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Retiring Early – Our Story

This post is about how my wife and I managed to retire about ten years earlier than the typical retirement age of 65. Some of the things we did will seem inconceivable to some readers, but the choices people make early in their working lives ultimately determine when they will be able to retire. Perhaps this post will inspire people to re-assess some of their life choices.

Most people believe that, unless you are either wealthy or very lucky, it is simply not possible to retire early in America today. If you are 40 years old, have 3 young children, and have an annual income of $22,000, in other words living near the poverty level, then early retirement may not be realistic for you. But for everyone else, early retirement is possible. The only road block is how bad you want it.

Retiring early is not about amassing millions of dollars at a young age. It is about accumulating just enough assets to allow you to live a comfortable and enjoyable life without the need for earned income. In other words, it is about having financial freedom on your own terms. For some people, this may mean having a net worth of $10 million or more. For others, this may mean having an asset base in the lower 6-digit range. It all depends on what makes you happy and to some extent where you live (however you can change where you live once you retire).

So the first step is to determine what asset base is necessary for you to retire at a certain point in time in the future. The way to determine your required asset base is to have an idea what your annual retirement expenses will be. This is difficult to know when you are young as your interests will change over time. The best way I know to estimate your retirement living costs is to use current living expenses and then make adjustments to them that represent how you see yourself living in retirement. You can read this post to see how I recommend you track current living expenses. After reducing your estimated retirement expenses by any annuity income you expect to receive, you can apply the 4% rule to get a rough idea of what your asset base needs to be. And, of course, the estimated asset base needs to be adjusted for inflation to allow for the planned early retirement date you have chosen.

After going through this exercise, you may find that the asset base required will seem so large you may think, ‘this is impossible so why even try.’ This decision makes it easy to continue living the way you have been and not make any changes. I would encourage you not to do this. Even if you decide the numbers are so big that early retirement is not a realistic choice for you, this is still a valuable exercise to go through. This exercise should at least make you think about how you plan to reach your retirement goal, no matter what age it may be. Unfortunately, this first exercise knocks out about 95% of the population from even considering an early retirement. But if you are still curious about retiring early or just want to peruse the steps we took, read on.

Assuming you are not expecting any significant changes to your financial lot in life, there are just two ways to retire early (or, for some people, retire at all).

• Increase your income while keeping your living expenses the same, or
• If increasing your income is not possible, then lower your living expenses.

As you read about our story, you will quickly see that we heavily favored the latter of the two choices. This is the path most people choose because they have more control over their living expenses than their income.

In our case we achieved early retirement though a combination of increasing income, long-term financial discipline, and perhaps some luck.

We were not lucky in the sense that most people think. My wife and I do not have employer provided pensions, we did not cash-in a bunch of corporate stock options, and we did not win the lottery. I did receive some assets from my parent’s estate which were not insignificant, but it was nowhere near enough to retire on. The overwhelming percentage of the retirement assets that my wife and I have accumulated came from savings from our earned income and through intelligent investing over 20 years.

However, I would say we were lucky in a few ways:

1. My wife and I, meeting relatively late in life, did not have any children, so this area of expense did not exist for us. (I realize some may not view this as a ‘lucky’ development, but I am only speaking from the standpoint of saving money).
2. Education costs were much lower 20 years ago relative to income than they are today. As such our college loans were easier to pay down than today.
3. My wife and I were not highly paid individuals, but our college degrees did allow us to obtain positions in the corporate world with higher than average pay. And jobs were always available. My wife and I were constantly changing jobs to increase our income.
4. But the luckiest card we drew was our birth dates. We are part of the baby-boom generation which has lived most of their adult lives in a time of unprecedented investment returns (from both stocks and real estate) which are unlikely to be repeated anytime soon.

Luck aside, I would say the two most important criteria that made early retirement possible for us was:

1. My wife and I view money the same way, and
2. Making early retirement our most important financial goal.

I dated a lot of women when I was single. The overwhelming majority of them (and frankly people in general), I believe, view money much too frivolously. That is, they see money as something to spend rather than something to save (although this may be changing). Twenty years ago people’s attitude seemed to be “we can always make more money tomorrow.” This attitude is not conducive to saving for any retirement; let alone an early retirement.

When I met my wife she was struggling to pay off her school loans and other debt. But I could immediately see she had the same respect for money as I did. When I was 40 years old and my wife was 35, I made her sign an oath in blood (figuratively speaking of course) that we would make retiring before my 60^th birthday, not just our main financial goal, but our only long-term financial goal (and, yes, I made her agree to this before we got married). This may seem rather passionless to some people, but differences over money are one of the most common reasons that marriages end in divorce. I was not going to be one of them. In any event, by this time I knew my wife’s values well enough that I knew this would not be a problem.

I am telling you this to emphasize the kind of dedication required to make early retirement happen. If you do not have the dedication, it will be impossible to maintain the long-term discipline necessary to reach the goal. In practical terms what this meant to us was that every major financial decision we made was measured against our goal of early retirement.

Being a financial analyst by trade, I had worked out exactly how much we needed to save every year to reach our retirement goal. To save the necessary funds annually, we had to limit our living costs in ways that most people at our income level would not even consider. What lifestyle changes did our early retirement goal require us to make? I’ll give you a few examples of how we handled some of the larger expense items:

• We always bought used cars about 4 or 5 years old. I bought a 1998 Honda in 2002. I still have it today. It has 188,000 miles and it is still running just fine. Over the last 10 years I could easily have bought a new high end Lexus, but I did not. Also, on more than on one occasion, while at an event at a friend’s house, I would hear someone say, “Whose beat up Honda is that in the driveway.” Most people we know could not fathom hearing a statement like that.
• For our first 10 years together my wife and I only took out of town vacations to visit relatives. There were no Caribbean cruises, Colorado ski trips, or trips to Europe.
• We only bought homes that were the size we needed to provide for our daily needs. We did not buy homes that could accommodate a sleepover for every living relative. A couple times when we moved out of these “starter homes,” we rented them out, and moved into another “starter home.” (Also, our first couple homes we occupied had auxiliary rental apartments which reduced our out-of-pocket housing costs even further). Most people take the money from their starter home, add to it whatever savings they have (or more likely get a bigger mortgage), and buy a bigger, more “prestigious” home. There is nothing wrong with this, but it makes reaching retirement goals that much harder.
• This one will really shock some readers. My wife would occasionally buy clothes at the Goodwill store. I have to say she was truly amazing or maybe just lucky. There was a Goodwill store in Annapolis one block from a boat store that I frequent (this boat store only sells used parts at huge discounts). While I was in the boat store, my wife would browse around the Goodwill store. She almost always came out with some outfit from a high end department store that had hardly, if ever, been worn. The price at the Goodwill store was probably 10% of the high end department store price. I guess the 1% crowd sometimes buys things they don’t need.
• This last example is one that may be the most difficult for most people to believe. Neither my wife nor I have a “Smart phone.” We surf the web and get our e-mails “the old fashion way.” We get them at home on our laptop (my wife and I share the same PC).

The financial discipline as illustrated above allowed us to save a very large portion of our earned income every year. In the first few years, we saved about 25% of our gross income. When my wife’s school loans were paid off, we bumped it up to 30%. When we sold our house in Washington, DC in 2002, which allowed us to pay off our Annapolis home loan, we started saving over 40% of our gross income (not including corporate matching funds). Every year when either of us got a raise, the additional take home pay went straight into savings. As you can see, saving was pretty important to us.

This savings rate allowed us to max out contributions, not only to our respective employer 401(k) accounts and our Roth IRAs, but it also allowed us to save considerable funds outside our retirement accounts. Saving money outside of retirement accounts is vital if you plan to retire early. Importantly, all these savings were coming out of our earned income. We left all our investments alone to continue re-investing the annual income they were providing.

Because of our financial discipline, and practicing all of the retirement planning concepts described in this blog, by 2006 our retirement asset base was doing much better than I had anticipated. We had bought our real estate at the most opportune times in the 1990s (this was not due to luck as described in many earlier posts such as this one). We avoided the dot-com stock market bust (this was also not due to luck as I described in this post) and our stock and bond portfolio income was left to compound year-after-year.

I point this out because when you start to accumulate sizable assets, it gets harder to maintain the savings discipline. You start thinking, wouldn’t it be nice to have such-and-such. If you are not careful, your retirement plans can easily get side tracked. I will describe a perfect example of where this could have happened to us. In 2006 we were 12 years into our 20 year retirement plan. At this point our net worth was about 14 to 15 times our gross annual income. Using a football analogy, I knew we had the game of early retirement won; we just had to hold onto the ball and run out the clock. In other words, don’t do anything stupid. However, when you have been deferring gratification for so long and see how all your friends are living, there is a very big temptation to take your foot off the savings gas pedal and spend a little.

In 2006 my wife wanted to expand our home in Annapolis. She wanted to add a large addition onto the house. This expansion would have cost between $150k and $200k. And there was no question it would have made our home a much more comfortable place to live. I said to my wife, “Honey, we can do the expansion if you want, but remember we are only 6 years away from never having to work again. If we add this addition to our home, we will have to push our retirement date back at least 3 more years. It is your choice so choose wisely.” When my wife heard the words “PUSH BACK OUR RETIREMENT DATE,” She looked at me and said “no, I do not want to push back our retirement date, not even ONE MORE DAY.” Of course she was sad that we were not going to expand our admittedly very modest home, but today she is very happy that “she chose wisely” because we do not have to work. We do what we want, when we want. And that was the most important thing for us.

I suppose others might have considered this same scenario and decided they would rather have the house edition and work 3 or 4 more years. There is no right or wrong answer here, just choices. But to achieve the goal of early retirement, the goal has to be measured against and ultimately be more important than any other major financial desire you may have.

The last chapter in our early retirement journey involved the 2008-2009 financial crisis. Obviously this was a period that made everyone nearing retirement very uncomfortable. We were no different. However, this was when all the market study on behavioral finance that I had read over the years really paid off. We got through this period unscathed because I knew not to panic. In early 2008, in advance of the crisis, I had adjusted our portfolio such that I knew I would not panic. In fact I viewed this period of high market volatility as an opportunity.

The 2008-2009 financial crisis actually ended up giving us one last final big push toward our retirement goal finish line. The crisis enabled us to increase our financial assets by 20% (including our monthly contributions) by the end of 2010. This increase allowed us to move up our retirement date by two years. You can read the details of how we managed this by clicking here.

In ending this post let me say that most people that know me, think of me as the last of the cheapskates in America. I suppose this is true. And most of them do not want to emulate me in this way. They feel that we are just missing out too much on life. They may be right, but it is all how you view the world and on what terms (or rather whose terms) you want to live your life. Every once in a while, when I happen to get caught in rush-hour traffic, I wonder how people can do this day-after-day, month-after-month, year-after-year.  And it is on these days that I think to myself, “Man, am I glad I saved my money; I must be the happiest guy on earth.”

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