A Beginners Guide to Early Retirement

Early Retirement-boat

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:

  1. Live on 25% of your salary
  2. Invest the 75%
  3. Reach the point at which passive investment income exceeds expenses and
  4. 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:

  1. Charity work
  2. Running for local office
  3. Write without financial pressure
  4. Complete a marathon
  5. Travel
  6. Advocate for a disadvantaged group
  7. Become completely self-sufficient
  8. Sleep in
  9. Teach yourself new skills
  10. 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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  1. Hi, I have been working on what this post is talking about for a year now, and have developed many strategies and ways forward. I plan to retire in 6-7 years from now. Most books on this topic that I’ve found are American, so I had to do a lot of my own research. I was wondering if anyone wanted to exchange contact information and share some ideas via email or messenger. I don’t know anyone else with this interest.

  2. We didn’t even think about retiring. During our 20’s and 30’s we were in our accumulation stage of life. Having babies, paying off the mortgage, a small savings account and a RRSP. We then used the equity in our home as deposits to buy rental properties. It wasn’t until about 6 years later, that the employed income was basically a hindrance. We were paying a lot more in taxes. We no longer qualified for child tax benefits or GST refunds. We felt like we were working for nothing. We did a trial run to see if we could live off our rental income for a year. We could..and that made the decision for us. I was 50, and my husband was 46. Once you are used to living frugally, I think you will rarely start wasting your money. Eventually our business debt will be paid off and we will have more disposable income, but we are content now, so I can’t see it really changing the quality of our lives. We are rarely bored.

  3. There are a number of retirement saving options available today.
    1. Investing in debentures are nothing but the bonds which proves profitable as very high returns can be earned, even more than a bank account with a fixed return. However, for that, the bond has to be kept for an entire term by the bond owner.
    2. Individuals who are already near to their retirement can benefit by investing in FDI insured accounts. Here, savings accounts, money market account and time certificates are included. These three offer comparatively low rates of return; however, all the three are insured.
    3. Investing in equities gives a shareholder ownership in a company for long term venture. As per the financial status of the company, value of the stocks fluctuates.
    4. Mutual funds do not have any guarantee as far as principles are concerned. They are usually bought by the investors in return of large sum of money in return of which, the investors get stocks and bonds.
    5. Investment in real estate isn’t included in the investment options for retirement. Nevertheless, as per IRAs and by following the exact IRS strategies, good returns can be earned.

  4. I’ve gotta say, after reading this, I feel very compelled to work toward early retirement. But I need details… how simplified do you have to make your life for this to work? Sans dishwasher or extra living space? Eating mediocre homemade lunches vs yummy homemade lunches? I guess depending on income, the sacrifices would be different for every person. This post will definitely spark a discussion between my husband and me tonight… thanks for sharing!

    1. It’s a great question you pose Joanna – it really depends on your particular situation. Normally there wouldn’t be a great deal of difference between a budget homemade lunch and a gourmet homemade lunch – the biggest factor would be that you’re making it yourself and therefore saving a boatload!

      If you can save 25% of your salary then you will have saved enough to retire in 10 years provided that you can continue to spend at the same rate. So it doesn’t really matter how you get it done provided that you stick to the percentage that you’ve set yourself. If you can only do 50% whilst maintaining a lifestyle that you can handle, then so be it. For me, 25% is manageable – although difficult to stick to with my partner also involved in the picture.

      A dishwasher might tip you over or not it just depends. The first step is to work out a very clear budget based on your income and previous spending habits and then work out your spending percentage – and adjust from there.

      If you already have a dishwasher, it won’t save you any money to get rid of it but if you don’t it might.

      Visit my site or drop me an email if you would like any clarification about your question.

  5. We went a different route: we started an office cleaning business (worked our ‘butts’ off for a few years getting it built-up) trained some of our people to manage our various accounts; and within a few years were working about 20 hours per week while earning a very substantial income. That gave us an early semi-retirement. The next step was to build the business to the point where we’re hardly involved at all, overseeing marketing and managing the managers.

  6. Great guest post! I’m on a similar trajectory, except we’re trying to just REDUCE the amount that we have to work. We’re both lucky to be in fields where we can commit to less work if we chose, so our goal is to get to the point that 75% of our income is from passive sources then make massive work-live changes.

  7. Nice guest post! I’m on this same path. Our goal is to actually reduce the amount we work….not get rid of it altogether. If we can get to this point and still save toward lowering the amount we “have to” work further, we’ll pull the trigger on some wholesale work-live changes.

  8. Very inspiring post. I love how you came up with a solution for each excuse or barrier. I hear a lot of people say ” i can’t live off of X”, when really they can. It is always an interesting exercise to see where you can cut expenses and then see how much you miss them.

  9. I agree with the action but it is difficult to put into play. My husband and I will be retiring at 57. Two years after we expected to. However the living off 25% of your income is a joke with children still in the picture. We will be retiring with two younger children in the house, and living off of rental properties we have. The adjustments will be daunting, but there is a plan and always has been. Putting money aside each pay check ( not 75% thought) and investing the money. Now if you could find a way for adult children to leave the nest and stay away I would be really happy to hear your plans there!


    1. Thanks for your comment Farmgirl – children in the picture makes the whole thing much more difficult both because it makes it difficult to earn two incomes instead of one, and because children are expensive – but it’s still possible! It’s certainly much easier if the first child arrives in year nine of ten than year one. I wouldn’t say it’s totally impossible with children, but you’re right – it’s much harder.

      It’s all about the sort of sacrifices you are willing to make. For me, I’d prefer to have my child go without the latest toys or clothes if it meant I would be an active parent for the vast majority of their childhood because I didn’t have the financial pressure to go to work.

  10. Critics who say early retirement can’t be done by the average person is just jealous of those who can :0) It’s suppose to be difficult, but if you do what others wont, then you’ll achieve what others don’t 😉 I think working 10 years to retire forever on is a great goal. Personally I’m a little less ambitious lol, I’m planning 15 to 20 years for myself, but if I ever get a spouse and become part of a duel income household then we could probably get there faster 🙂

  11. I would love to retire early, but right now its an uphill struggle to create some side income so that I can focus on building up passive income. I’ve done everything I could to cut back on expenses and do some saving on the side, but when it comes down to the core of my issues its the lack of money that’s holding back early retirement. You have great ambitions, I really hope you achieve everything you aim for!

    1. Thanks Veronica – multiple income streams make the whole thing much more attainable, but from most of what I’ve seen it’s drastically cutting back on spending that makes early retirement possible. It’s the sacrifices that make it achievable – if it’s truly lack of income that is the sticking point, keep working on your passive income streams and you’ll get there!

  12. James, they should hire you to teach a mandatory class at universities. If you could graduate and follow your philosophy, it would make a difference to lots of people. Some would choose the traditional route, but many others have never heard anyone who has done this and wouldn’t think it possible,even thought the math is pretty simple. We just aren’t conditioned that way.

    1. That is very kind of you Kim. I think we should be doing more to educate children about financial matters – particularly the effect of long term savings and living within one’s means. It’s powerful stuff that has the power to radically effect how our lives play out. It’s so easy to get locked into a cycle of consumer debt and never be able to save for a traditional retirement, let alone an early one.

  13. The only thing I would change is the list of things made impossible… so many of those are possible, and when you set out to achieve them, the skills that you learn along the way will often further your own financial goals as well.
    – learn a new skill – this can either save money as DIY at home or translate into greater income at work!
    – run a marathon – totally doable working a desk job. I’ve done it many times over now. And the discipline that it takes to do this directly translates into the discipline you need to reach financial goals. (I wrote a post on this last week, actually…)

    Few things are truly impossible. Just my $0.02. =)

    1. That is a good point. Most of those things are possible while working full time, just a whole lot harder than if you didn’t have to work for a living. It’s a good point you make though – it’s not healthy to put these sorts of mental barriers in the way. Thanks POP

  14. Great post! We firmly believe in early retirement. We’re going about it slightly differently, as real estate and rental income play a part in our plans, but with any luck, we’ll make it there one day as well. 🙂

    The thing that most people don’t get, is that even IF you don’t “make it” to early retirement, the money you end up saving along the way puts you in a great position anyways. And what are you sacrificing to achieve those savings? For us, it’s been mostly achieved through giving up crappy TV shows, unhealthy junk foods, and sharing a car in transit-friendly Vancouver. It’s a win-win attempt.

    1. AMEN! Couldn’t have put it better myself. I’m giving up absolutely nothing for a shot at not working for my whole life. I’m happier and healthier and life is good.

      I don’t miss buying expensive meals or high tech gadgets one iota.

  15. I guess it comes down to a difference of opinion over definitions. I think that if you keep working after you retire, you aren’t really retired. My grandfather “retired” 4 times! And yet he kept working at what most people would consider low-paying and menial jobs all the way up until he got to sick to work a year before he died.

    1. I agree that if you reach financial independence and keep working then you’re not retired. But you could if you wanted to, which gives you more options than most people. You’re used to living frugally and could continue to do so ad infinitum if you chose to. For me, I think that once I get to the point of financial independence I will probably work long enough to be extremely safe in my early retirement – and then quit permanently.

      I will keep my mind open, and if I’m still loving work at that stage, of course I won’t quit, nor will I consider myself retired. Just financially independent and capable of retirement at will.

      1. Maybe it’s time to retire the word retire. I agree that financial independence and having options is a laudable goal and one that is better to have early than later.

        Personally I don’t love work or even partuclarly enjoy working. But I like it more than not working. It’s the lesser of two evils. 🙂

  16. I am not really trying to retire early. Having three kids puts a bit of a hamper on that, as well as running our own business. I do agree though, that living a life of frugality, along with increased income really is the way to go in order to make decent financial headway. Your spending, whether you like it or not, reflects your values. I’d much rather save our money and not have the latest and greatest so we can have a better retirement and future.

    1. It’s certainly not for everyone, but some of the necessary components like frugality are financially healthy no matter what your goals. I think it’s actually much more satisfying to find fun in the world by exploring and taking advantage of fun that you create with people around you rather than lose yourself in gadgets and modern ‘conveniences’ – which make us ever lazier and ever less able to do things for ourselves.

  17. Fascinating idea – I’ll have to sit down and see just how much of our salaries Mr. Canuck Buck and I are spending – and what we’d need to do if we wanted to get it down to 25%!

    1. It’s totally worth the time to do the sums. It shouldn’t take you too long – maybe a couple of hours. We found when we started to run the numbers that it was much more in reach than we initially thought. If you do run the sums and work out that with a few adjustments, you could be retiring within a decade – it’s totally worth the two hours!

  18. People are full of excuses, “I’d love to live like you but”… at the end of the day, if you’d love to live like me, or James, or anyone trying to reach financial independence early, you would be taking action. Some people are perfectly fine with working for 40 years to buy too big of a house and a lot of stuff. I respect that but people who are complaining about their life situation and don’t do anything to change it annoy me. Great post.

    1. Thanks Pauline. It’s definitely not an easy life choice during the period leading into financial independence and as you say, it requires sacrifice and dedication – and most of all action. For me, the light at the end of the tunnel spurs me on and keeps me on the right path.

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