“I’m never going to be able to retire.”
Have you ever mumbled this to yourself?
If you have, you’re not alone.
Over 1/3 of all Americans don’t believe they’ll have enough money to live off of in retirement. Ouch.
With all the pessimistic view on retirement, then how in the blue blazes are there outliers that are able to buck the trend and retire in their 30’s?
While they may be on the extreme side of retiring early there’s a lot to be learned from them.
So yes, even if you are one of pessimistic souls that believes that you can’t retire early, here are 7 simple early retirement strategies you can implement today.
1. Know Your “Numbers”
Your “numbers” are the amount of money that you will need live on in retirement. There are two of them,
- The annual amount of income you will need to to live on in retirement, and
- The size of the retirement portfolio that will be needed to generate that income.You have to start with the income number, since that will determine how large your investment portfolio needs to be.
Calculating your needed retirement income
The conventional wisdom is that you should plan to be able to retire on an income that is 80% of your pre-retirement income. That’s not bad since it will keep it simple, but you may want use that as a starting point only.
Depending on what your plans are for your life in retirement, the actual number could be higher or lower. For example, if you expect that health insurance will be more expensive than it is now, you’ll have to make an upward adjustment. If you expect that your housing will be lower, due to either downsizing to a less expensive home or paying off your mortgage, you can make a downward adjustment.
Once you have your income number figured, you can then calculate the size of the investment portfolio that will be necessary to produce that income.
Calculating your needed retirement portfolio amount
This is where another convention comes in handy. It’s called the safe withdrawal rate, and it’s loosely based on the idea that if you withdraw 4% of your investment portfolio each year as income, your portfolio will never run out.
This connection is probably based on the expectation that the portfolio will produce an annual rate of return of somewhere between 6% and 10%. That means that not only will there be enough income to cover your withdrawals, but enough return that your portfolio will keep growing.
Using the 4% safe withdrawal rate, we can calculate that whatever your necessary annual income number is, you can multiply it by 25 to determine how large your portfolio will need to be. 4% is 1/25 of your portfolio, so if you create a portfolio that is 25 times larger than the annual income requirement, you’ll arrive at your investment portfolio number.
So let’s say that you will need $40,000 in investment income to retire. In order to calculate how large your portfolio will need to be to produce that income within the scope of the safe withdrawal rate, you can simply multiply it by 25. In this case, $40,000 X 25 = $1 million.
But we’re not done yet.
Calculating inflation into the mix
You’ll also need to factor inflation into your plans. If you’re 30 years old, you want to retire at age 50, you’ll have to calculate – approximately – what inflation will do to your needed $1 million investment portfolio over the next 20 years.
There’s no way to know what inflation will be in the future, but you can estimate it based on past history. You can do that by going to the Bureau of Labor Statistics inflation calculator, and tracking what inflation has done over the past 20 years.
Using the inflation calculator, we can see that $1 million in 1995 will require $1.54 million to maintain equivalent purchasing power in 2015. We can project that number forward 20 years to 2035, and use $1.54 million – or roughly $1.5 million – as the target number for your investment portfolio.
And not to make matters even more complicated, but you may also need to plan for contingencies in your income number too. If you plan to purchase a boat or an RV, that will have to be reflected in the size of your retirement portfolio.
2. Lower Your Basic Cost of Living
Simply put, the less money you need to live on, the more you’ll be able to save, and the sooner you’ll be able to retire. Keeping your basic cost of living to a minimum will provide you with the extra cash that you will need to save for retirement. But at the same time, it will also condition you to living on less money, which will certainly help once you reach retirement itself.
This may mean driving older, less expensive cars, avoiding restaurant meals and costly entertainment, and keeping vacations close to home, or not taking them at all.
Todd Tresidder at FinancialMentor.com wrote about an unconventional yet powerful idea to lower cost of living:
Consider moving from a high cost of living area like San Francisco, New York, or any other major city or coastal area to a low cost alternative such as the South, Midwest, or even a foreign country. The cost differential can be as dramatic as night and day so don’t dismiss this possibility lightly.
Several things to consider before moving include proximity to family, friends, and important medical providers. Are there other retirees to connect with, and how does the lifestyle fit your retirement interests? Consider visiting the area first and renting for awhile so that you can try before you buy. There are many low cost alternatives for retirement living including moving abroad so try visiting and renting at several until the fit feels just right.
Would you be willing to relocate to keep costs down? It just might be the very thing that makes or breaks your retirement.
Retiring at the rip old age at 30, Pete who runs the wildly popular blog Mr. Money Mustache knows a few things about reducing your spending. He says,
Our giant culture-wide misconception that reducing our spending will lead to a less happy life. In practice, the reverse is almost always true: voluntarily scaling back luxuries, increasing the level of challenge in your life, and banking the enormous surplus of money that results is probably the fastest way to gain control, satisfaction, and happiness.So the answer to early retirement is much easier than most people think: really understand and streamline your spending, and use the savings to invest heavily in a low-cost index fund like Vanguard’s LifeStrategy or Betterment. Once you have 25-30 times your annual spending invested in this account, you can quit working forever.If you save 50% of your take-home pay and live on the remainder, your entire mandatory working career only needs to be 17 years. After that, you’re financially free and can do whatever you want – continue work, all play, or a healthy mixture of the two.
Mr. Money Mustache also explained the difference between conventional advice and his radical, but effective advice:
For almost two years, I’ve been preaching a different brand of financial advice from what you see in the newspapers and magazines. The standard line is that life is hard and expensive, so you should keep your nose to the grindstone, clip coupons, save hard for your kids’ college educations, and save any tiny slice of your salary that remains into a 401(k) plan. And pray that nothing goes wrong in the 40 years of career work that it will take to get yourself enough savings to enjoy a brief retirement.
Mr. Money Mustache’s advice? Almost all of that is nonsense: Your current middle-class life is an Exploding Volcano of Wastefulness, and by learning to see the truth in this statement, you will easily be able to cut your expenses in half – leaving you saving half of your income. Or two thirds, or more.
He also explains how to practically cut expenses:
Here’s how to cut your life costs in half. Start by getting rid of your Debt Emergency if you have one. Live close to work. Move to another city if you enjoy adventure. Don’t borrow money for cars, and don’t buy stupid ones. Ride a bike wherever you can. Cancel your TV service. Stop wasting money on groceries.
His list goes on and on. It’s definitely worth a look!
If you’re serious about early retirement, you’ll need to embrace all the steps that will be needed in order to make it happen. I put together a list of 15 Reasons Why You Won’t Be Able to Retire Early to outline habits and mindsets that will sabotage efforts to retire early. Not coincidentally, how you spend your money is a big part of those habits and mindsets.