Retire in Your 50s
There's no real secret to retire early. The key is to start saving as much as possible as young as possible. People who start saving 20% of their income at 20 are far more likely to retire at 50 than people who start setting aside 10%, 15% or even 20% of their income at 30 or 40. Avoiding debt and adjusting your definition of a comfortable retirement can also help you make your retirement savings go further.
The real trick of retiring early, then, is having the discipline to sacrifice the right-now extravagances to focus on the long-term goal of working less in the long run. We're certainly not the first to point out the $3 cup of coffee every morning, the new car when a quality used car will do and the weekend blow out in Las Vegas all add up over time. But if it were so easy to give up those comforts along the road of life, we'd all be out of the rat race before our kids were off to college.
The key thing to remember is that anyone can retire early with a little planning and sacrifice, and that its never too late to establish a goal to stop working sooner. Even at 50, you can shoot to retire at 60 instead of 65. What follows are some tips, trick and steps others have used to retire early.
It's Not Retirement. It's Financial Independence.
Retirement is no fun if you still have to worry about money, so it's not surprising that the people who post on online forums about retiring early talk about "financial independence" instead of retiring. Their goal is to save enough money to cover living expenses for the rest of their lives, even if they live well past the life expectancy. Indeed, a lot of people who "retire early" continue to work; the difference is they can choose to work as a volunteer or pursue a passion project that may not offer the financial stability of a traditional 9-to-5 job.
The first step, then, is figuring how much you spend now. Knowing where your money is going will give you a great foundation to estimate how quickly you will burn through your retirement savings. Monitoring where every penny goes for a month or, better yet, several months, will help you come up with a target number of what you need to tell your boss to take this job and shove it.
Know Where Every Penny Comes From and Where Every Penny Goes
Monitoring your money can be time consuming. Once you have a good picture of how you spend it, you need to look for places where you can save it. And that's not just the small expenses, like that previously-mentioned, gourmet cup of coffee. You need to periodically do some comparison shopping on your bigger expenses: insurance policies, cellphone bills and utilities should all be reviewed annually to see if you can get a better deal from another provider.
There are some built in savings that come with not working: the family may be able to get by with one car instead of two, and, since you're already retired, you'll no longer be contributing to retirement accounts. But the big key is to make sure you know you have enough money to last before quitting your job; for most people, not working and not having enough money is far more stressful than working and feeling like you struggle to make ends meet.
People who retire early come from all walks of life and, when they were working, had a wide range of income levels. The one thing they have in common is that they all found ways to live simply while they were saving to retire, and continue to live simply now that they are free from work.
One of the most famous financial independence gurus is the blogger Mr. Money Mustache. He and his wife retired at 30 after saving $600,000 and paying off the mortgage. The couple and their son now live on about $25,000 per year.
People like Mr. Money Mustache do this by deliberately not keeping up with the Joneses. The latest high-end German automobile might make you happy for a few weeks while that new car smell wears off, but in the long run, financially independent people are fine with a well-maintained used car that offers lower payments and lower insurance costs.
Annual raises at work aren’t an excuse to spend more for people who want to retire early. They're a chance to save more. The same goes for bonuses, inheritances and that $25 birthday check you've gotten from Aunt Kathy every year since you were five.
Saving only works if you have low – or no – debt. Putting $100 in a savings account with a 2% return is great. But if you have $100 on a credit card with a 19% annual interest rate, those savings are gone in an instant. After you get rid of your high interest debt, your first step should be building up a six-month emergency savings account that can cover all of your expenses. This means you won’t have to live off of credit cards if you lose your job, and unexpected expenses like a new transmission for the family car or the kid's braces can be paid for with that account as well.
Cut Spending Even More Aggressively
The best way to free up money for your savings is to find places where you can save money. If this advice sounds familiar, it's because we cannot emphasize it enough. Lunch and dinner out should be the first thing to go, and it's no surprise that a big chunk of the online chatter about financial independence is dedicated to cutting grocery costs. Some people take it to extremes, seeing how low they can get their grocery bill while feeding a family of four with no complaints about "Rice again?"
A smaller home doesn’t just mean a lower monthly mortgage payment: it also means less stuff you need to buy to fill the space. Another common theme of those online forums for people seeking financial independence is that in their past life they tried to keep up with friends by buying the latest and greatest possession but, given time to reflect on those purchases, found that they didn’t actually make them happy in the long run.
Invest Early And Often
Financially independent folks also swear by investing. They know that the 7% average annual return from the stock market is much better than the less than 1% annual return on the typical savings account.
But because they are also frugal, they look for funds that offer low fees. Another common theme is they don't tend to try to chase market peaks and valleys: they look for funds that track the major indices and use a method called dollar cost averaging. In this form of investing, you set aside the same amount of money for savings every month. When stock prices are high, you minimize risk by buying fewer shares; when stock prices dip, you take advantages by accumulating more shares in your fund of choice.
One important consideration when planning an early retirement: workplace savings accounts like 401k plans often impose steep penalties if you make withdrawals before the traditional retirement age. You may need to scale back contributions to those plans and make investments through a brokerage account so you can tap into your savings when you're ready to retire.
Know If the 4% Rule Will Work For You
A lot of early retirees swear by the 4% rule, even as financial planners have made a sport of debunking it in recent years. The idea is that, because no one knows how long they are going to live, they should withdraw 4% of their retirement savings in their first year of not working. After that, you withdraw the same dollar amount, plus inflation. The theory behind it is that it will automatically factor in market fluctuations.
The financial advisers who are skeptical of it say the 4% rule is too optimistic given marked volatility and may leave you short on savings at the end of life. But the basic tenants of the rule still apply: just as they were disciplined in their savings plan before they retired, the early retirees have a plan for spending and drawing down their savings after they retire.
The 4% rule also gives another sound rule of thumb: you're going to need 25 to 30 times your annual expenses saved before you can retire. Owning your house free-and-clear and not having any debt are also goals you should plan on achieving before you consider quitting your job. That debt includes student loan debt your kids may incur if you plan on co-signing for them.
For most of us, mortgage payments are the biggest expense we have. And by default, we often use the equity we built up in that home to fund a portion of our retirement. We downsize to a smaller home. Financially independent people, however, consider buying cheaper houses as their building their retirement nest eggs so they have more to put into savings. That may mean a smaller house or, in some cases, moving to a part of the country where housing costs are significantly lower than where they currently live.
If you are going to rely on home equity for a portion of your retirement, you need to factor that into your planning. Housing booms and busts happen over any period of time, so you need to factor them into the possible worst-case scenarios you may have to face after you stop working. And don’t forget to factor in things like maintenance and taxes when you plan your post-work life budget.
In recent years mortgage rates have been so low that some retirees have held a mortgage even after they stopped working to continue having that cash work in the stock market. But the overwhelming consensus on online forums focused on financial independence is to avoid that strategy. There's a psychological boost that comes with entering retirement with no debt. And, beyond that, if a successful early retirement means not worrying about money, trying to time the stock market with mortgage rates seems the antithesis of that goal.
Paying for Healthcare
There's no simple answer for paying for healthcare when you're no longer on the company insurance plan. And, given Congressional bickering over the Affordable Care Act, what you can expect today is not what you should expect one, five or 20 years from now.
If you're young and relatively healthy, you may want to look into a low-premium, high deductible insurance plan on the open market. These plans offer low monthly costs – Mr. Money Mustache claims he spends $275 a month to insure his family of three. But you do need to make sure you have set aside enough money to meet the maximum out-of-pocket expenses for every year you are retired.
As we mentioned, a lot of things go down in cost once you stop working. Health care, unfortunately, is not likely to be one of those things.
You don’t have to immediately make massive changes to your day to day life. Indeed, financial advisors caution that such radical changes can be overwhelming and easy to abandon after a short period of time. Make smaller, incremental changes and set a schedule – in writing – of benchmarks you want to hit as you build up to the bigger changes you need to make.
Instead of overhauling every aspect of your financial life in one week, focus on the low-hanging fruit: if you stop at Starbucks every morning on the way to work, invest in a travel mug and start brewing coffee at home before you leave for work (Expert tip: set the coffee maker up before you go to bed each night, so you just have to turn it on when you wake up in the morning). If you eat lunch out every day, try brown bagging but then reward yourself with a lunch out of the office on Fridays.
The earlier you start planning for an early retirement, the better. But, as the saying goes, the best laid plans...
Most people see their plans for an early retirement derailed because they rationalize one more, blow-out vacation or one more new car when a pre-owned car will do. They tell themselves they'll get serious about financial independence after their next raise or their next bonus.
At some point, you have to jump into it and get going. Planning is only half the battle: implementing the plan and sticking to it is critical. And if you hit a setback, learn from it: don’t use it as an excuse to give up entirely.