It might sound like fantasy, but early retirement is actual. For me, and very likely you. The way I figure things, if I play my cards right, Mrs. Impersonal Finance and I should be able to retire comfortably in about 10 years. This will put our retirement just short of us turning 40. Now, it wouldn’t be easy, and would require significant work on our part. It also assumes we would continue to progress in our careers (provided things go according to plan, we will have a significantly increased income in the next couple of years). Considering we had about $70k in debt around our 26th birthdays, this really isn’t too bad. That would mean around 15 working years for me, since I went to grad school, and about 17 for the Mrs. Like I said, this would be a comfortable early retirement. Nothing extravagant, but we wouldn’t go wanting. So, how would we do that? How would we be able to retire at 40, a full 25+ years before the average American?
Live below your means. Here’s the thing everyone knows but not everyone acts like they know- if your expenses are equal to or greater than your income, you’re never really going to get ahead. It might feel great to have the latest fashions, newest technologies, bigger house, and eat out several times a week. But you won’t get anywhere doing that, and you’re going to be working until the day you retire. And you likely won’t be ready to retire. One of the things that always seems to pop up in politics is the notion of generational theft, where seniors are robbing the younger generations. But, I’m not talking about politics here,. Think about that term, and how you live your life. Are you stealing from your future self to pay your present self?
Take advantage of opportunity. You know that old saying “they wouldn’t know a good opportunity if it jumped up and bit them on the ass?” Does that apply to you? Do you take advantages of the opportunities afforded you by virtue of living in America (or Canada. Some of you may live elsewhere, but the vast majority of people who read this blog live in America). I’ve written about how I’m in law school, and I’m not paying a cent for tuition because my employer covers it. I may never use my JD, but I’m learning about a lot of things that are going to save me money, from estate planning to taxes, to my basic rights as an American. I firmly believe education is key to a more successful life- and not just formal education. People are afraid to invest in the stock market, or get into real estate, or save money on taxes, and what is the most common excuse? They don’t know enough about it. There is no reason this should be anymore. Internet access has changed education to the point that some of the most prestigious universities in the world offer free courses from the comfort of your own couch. From economics to finance to biology to astrophysics. If you don’t know something, it’s not because you don’t have the opportunity to learn it, it’s because you don’t want to.
Invest. I’m not an investment professional. I don’t invest in hedge funds, and I’m not able to value companies like Aswath Damadoran. I don’t need to, and neither do you, thanks to a man named John Bogle. If you’re unfamiliar with him, he is basically the father of index funds. An index fund provides immediate diversification. It basically is like investing in all of the companies that create a certain sector of the stock market. An additional benefit to index funds is their fee structure, which is massively lower than a fund that has active management. Even a Vanguard Target Date Fund has low fees, and is comprised mainly of index funds. Do you avoid putting money into a 401(k) or Roth IRA because you’re afraid that if the stock market crashes, you’ll lose it? If so, that’s not a good move on your part. The stock market probably will crash a couple of times in your investing lifetime. The bank isn’t a better investment choice, though. You’re not going to get much if you save a bunch of money, but leave all of that in a savings account. You’ll likely lose money due to inflation. The stock market, while volatile, has historically been one of the best hedges and protections against inflation, since as the value of a dollar decreases, the price of any given stock will typically increase. So, in order to get the serious kind of wealth that will allow you to retire early, you will have to get over any fear of the stock market. *
Use debt to your advantage. Smart people are terrified of debt. Smarter people utilize debt to their advantage. The 30-year mortgage hasn’t always existed, and it’s actually a rather new device that helped the massive growth of the middle class over the latter half of the 20th century. If you couldn’t take a mortgage out on a home, do you think you would be able to afford to own one before you turned 40 or 50? Some of you might. Others, myself included, would not be able to. But, we have mortgages! Rental property can be an excellent way to grow your wealth. Not only can it provide you with additional monthly income, but it can build equity in a home at no cost to yourself. A lot of folks are afraid of real estate speculation since the housing bubble collapse. But, those prices were driven by subprime mortgages. People were getting approved for massive amounts of money without any real way to afford it. You’re not speculating in real estate if you do your research.**
Live simply. It’s easier to live below your means if you commit to living simply. Lifestyle creep is a killer, and it’s hard to see because it’s a creep. It happens slowly. One of the gifts I received over the holidays was a magazine subscription. It was a very nice gift, but in all honesty, I don’t have as much time as I would like to read a magazine every month. When I do sit down to peruse it, you know what I see? Ads. Every other page ads screaming at me to buy something I don’t need. Waste my money on something I don’t want. Pictures telling me how my clothes aren’t cool, or how I’m going to be the hippest kid on the block if I just buy this one product. And, you know what happened to me? I began to want those things! I fell for it. I began to justify the purchases with that little phrase that creeps into your head “I can afford it.” Yes, I can afford it, technically. But not if I am going to get to where I want to be. Now, of course if you’re one of those Apple fanboys, and where you want to be is in line 2 weeks early for the iWatch or iPhone 6, that’s all you pal. And you might be able to afford it and get where you want. But realize you don’t need a bigger house, new car, or expensive accessories to live a happy life. There are people all over the internet who succeed in this area.***
* If you’re interested in learning about investing, read some Ben Graham, John Bogle, or check out Joshua Kennon’s blog.
**If you’re interested in learning more about how to be successful in real estate, check out what Charles has to say. Smart dude.
*** Check our The Frugal Farmer, Mr. Money Mustache, Johnny Moneyseed, or just google it.
Do you think you will be able to retire early? If not, what’s holding you back?