A Beginner Guide to Early Retirement
Estimated reading time: 7 minutes
Explore the concept of early retirement and how it can provide maximum free time during your best years. Start saving enough money for financial independence now!
Early retirement is simply the process of retiring before the standard retirement age and often refers to retirements that start decades before the typical age.
An early retirement aims to provide the maximum free time during our best years of life.
After all, what is the point of saving bucket-loads of money for retirement only to be too old and frail to use it properly?
I aim to save enough money rapidly to retire from paid employment permanently.
This is not to say that I won’t continue to work after I reach the point of financial independence, but I wouldn’t have to.
The process for doing this is to drastically reduce expenditure so that you can save a large percentage of your salary (50% or more) for your early retirement.
The fundamental steps are:
- Live on 25% of your salary
- Invest the 75%
- Reach the point at which passive investment income exceeds expenses and
- Retire early!
They are the steps, and they are easy to articulate and difficult to argue with but incredibly challenging to implement well.
The Impossible Is Possible
Let’s start with common objections at this stage:
- I can’t live on 25% of my wage! I have debts and a family!
No one said this was easy; otherwise, everyone would do it!
Early retirement won’t happen unless it’s an extremely high priority and you are willing to make sacrifices.
Nothing is more important for me than spending my minimal time on earth in the manner that pleases me most, rather than being locked in a cubicle for all of my most productive adult years.
Average Family Budget
A typical family budget spends almost everything they earn.
But it doesn’t have to be this way.
The typical family budget is full of expenses that don’t need to be made.
For us, I was constantly buying lunch at work.
I have saved 44,000 over ten years by bringing my daily lunch to work.
It might require moving closer to work, selling a second car, and some significant sacrifices.
Still, when my partner and I sat down and decided to retire early so we could travel and enjoy life to its fullest, these sacrifices seemed extremely easy.
For an expensive hobby or time t, here is a free one waiting to be discovered.
- I don’t know anything about investing.
Several passive and low-cost investment vehicles like index funds don’t attempt to beat the market by paying expensive managers but track the share market.
Several studies have suggested that it’s increasingly difficult to beat the market regularly, much less pick a manager who will periodically provide you with above-average returns, and even less likely again to find one whose fees don’t eat away any of the gains made.
- What would I do all day if I didn’t have to work?
You don’t have to stop working just because you can retire!
You could do all manner of things that are made impossible by being chained to a desk all day:
- Charity work
- Running for local office
- Write without financial pressure
- Complete a marathon
- Travel
- Advocate for a disadvantaged group
- Become completely self-sufficient
- Sleep in
- Teach yourself new skills
- Whatever you like!
Start a proper budget and work like mad to reduce it as much as possible.
It’s also possible to keep spending at the same level but increase your income.
The problem with this technique is that it is usually much harder to do and the constant temptation to increase spending to match your new level of income – a phenomenon known as lifestyle inflation.
How Long Does It Take To Reach Early Retirement?
In ten years, I’m hoping for an early retirement.
I think it’s a reasonably achievable aim for people on an average income.
As an Australian, I earn an average wage and am on track for retirement in less than eight years.
I started my journey to early retirement in debt with a negative net worth.
The magic number is accumulating 30 years of expenses in your investment account.
This seems to be the level at which an adequately invested nest egg will never deplete itself (given historical market performance).
Over the stock market history, there have been very few periods in which a 30-year nest egg would deplete itself – check out the excellent tool firecalc.com to test the numbers for yourself.
A nest egg accrued beyond the 30-year mark will allow a more significant margin of safety or the ability to increase annual spending.
A 3% withdrawal rate is considered a conservative starting point.
The withdrawal rate is the percentage of the nest egg eaten annually.
Living On A Percentage Of Income
If you can live on 25% of your income for ten years, then you will have accumulated 30 years of living expenses, for example:
- Income: $80,000 PA
- Spending: $20,000 PA
- Savings: $60,000 PA
- Savings over ten years: $600,000 or 30 years of expenses.
Not Everyone Believes In Early Retirement
Early retirement is controversial but shouldn’t be
The reasons for the controversy are understandable but also frustrating.
I understand that for most people, it’s challenging to justify lowering the standard of living after fighting so hard to increase it for so many years.
I also understand the pressures of keeping up with the Joneses and that people like having four large flat-screen televisions in the house.
My question to you is – at what cost?
- What if there was a better way?
- What if you could be just as happy living a more spartan existence without pressure to compete as a consumer?
- What if you could stop working at the end of ten years, and you could stop working forever?
Plan For An Early Retirement Without Consumerism
Since simplifying my life, eliminating debt, and avoiding rampant and unthinking consumerism, I have become significantly happier and more satisfied.
I wake up with a smile, knowing my retirement is just around the corner.
You owe it to yourself to dip your toe into the early retirement waters and see if you like what you feel.
Discussion: What are you doing to plan for an early retirement?
Please leave your comments below.
Thanks for reading,
Mr. CBB
This was a post contribution years ago; however, the finance blogger has since retired his blog.
