What Does It Take to Retire Early?
This post will be more applicable to people less than 40 years old, but the discussion may be useful for anyone looking to retire anytime. I got a question about how we were able to retire in our mid-50s, ten years earlier than the average retirement age without any employer paid pension or health care benefits.
Paying for health care had not been a problem for us the last three years, but we have just been informed by our insurance company that we will not be able to keep our current affordable policy when the new health care law starts in 2014. So this is an area of concern for us as our premiums will rise considerably. I hope we do not have to go back to work because of the new health care law. However, we do have some time to see how the new law shakes out as Maryland is one of the states that allow people to keep their current insurance plan until their anniversary date in 2014. For us that is in the second half of 2014.
Health insurance aside, there are many things we did that enabled us to retire early; so many that I could write a book on the subject. But there are a few important things that are essential to have any chance to retire before age 60.
They are:
1. Start early,
2. Make early retirement the most important financial goal in your life,
3. Live below your means.
Following Item 1 is the easiest way to retire early. This is because of the law of compounding. If you start saving for retirement in a consistent manner before age 30, it will be much easier to accumulate the asset base required to retire early (or for many people to retire at all).
I wrote about the topic of “the cost of waiting” in regards to retirement savings a couple years back in this post. To summarize, when starting with zero assets, because of the law of compounding, in order to save $1 million by age 55 (assuming an average annual total return of 8%), a 25-year old must save $671/month, a 35-year old must save $1,698/month, and a 45-year old must save $5,466/month. For most families if you start your retirement savings after age 30, retiring early becomes almost impossible.
Item 2 seems obvious. But even if you manage to start your retirement savings plan in earnest before age 30, most people never get beyond step 2 as soon as something expensive comes up that they or their spouse want to buy (usually because everyone else they know has one, so it is viewed as a necessity). As such, because most people do not take item two to heart, item three, living below your means, is also not followed.
So, in the end, retiring early or retiring at all almost always comes down to religiously following item 3……for decades. With the current consumer culture in the US, this is much easier said than done.
But what does” living below your means” really mean? A lot of people (usually sales people) think this means, if you qualify for “financing” something you want to buy then you are living below your means. Unfortunately, to retire early means living below means the old fashioned way; by paying cash for everything.
You may laugh but this is the way almost everyone lived in the United States 100 years ago. I know paying cash for everything means you will not be living in the same style as your friends and neighbors, but that is why internalizing item number two above is so important, so you can ignore the way your friends and neighbors live. They do not have a goal of retiring early (most will come to realize too late that they had no long-term financial goals at all).
When I say pay cash for everything, I mean almost everything. There are a couple exceptions. A good way to determine if you should finance a purchase or pay cash is whether the item you are purchasing will go up in value over the long term.
Obviously cars, boats, and furniture should not be financed. My first car I owned was not until after I graduated from college in the mid-1970s. It was a 1965 Mustang that I bought for $800. My first apartment was furnished from yard sales back when yard sales only sold things Good Will Industries would throw out. Of course, we paid $2,500 cash for our first boat (a 33-year old 25-foot sailboat) when I was 45 years old.
Housing is something that can be financed as it should go up in value over the long term.
Although most financial securities do go up in value over the long term, publicly traded securities can be incredibly volatile at times. So much so that I would not recommend using borrowed funds to buy them. It is too easy to panic during market downturns and sell securities at a loss.
One other item that can be worth financing is a college education. But this is an area where you need to use some common sense. In years past people could get a college degree in almost anything and substantially increase their lifetime earnings. But with the proliferation of so many college graduates in recent years (due to easy financing) that is no longer true.
If you intend to get a degree in engineering, science, accounting or something similar, you will very likely increase your lifetime earnings so much that you could pay off your college loans many times over. However, if you have a strong interest in 19th century middle-eastern music or modern gender studies, I would think twice about expecting to obtain a job that will increase earnings enough that will pay back the cost of this education.
To retire early start saving for retirement early and do it consistently every month year after year. Saving money is more important than maximizing asset returns; you have control over the former you do not have control over the latter. Do not spend your retirement savings for any reason, even if you lose your job. Do not borrow from your retirement savings for any reason, even to buy a house. You must learn to live below your means your entire working life.
There is an old axiom of life that is as true as the law of gravity; “If you live ABOVE your means early in your life, you will be required to live BELOW your means later in your life.” You do not want to be forced to live below your means later in life.
Tomorrow I leave for the Bahamas, so next month I will start writing more posts about sailing in the Abacos. And I will post more pictures.
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