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Retire Early

Updated: Jul 29, 2020

If you look on the resources page, there is a list of blogs whose authors retired crazy young. And if you read through their websites, they all have the same approach. This is something I'm trying to emulate, and we'll see how it goes. Here's how you can get started alongside me.

1) Figure out a retirement budget, and from there, how much money you'll need to save up.

What do you think you might do in retirement? Would you work part-time for a while? Will you have a mortgage? Make your best guess. If you're frugal like me, maybe you'll estimate a budget of $25,000. If you want to travel and live large, maybe you want an income of $100,000. It's a very personal decision. Remember to take into account health care (if you won't have a job that provides it) and one-time expenses like a new roof or car.

Once you've decided on a desired income (which can be adapted as you get older and learn more about your money habits), you can easily calculate how much $$$$ you need to save.

The central idea of retiring early is that you will live off of the dividends/growth from your savings. For example, maybe you'll save up $1 million. If it grows 4% every year, you'll have an income of $40,000.

You can generally assume that your investments will make 3-6% every year. When you retire your money will be in a blend of stocks, bonds (lots of these!), and cash, so it should make a fairly steady income.

To calculate your quit-your-job bank total, divide your proposed income by 3%. To be extra safe, for example, for an income of $30,000 you would want to save up $30,000 / 0.03 = $1 million.

If you think that the stock market will do well and you could live off of less than that if necessary, try the calculation again with 6% returns. You would need: $30,000 / 0.06 = $500,000.

To summarize, this means that if you save up $500,000 you could probably retire and be okay. However, it's possible you would need to dig into your savings on a hard year, and then your resulting income would be lower in the future.

If you save up $1,000,000 then you will almost definitely be okay, and get a reliable income of $30,000. Your savings might even continue to grow (slowly).

The table below shows how many years it would take you to save a million dollars, based on how much money you're saving every day.

2) Be frugal and save as much money as possible.

Generally, people who retire early max out their 401(k) and IRAs. That means putting $25,500 every year into your retirement accounts. This money will be difficult to access in early retirement, but it has such big tax savings that it's still worth it to use them. You'll pay less in taxes if you put money into these accounts and the money growwwwwws without additional taxes.

$25,500 might be out of reach, but the more you can live without, the better. Saving more towards retirement not only increases your savings, but it also decreases your needed income. If you earn $50,000 and spend all of it every year (no savings) then you'll retire wanting an income of $50,000. Hmm. On the other hand if you earn $50,000 and save $25,000 toward retirement, then you get used to living off of $25,000/year. You'll be able to retire much earlier because you are saving more and spending less.

Based on your income, benefits, marital/family status, and whether you have a 401(k), you'll need to make your own decisions about saving. The bottom line is, save at least something and save as much as possible. Try to take it out of your paycheck before you can even access it (this is called "paying yourself first"). If you can max out both accounts, great! Contribute even more to a brokerage account (which you'll have to pay more taxes on).

Your 401(k) probably won't have that many options for investments. That's okay, just invest in the lowest-cost ETF they offer.

For an IRA or brokerage account, you have TONS of options. Almost too many. You can pick individual stocks (but be careful!) or invest in mutual funds or ETFs. You can do almost anything with your money. You could pick a sector, like Biotechnology, or a business size, like small-cap. Talk to a financial advisor if you have large amounts of money at stake. The general consensus is that all you really need is a low-cost ETF that is either all-market or an S&P 500 fund. Both types of ETFs tend to do very well and grow hugely on the whole.

Look for ETFs that have an expense ratio of less than 0.2%. Some have expense ratios as low as 0.01%, but they're rare. Vanguard has famously low fees, and you don't need a Vanguard account to invest in them.

Popular all-market funds: VTSAX, VTSMX, IWV, SWTSX

Popular S&P 500 funds: VOO, IVV, SPY

3) Account for all sources of income.

Keep in mind that we will (fingers-crossed) receive social security income starting anywhere from age 62 to 70. Even if you retire early, it will likely be a nice helpful chunk of money, just not enough to singularly survive on.

You'll have your retirement accounts, some of which you can take money out of early without penalty, and some of which you cannot. Learn about the best options for accessing money early here.

Maybe you'll get a side-job, like working part-time at Starbucks which also provides health insurance. Maybe you'll rent out a room in your house.

Keep in mind you may inherit some money eventually, but do not count on it. Unless your family is wealthy and has discussed giving that wealth to you, do NOT plan your inheritance into your budget. There may be less money than you expect, or unexpected gifts to charities and extended family. It also makes for a very messy dynamic, where you are waiting for your family members to die. Just don't think about it. Tell yourself that the money will go to charity, and then it's a nice surprise if you inherit after all.

In summary, to retire early follow these steps: Calculate your retirement number, save as much as possible, and account for extra sources of income. Then you'll just have to decide what you care about enough to pursue in retirement! You can do anything (as long as it fits in your budget).

How will you use your money? What's your magical retirement number? When are you hoping to retire?

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