors degree and certifications | Call center | <1 month of unemployment | $26K, 2007
- Second job @ second employer with masters degree | staff support | $62K, 2010
- 3rd Job @ 2nd employer w/ Masters and more certifications | staff support | $112K, 2015
Sure education costs money but consider it an investment. You’ll have the ability to pay it off and significantly increase your lifetime earnings. And eventually you can pay for that sweet a$$ signed commemorative Nickelback guitar.
So go out. Get yourself some education. Increase your employability and earning potential and give your life a several-hundred thousand (maybe even a million?!) dollar raise!
What’s your perspective on education, income, and early retirement? What else would you like me to talk about?