Cadet = Future Millionaire

Beginning your FIRE journey here...

Step one of any journey is believing the destination is attainable.

Let's be honest: most 18-22 year olds aren't thinking about retirement. Far from it -- they're in school or training, focused on acquiring the skills they need to be successful IN their careers, not wondering what happens after their career is over. Which is part of the dilemma: achieving financial independence requires you to start early... thinking, saving, investing, planning, and focusing on those days many years in the future.

Some 18-22 year olds are thinking about acquiring wealth, but those that do are mostly considering it in a "get rich quick" way: winning the lottery, inventing an app, or starting a company they can sell for millions. I routinely ask my cadets to raise their hands if they think they will ever be millionaires. It's rare that I get any takers. A million dollars seems wildly out of reach for these students netting $100 per month.

That makes it all the more startling when I tell them that at the age of 35, after 13 years in service, Mr. FIRE and I passed the million dollar mark in net worth. Not through a lottery or inheritance, but through focused saving and investing. Telling them our story (and offering our tips and tricks) was partly the inspiration for this blog. But more than that, it makes future wealth real, achievable, and entirely possible.

But if our personal example isn't enough, maybe the math will convince you. This post is designed to show how achievable wealth is -- if you start early. The key to investing is to let your money make money; to let your interest accrue more interest. And to do that, the more time your money has to build interest, the better. That means starting NOW.

Welcome to the power of compound interest.

Say you have 3 cadets: Cadet Green, Cadet Red, and Cadet Blue. All of them are going to take the roughly $400 per month they are NOT spending on student loan payments (see my analysis on student loans in this post) and instead invest it. That's $4800 per year -- not a huge amount in the grand scheme of things. All three cadets are going to achieve an interest rate of 8% APR on their invested money, compounded monthly.

But that's where their similarities end. Cadets Green and Red took my class and started saving as soon as they turned 20. Cadet Green kept dutifully investing her $400 every month all the way until age 65, for a total of $216,000 invested. Cadet Red had some life expenses pop up -- marriage, children, pets -- and stopped saving at age 30. But, having invested a total of $48,000, he let it grow for the next 35 years without making any further deposits.

Cadet Blue missed my class and didn't start saving until age 40. He dutifully invests the same $400 every month for 25 years. But take a look at the chart below for how things work out for these cadets.

Wild, right? Even $48,000 invested over 10 years early will grow to over $1 million by normal retirement age. Compare that to someone who starts late, invests more ($120,000 total) and only makes $380k by the time the investment matures. If this doesn't convince you to start saving now, nothing will!

Of course, you'd be right to point out that none of this helps the FIRE movement, which aims to have financial independence (and the ability to retire) way before the normal retirement age of 65. So let's imagine my cadets want to retire fully after 20 years in military service, or age 42. It is worth noting that, with almost nothing saved, Cadet Blue has no chance of retiring early in this scenario....if he can ever retire at all. But even Cadets Green and Red aren't looking particularly strong, having $280k and $190k respectively in their bank. Not bad, but definitely not enough to retire on.

If our cadets want to retire for good at 42 with $1 million, what will it take to get them there? Let's look strictly at the Thrift Savings Plan (TSP) which acts like a government 401k. For 2019, the contribution limit for the TSP is $19,000 per year. For the moment, let's ignore the government matching contributions (up to 5% of base pay) and increases in the TSP contribution limit, and pretend our cadets just max out their TSP at $19k every year for their 20 years of service. In total, they will have invested $380,000.

Now, let's see how their investments perform:

• At a respectable 5% interest, the cadets will have $703,544 after 20 years.

• At 7% interest (the low end of the average inflation-adjusted market rate of return), the cadets will have $904,051.

• At 8% interest (the high end of the average inflation-adjusted rate of return) the cadets will have $1,029,740 after 20 years.

• And at 10% (the market's average rate of return without accounting for inflation), the cadets will have $1,348,137.

The clear message to take from this calculation is that FIRE is possible! And while $19,000 per year is a lot to save as an O-1 (about half your starting base pay) or O-2 (about one-third your base pay), it's certainly doable....especially if you can see the benefit it will have in the long run. And perhaps most importantly, by focusing only on TSP, we're ignoring the government's 5% match, growth in the contribution limits, other IRAs, BRS or High-36 pensions, and additional investment vehicles (like real estate) that will all make this final number bigger. This means our numbers are pretty conservative.

So there you have it: being a millionaire is not only possible, there's really no excuse NOT to be one if you start early and keep steadily saving and investing your money. No lottery or inheritance required!

Now, go forth and save!