The normal retirement age, as defined for us by the government, is 67 for those born after 1959. For those graduating college at 22, that’s 45 years in the workplace. Holy crap that’s a long time! Most people seem to think they are powerless to change this. Only those who receive an inheritance, come up with a great idea to sell for millions, or those who win the lottery can retire early. Why? Why go through the better part of your life working for someone else when there’s a much better option available?
A recent poll by Gallup found that 68% of workers are not engaged at work. Of this number, 51% of workers were simply not engaged, meaning they are unmotivated or unlikely to assert extra effort, while 17% were actively disengaged, or truly unhappy and unproductive. Why spend so much of your life doing what doesn’t make you happy? I am one of the fortunate few that love my job. But I still don’t want to work for that long!
The solution, is figuring out how one can retire early. All it takes is self discipline and foregoing instant gratification that has become the norm of today’s society. Seems so simple, yet few believe it’s even a possibility. It’s really not complicated though. Early retirement is nothing but a simple math problem.
Step 1: How much will you spend?
You can’t determine how much you’ll need to retire early until you know how much you’ll spend each year. Traditional retirement calculators default retirement spending to 80% of your current take home pay. For example, if you currently make $100,000 per year, you will need to replace 80% of that, or $80,000, annually in retirement. This is way too much in my opinion. First off, if you’re going to retire, and especially for early retirement, you should have your house paid off. This is the single biggest expense for most families. For me, my mortgage amounts to about 22% of my monthly expenses. Additionally, you’ll no longer be setting aside a percentage of your income for saving. Financial advisors recommend setting aside anywhere from 15-20% for retirement (much more for early retirement). On top of that, your daily expenses should decrease as you won’t have a daily commute that eats up lots of gas, and you won’t be eating out for lunch as often.
Take a good look at your expenses to figure out where you’ll likely be able to cut back in retirement. Everyone’s situation is different, so don’t just accept a flat percentage as the norm. Will you be traveling for months on end? Or will you be staying home playing pickup pickleball games for free? Get an idea of what lifestyle you want to live when you retire early, and figure out how much it will cost.
Step 2: How much can you save?
To retire early you’ll need to have a very high savings rate. You will also need significant savings outside your retirement portfolio. I’m currently shooting for a savings rate of 50% of my after tax, after 401k contribution, income. I’m currently at 38% after maxing out my 401k, and anticipate being able to hit the 50% mark in the next 1 – 2 years.
There are two ways to achieve a high savings rate. One, remember what it was like to be a broke college student and spend accordingly. Or two, increase your income through your current job or through side hustles. With either approach you choose, you’ll need to live well below your means. Two years ago I became the CFO of a company which significantly increased my income. I still drive the same car I bought after college 10+ years ago. My wife and I live in a 900 square foot starter home that we bought 9 years ago. We spend money on the things that matter to us – not expensive toys to impress the Joneses.
Step 3: Find your number
Now that you know how much you can save and what you’ll spend each year, the final part of the equation is figuring out when you can retire. There are several good retirement calculators out there. Personally, I like the Retirement Planner tool offered by Personal Capital. Using the Retirement Planner I can input my current annual savings rate, expected retirement spending, and retirement age. It will then run through 5,000 Monte Carlo simulations and give me a percentage likelihood of reaching my goal.
Did you come up a little short of your goal? That’s ok. Figure out how much more you’ll need to save to reach your goal. Then figure out a way through side hustles, achieving a promotion and pay raise at work, or by cutting back expenses to save more. Once you have a plan in place, continue to save aggressively and adjust as need be.
You Have a Choice
Because we live in the great country we do, opportunities to reach financial independence are abundant compared to other countries. Be it making more money through your current job or side hustles, or by living further below your means, you can retire well before you thought possible. You simply have to want it and be willing to make sacrifices. Are you willing to forego watching TV during the week so you can be more productive and earn more money? Are you willing to do without a fancy new car? A large house? A man cave with a 70 inch TV? It’s all about choices.
You will no doubt receive some flak from friends and family if you take the route towards early retirement. People don’t like those who challenge their beliefs. Who are you to retire at 45 on a normal income? There will always be haters when you choose to go a different direction from the crowd. That’s ok. You’ll have plenty of time to binge watch Netflix like them when you’re financially independent.
Readers, what are your thoughts on early retirement? Share your goals for achieving FIRE and how you plan to get there (or got there already).