Wednesday, February 24, 2010

How Living Only on Base Salary Funded our Early Retirement

In the 10 years prior to retirement, we tried to live on less than 80% of my take home salary. By the time I retired, we had a comfortable lifestyle on a such a budget. However, during that time, I had other compensation, which we consciously ignored and put entirely into our retirement savings. Here were the compensation elements that we did not include in our spendable income:
  • Stock options. In 1998, I became eligible for 10 year stock options, which vested after one year. Later options vested after three years. Although the options had positive value after vesting, we chose to hold the options until expiration, and and planned to use the proceeds to fund our retirement savings.

    When I retired early in 2007, two option grants were worth more than my base salary, and several were worth more than two thirds my base salary. Even with the market pull back, two grants are worth about 90% of my base salary and several are worth a little over half my base salary.

  • Bonus. In 2000, I became eligible for an annual bonus targeted at 15% of my salary. In the ensuing years, the bonus ranged from 7% to 25%. At first, I took the payment in cash and put the funds into savings. In the third year, I began taking a portion as deferred compensation, in the form of 10 year stock options. After five years, I chose to take all of the bonus in the form of stock options.

    Many of my colleagues would use their bonus to buy a new car, pay for vacations or expand their lifestyle. Our decision was to use the money to fund our retirement.

  • Cost of Living Adjustments. During this same period, we overseas for a several years and were given a cost of living adjustment equal to about 50% of my take home pay. Although we needed the funds initially, we were able to learn to live mostly on my base salary and save most of the adjustment. The secret was to eat and live like the locals, which significantly lowered our daily expenses.

    For reference, our housing was paid by the company separately and not part of our cost of living allowance. This was helpful since housing cost seven times more than what we paid in the U.S.
  • Living well below our means significantly contributed our capability to retire early. When I retired early in 2007, the options were valued at six times my base salary and our savings were nine times my base salary. This was added to the company retirement plan, which provided eight times my base salary, for a total of 23 times base salary.

    Of course, the financial crisis has negatively impacted our savings, reducing are savings to 16 times base salary. Although significantly down from the peak, the amount saved is still sufficient to support our living expenses in early retirement.

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial or retirement advice. Please consult a professional advisor.

    Copyright © 2010 Achievement Catalyst, LLC


    ParisGirl111 said...

    Living below your means can be quite challenging. It looks like you have done a good job of taking that extra money given and not allowing it to be disolved into your spending. This is a great tip for those who are wanting to save more! I am currently attempting to learn how to live off of one paycheck. It's difficult and I have still haven't mastered it yet, but I am working for diligently to cut expenses.

    Unknown said...

    What a great example of living on less than you make and investing the difference...better yet you lived on 80% and invested the other 20% wisely..hats off to you. People thinks raise or bonus means buying more stuff...not so with you. Great story.