When Joe Udo first told his wife that he wanted to retire before he turned 40, she sat speechless. It’s not the traditional path for a computer engineer, sure. But, more importantly, she was also five months pregnant.
“She didn’t like it,” Udo remembers. It took a more formal presentation, where he outlined how the numbers looked in the portfolio and what they would need for retirement, before he “eventually convinced her to come on board.”
At the time, Udo had grown tired of his engineering job at a high tech company. He had worked there for 14 years, and the grind had finally taken its toll. He thought about looking for another job, but he didn’t want to move out of Portland, OR, which he thought he would have to do to find that next gig. At 36, while seeking a way to change his situation, he discovered some of the original FIRE (financial independence, retire early) bloggers.
Udo realized his best bet to escape was to save.
Within two years, he had enough in his retirement and brokerage accounts to officially step away from the job, while also earning some income from rental units he owned.
With the help of his wife – who he refers pseudonymously as Mrs. RB40 on his blog Retire By 40 – the family’s net worth has doubled in the seven years since he quit.
Learning A Frugal Lifestyle While Young
The main reason Udo could retire so quickly upon learning of FIRE is that he was already a frugal person while he worked. He learned the behavior after emigrating to the U.S. from Thailand when he was 12.
As his parents “struggled for quite a few years” trying to gain a foothold in the U.S., he saw them scrimp and save, Udo said. “I imprinted the experience in my mind.”
It’s the reason he chose to become an engineer out of school. He feared taking on some of the menial jobs that he saw his parents do, simply to make life work in a new country.
His decision is a common one among those that retire early. Having a high income or benefits that you can maximize provides flexibility when playing with the numbers. For instance, those that work for government agencies can often access both a 401k and a 457 account, allowing for faster accumulation. It doesn’t mean you need to be a doctor; in fact becoming a doctor isn’t always ideal for extreme early retirement since physicians have to go to school for so long, all the while taking on more student loans. But you do need to make enough that covers your expenses, with plenty left over to aggressively save. Therefore, it’s common to see engineers, former military personnel, entrepreneurs and other federal workers among those seeking FIRE.
For Udo, even while earning a sizeable income, he didn’t spend much of it. The only thing that changed in 2010, when he began to contemplate early retirement, was evaluating the numbers that he had in the portfolio. Using the rule of having 25X your current spending to step away, he realized that he had already gotten very close.
He did have to shift his portfolio to ensure he had income accessible to him, since he wasn’t planning on touching the retirement accounts first. It meant adjusting his brokerage account into dividend-focused stocks, so he can receive the cash as the stocks pay out. Last year, he earned $12,000 in his dividend-paying portion of the portfolio in a brokerage account, about 23% of all his passive income last year.
To test if the family could manage without his job, in the two years before he retired, Udo and his wife invested his entire salary. When the two saw that they could live well without his income, Mrs. RB40 gave him the go-ahead.
His Wife Still Works, Giving Him Flexibility
When Udo stepped away from the day job, he had a 15-month old at home in which he took over full-time daddy day care duties while his wife stayed at work. This brought on criticism from online commenters that he wasn’t actually “financially independent.” And it’s sometimes difficult to separate someone that’s at home taking care of the kids from the retire-early crowd.
But Udo doesn’t see it that way. He chose to quit working because he had the financial ability to do so based on his savings and the income streams he built.
“Mainly it’s just how you look at it,” said Udo. “I plan to never go back to work for somebody else again. Probably a lot of [stay-at-home parents] think they will go back to work.”
He also argues that if a couple reaches retirement age, it doesn’t always mean that the two partners retire at the exact same time. It’s a fair point, only about half of couples do so.
The fact his wife continues to pull in a paycheck does make the ability to continue to save much easier. She doesn’t want to give up the day job, even though Udo would like her to by next year. It has allowed them to continue to max out a 401k and IRAs while also utilizing her health insurance. Udo, meanwhile, concentrates primarily on building up passive income streams.
This ability to earn the steady paycheck (and the continued bull run) has led to a doubling of the family’s net worth to $2.6 million during the seven years since Udo stopped earning a traditional salary.
He Still Has An End Goal In Sight
Udo retired on the premise that he had enough in the bank to live comfortably for the rest of his life, tapping his investment portfolio if needed. But he has a goal of also building enough passive income streams to where he wouldn’t have to touch the majority of his retirement income for many years. He’s gotten closer to that reality.
The Udo family keeps expenses as low as they can, usually landing near $55,000 a year. The passive income, which doesn’t include his wife’s current paycheck, came in at just over $56,000 last year. It covered 99% of the entire year’s worth of expenses (it was a slightly more expensive year than normal).
Since his wife still works and because he earns a good amount through his website, he hasn’t had to actually use much of his passive income streams. Instead it’s a trial run for when he needs to.
An example of this is how he calculates the use of retirement accounts. When the time comes, he plans to take the dividends in his retirement accounts, and use a Roth IRA conversion ladder in order to spend the amount. He hasn’t had to go through this retirement income engineering, yet, but he made over $32,000 in the dividend portion of his retirement accounts last year.
None of this includes what he refers to as “somewhat passive income,” in the monetization of his website. Last year, he brought in over $82,000 in pre-tax income from his blog, a personal record.
While he might make about half of that in 2019, it would still buffer any potential bump that might arise from not having a traditional salary.