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?