The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
Have you ever thought about retiring early? With the proper savings and build-up of passive income, it is entirely possible! But, what about benefits like health insurance? What about the company 401k contributions? Is it realistic to walk away from these benefits and still retire early?
These are questions that I have been asking myself lately, and if you have ever thought about early retirement I bet that these questions have you curious as well. Let’s dive in and see what the impact might be of an early leave from your job.
My Extreme Early Retirement
My plan for financial independence started a couple of years ago. I first decided that I would get rid of all of my debts including my home mortgage, and then start to build up some passive income in real estate. At this point, I am 100% debt free and am ready to try out my luck with land lording.
I originally had a plan to purchase one or two rental houses per year with cash. By following this plan I could accumulate about 8 rental houses by the time I reach the age of 34. After factoring vacancies and general expenses, I figure my before tax earnings would be about $70,000 per year. If I could achieve this income per year, I would actually be making more money than my current salary! Surely I would be able to retire from my day job with an increase in salary, right? Unfortunately, the math isn’t quite that simple.
There are a few issues with my plan though. I did not factor in how much it would cost to insure myself, and I also didn’t figure how much I would lose in company 401k contributions. How much would it cost to buy my own health insurance? And how much money am I leaving on the table by forgoing those 401k payments?
The Cost of Medical Insurance
In my current company, medical insurance is pretty cheap. For just myself, I pay $54 a month for some pretty decent high-deductible coverage ($1,500 deductible). Based on the research I have done, my cheapest insurance option would be $148 a month for a $5,950 deductible. In other words, I am paying three times the cost for some pretty crappy coverage.
Realistically, in five years I probably won’t be single. I plan on being married and will probably have a child. In this case, my total cost of insurance through work would be $156 per month vs. $450 on the exchange (again, for a crappy deductible of $5,950). Plus, by leaving work I am forgoing $1,000 of HSA money from the company.
With the HSA contribution, my total yearly insurance cost within the company is $872/year. If I decided to retire early, my insurance costs would be $5,100 each year, and would certainly increase with age. This is a massive difference! So what about the 401k contribution?
The Cost of the 401k Contribution
My company currently matches 401k contributions up to 3% and also contribute an additional 7% for our benefit. For me, this totals about $6,000 per year. If I retired 30 years early, I would be throwing away all of those contributions. With interest, these $6,000 deposits would total $734,000! Yikes! That’s quite a lot of money to give away!
The New Total for Early Retirement
Instead of earning my current salary with my passive income, I figure that if I still want to retire early I will need to earn much more.
If we consider only the increased cost of medical insurance, one should earn about $10,000 more than their current salary in order to fund a respective medical insurance plan, and that’s if you’re young and healthy! If you are older and have health issues, then early retirement might not be in your best interest.
It is a sad realization, but one must factor in all of the increased costs that come with early retirement.
How about you all? Do you think you’ll retire early? Have you considered the increased costs of insurance?
Share your experiences by commenting below!
**Photo courtesy http://www.flickr.com/photos/120360673@N04/13856188134
