You might think that in order to achieve early retirement, you have to embrace a harsh and Spartan lifestyle. I don’t accept that premise, and you don’t have to either. In fact, I believe the only way to really reach your early retirement goal is to learn to love the process. Suffering through your life is no way to live – even if it means you get to retire early.
Sure there are people who can live off of 25% of their income and bank the other 75%, but I’m not one of them. And I don’t know many other people who can do so either. Does that mean the rest of us have to remain chained to our jobs for the rest of our lives? Is the only choice between a life of almost complete self-denial or career slavery? I don’t think so. Here’s how you can achieve early retirement extreme and enjoy the process.
1. Decide, Commit and Declare
Think about what you want, why you want it and when you want it by. Write this all down. Then write down what your fears are. You are about to embark on a wonderful journey, but you will be out of your comfort zone. Your fears are going to creep into your brain every time things get a little tough. Those fears are going to try to convince you to give up and turn back. Anticipate the bumps in the road by writing down your fears. You’ll find that those fears are not quite as threatening as you thought.
Let’s say you want to retire in three years, move to New Mexico and become an artist. Why do you want this? What is standing in your way? What are you afraid of? Write this all down.
2. Play the Numbers
Once you are crystal-clear on your objective, timeframe and fears, you are ready to take this to the next level. You need to know how much money you need to retire, and the best way to discover that is to look at what it costs you to live now (in other words, what you spend). Then you can estimate what it will cost you to live in retirement. (We may have to come back and tweak your spending, but let’s start by being absolutely certain about what it costs you to live now.)
Many people think they know what it costs them to live, but please don’t assume you know. I like using You Need A Budget to track my spending. But you can use any method you like as long as you do this task.
While we are on the subject of numbers, don’t put your calculator away just yet. We need to look at your assets and the income those assets can generate.
Add up all your savings and investments and calculate what 4% of the total is. That’s about what you can expect to generate in withdrawals for income during retirement. So if your investments total $300,000, you can count on $12,000 in annual income from those accounts.
Now let’s consider income. When you pull the plug in three years, are you going to have any passive income such as Social Security benefits or pensions? Let’s assume for our example that you’ll be too young to qualify, so the only income you can “count on” is the $12,000 from your investments.
Now we’re getting down to brass tacks. You do a little investigation and you realize that you need at least $52,000 a year in order to retire to New Mexico as planned. You are $40,000 short. In order to generate an extra $40,000 in annual income, you’ll need an additional $1,000,000 in assets. (That’s because it will take $1,000,000 invested at 4% to generate that extra retirement income of $40,000.) I don’t know about you, but I would find it a little difficult to save $1,000,000 in three years. That boils down to saving $333,000 a year or close to $25,000 a month.
This is where the “gentle path” starts. You now get to prioritize which is most important:
1. Are you willing to delay retirement?
2. Are you willing to move somewhere other than New Mexico in order to achieve a lower cost of living?
3. Are you willing to work part-time in retirement?
4. Are you willing to live on $12,000 a year?
If the answer is “no” to all these questions, you have an untenable situation and there is no solution. That means you can’t achieve your goal of early retirement extreme. You must be willing to compromise. This is the situation that most people face when they talk about a big lifestyle change. It always boils down to compromise.
But let’s say you aren’t $1,000,000 away from your retirement goal. Let’s say you have $500,000 saved (which will generate $20,000 income at 4%) and you’ll have rental income of $20,000 a year. That’s a grand total of $40,000 in annual income. You sharpen your pencil and determine that you can live on only $44,000 a year. Now you’re only $4,000 away from your retirement income goal.
If you save another $100,000 you could generate that missing $4,000. That means you must save another $100,000 over three years. This is not an easy task, but it’s not impossible. We’re talking about saving $2,500 a month. This can be done, but I wouldn’t recommend you do so by going off the grid.
A balanced life is the best life, according to my experience. Cut what you can. Save as much as possible. Continue to compromise. Set down your plan and acknowledge your fears. By taking this approach, you’ll be able to retire early (if that is what you want to do) and more importantly, you’ll enjoy the journey. You don’t have to give up your life today in order to retire early.
What are your retirement plans? Did you retire early? If so, how did you do it?
Dansbooks says
Hi Neal–I’ve been reading your blog for a year or so now, since Jonathan at My Money Blog mentioned it. I worked full time for 12 years, until I was 36. I saved and invested in some speculative things, from real estate to private placements to limited partnerships, the latter with fairly small amounts of money ($2,500 to $20,000). Some failed; a few paid off big. At 36 I switched to working part time, two days per week, which continued for 23 years. A year ago I was laid off. Assessing my financial situation, I began a one day per week consulting position. That has continued for the past year, and I expect it to continue in the future. Rental income and investments provide most of my income, and will continue to do so. I have time for volunteer work–I serve on the Board of Trustees of my college, among other things–considerable travel, and I can generally sleep as late as I want six days a week. I was very disciplined in my earlier years; I studied tax, finance, investing, and anything else that could help me reach my goals. But I was able to be home much of the time my kids were growing up, and that was more than worth giving up shopping at Nordstrom.
Neal Frankle says
Hey Daniel. You get the Pilgrim Of The Year Award. well done! One question – what advice would you share with the readers?
Dansbooks says
Hi Neal–I’ve delayed responding because frankly, I could write a book about champagne living on a beer budget. I still clip coupons, buy on sale, and apply for (and receive) 5-10 credit cards per year–anytime I can get $500 cash or a free round trip flight. Of course, I don’t pay any fees, canceling the cards before the free year is up. Perhaps this example will give you an idea of how I operate: Last year I decided that a cruise to Alaska would be fun. I signed up with numerous sites that offer Alaska cruises, cruise lines as well as web sites like cruisecheap.com, alaskacruises.com, and several others. I quickly learned that the closer one gets to the cruise departure date, the lower the cost…if there are available cabins. I also knew that the opposite was true for airline flights–booking at the last minute costs far more than booking in advance. In my research, I learned that this year (2013), there were three major cruises leaving from, and returning to, Seattle late in the season–two on August 31 and one on September 1. They were Holland America, Norwegian, and Princess. That meant that in a 24 hour period, the three companies would need 8,000 clients to fill their ships. So in June, I bought two round trip tickets to Seattle for my partner and myself for August 31 for $198 each. Then I waited…and waited…and waited…and watched the cruise prices drop from $1,299, to $999, to $879, and down, and down…until just a couple of days before the cruises were leaving, Princess offered my partner and I an oceanview cabin for $499 per person. I grabbed it and had a fabulous week long cruise through the Inside Passage that cost others $1,000 or more for less than half the price–with cheap airfare in addition. And that is how I try to deal with all my financial matters: Never be cheap, but always be frugal.
Jesse says
I worked from age 13 to 26, and made about 15k a year. Invested at least 50-75% of my income. Retired at 26 and live off my rental income. I continue to live off less than 50% of my income. I have lived an above average lifestyle since I was 30. Before that my friends said I was too cheap and should spend more “you are justutting off your happiness.” All of them will work full time until they are at least 60 or 65. It is worth the short sacrifice not to drive the latest model car every couple years. I have more than any of them, and I don’t have to work ever again, and my investments will continue to grow much faster than I can spend.
Neal Frankle, CFP ® says
Do you work now for yourself? How do you spend your time? BTW, congrats on your success and bucking the “spend trend”. Nice job!