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?
My aim in life is to rapidly save enough money to allow me to permanently retire from paid employment. This is not to say that I won’t continue to work after I reach the point of financial independence, just that I won’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 very basic 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.
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 be doing it!
Early retirement won’t happen unless it’s an extremely high priority and you are willing to make sacrifices. For me, there is nothing more important that being able to spend my very limited 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.
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 really don’t need to be made. For us it was constantly buying lunch at work – I have been able to find a saving of $44,000 over ten years by bringing my lunch to work every day.
It might require a move closer to work, the selling of a second car, and some major sacrifices, but when me and my partner sat down and made the decision to retire early so we could travel and enjoy life to its fullest, these sacrifices seemed extremely easy.
For ever expensive hobby or pass time there is a free one waiting to be discovered.
- I don’t know anything about investing
There are several passive and low-cost investment vehicles these days like index funds which don’t attempt to beat the market by paying expensive managers, but simply 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 regularly 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 beingchained 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 normally 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?
My aim is to be free in ten years. I think it’s a reasonably achievable aim for people on an average income. I earn an average wage for an Australian person and am on track for a retirement in less than eight years. I started this process in debt and with a negative net worth.
The magic number is to accumulate 30 years of expenses in your investment account
This seems to be the level at which a properly invested nest-egg will never deplete itself (given historical market performance). Over the history of the stock market in the US 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 greater margin of safety or the ability to increase annual spending. A 3% withdrawal rate is considered extremely safe, as a conservative starting point. A withdrawal rate is the percentage of the nest egg that is spent annually.
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.
Early retirement is controversial but shouldn’t be
The reasons for the controversy is understandable but also frustrating. I understand that for most people it’s difficult to justify lowering your 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 much simpler existence with no pressure to compete as a consumer? What if at the end of a ten-year period you could stop working forever?
I can honestly say that 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 at least dip your toe into the early retirement waters and see if you like what you feel. Are you planning to retire early?
Guest Post By: James blogs at Free in Ten Years where he documents his path to an early retirement. He is planning to retire at 38 by saving 75% of his income by being a frugal machine. He blogs about money-saving ideas, investing and avoiding consumerism.”
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