How to retire early in the Bay Area

< Back To Blog Home

If you got a job at Google, Netflix or Facebook today and have a normal career progression, in 5 years the average engineer will have or be close to reaching the terminal level of Senior Software Engineer. Your total compensation could easily be $300k a year, which is more than 150k after tax (California is brutal for high income earners). That means in 10 more years from then, you will have earned over $1.5 million in after tax income! If you manage to save 50% of that (still doable even if a 1 bedroom costs over $3000 a month), and assuming a 7% after tax investment growth, you will have saved over $1m, maybe $1.5m with some company stock growth, but that's...not enough to FIRE to a middle class lifestyle any decent city in the US, much less the Bay Area.

To FI to a middle class lifestyle in the Bay Area, you probably need a $5 - 6m net worth. $1.5 - 2 million on a modest 3-4 bedroom house in a good school district, maybe Sunnyvale, Fremont or Foster City which is middle class good, but certainly not Palo Alto or Los Altos good. $3 - 4 million in invested assets, which generates over 200-280k assuming 7% returns or $120k - $160k at the 4% safe withdraw rate. With the house paid off and public school for kids that's the two biggest expenses taken care of. Then you should be able to have a family of 4 live on $120k a year. After $20k in income tax (mostly long term capital gains when you retire, but California would still like their full share), $20k in property tax, and $15k for health insurance, that still leaves around $65k or $5.4k a month to live on for every day expenses and maybe some travelling.

So how can you acquire the net worth to retire in 15 years from starting your career as a Software Engineer? Remember, that puts you in the mid - late 30s, if you started right after college. And now's the time when your skills in this profession are likely still relevant, but probably soon to expire if you haven't moved to the management track and haven't kept your skills updated -- this gets harder once life takes over when you have kids or your parents get old and start to get sick or both.

The quickest and sure way to accelerate this is to have a significant other also working in a high paying job in tech. So then that doubles your expected net worth from $1.5m to $3m in your mid - late 30s. Kids are more expensive with two working parents, so it will be lower if you have kids earlier, so let's assume $2.5m is conservatively achievable for a working couple in tech. Still not enough to FIRE in the Bay Area, but probably enough for a Portland or Austin.

Another more risky path to accelerating FI is to find and join a company that will likely 3 - 5x in the next 5 years. The most visible company today is Uber if you joined 4 years ago or earlier, but you can say the same about Stripe, AirBNB, Lyft or several other companies that's worth more than 3x since 4 years ago but was still well known enough to be a good pick back then. Snap employees were not as lucky, so it's definitely a risky bet! Going for the 10x or more multiple is much harder since you have to join before the company shows enough promise to have their valuation balloon, so unless you found a Facebook in 2009, Google 2004 or Uber in 2013, you probably won't see your equity more than 10x in the next 4 years (the standard initial stock grant vesting period), and those companies were very very small back then, and few people thought they were sure bets!

Say you joined Uber in 2014 as a Senior Engineer when it was worth $16B, and now it's worth 4x that. Your total comp at the time was $150k base and $600k over 4 years in equity ($300k a year), due to the 4x growth on equity, your total earning over 4 years is $3M, or $1.5m after tax. You've just achieved a net worth in 4 years that the conservative approach would take 10 years to achieve! Of course Uber is still not profitable and can still collapse like it almost did in 2017 or if autonomous cars become a viable alternative soon, but hey, no pain no gain.

It took 5 years to achieve the senior level when equity becomes a significant part of your total package, so now you have 10 years left of the 15 to beat your alternate conservative selves' $3M net worth. If you front load this start up life before you have kids and have the time and energy to work as hard as you need to at a fast growing start up, then you earn $6M before tax and $3 - 4M after (3M at normal rates and maybe 4M if you had options with better tax treatment and exercised early). You spend $400k on living expenses combined in those 4 years living in an apartment (remember no kids yet, company provides insurance, and maybe even some free food but rent is $3500 a month), and you're left with $2.6M - 3.6M. You have 6 years left and you can't work at the same intensity anymore because you're now 32 and have a baby on the way. You both get a job at the stable company making $300k a year, plus you have a $2.6M - $3.6M nest egg growing with you. In 6 years, $4M - $5M and you save an additional $1M from earnings. Congratulations, now you have $5M, and can think about retiring middle class in the Bay Area! Go buy a house for $2M, and enjoy your $120k passive income from your 4% yearly withdrawal on $3M.

It's easy in hind sight to pick AirBnB or Uber 4 years ago, but what company can you join now? In many ways I feel it's harder to pick out the winners now. There's a lot more funding in venture capital compared to 4 years ago, especially with the stock market rally and the $100B SoftBank vision find sprinkling money and making unicorns everywhere. If I was a betting man, I would probably look at OpenDoor, Lime or Flexport. I also like RobinHood and InstaCart, but feel their valuation is already quite high based on their recent funding and 3 - 5x is unlikely in 4 years. I recently found FutureEngine which helps rank fast growing companies, I don't see a talent magnet kind of company with the kind of potential Uber had in 2014 or Google in 2005 or Facebook in 2010, but then those kind of companies weren't entirely obvious to spot at the time, so who knows if I would have been able to pick them out back then, but you don't have to have picked those big ones. A Lyft or a Stripe 4 years ago would have done just as well or better!

< Back To Blog Home