In a team meeting the other day, my coworker mentioned how it’s hard to keep up with the names of new employees because so many people are retiring, and how he would love to retire as well to enjoy life more. The comment was followed by another coworker in her late 20’s who said that she doesn’t want to retire: “No offense to older people, but why would I want to retire and have nothing to do?” I didn’t want to blow my FI cover, so I kept my mouth shut and moved on to the meeting topic. She was mostly referring to a traditional retirement and, obviously, has not been introduced to the prospects of an early retirement.
Traditional retirement doesn’t sound like a ticket to an exciting chapter in someone’s life. And I don’t meant it because of the age factor, but because it rather feels as if these people gave their best years to the corporate world. And I sense retirement as something they do when there is really nothing else more interesting on the horizon. These folks are mostly retiring from years of a routine that gave meaning to their lives. Soon, they’re faced with the pressure of an empty schedule and a search for purpose. This does not sound attractive to younger people. But would an early retirement have the same connotation?
And there’s the physical aspect of it. You also might not be as healthy as you once were, and a trip up the stairs to a third floor might feel like a hike to the Machu Picchu. The great news is that retirement doesn’t have be like that. How about doing it in a different way? In a non-mainstream kind of way? It’s the movement that Vicky Robbins and Joe Dominguez started in the 80’s and is now picking up steam, thanks to the internet and many brave souls that expose how they’re having awesome lifestyles in early retirement.
As you can see, I’m not coming up with a new concept here. I’m trying to reinforce the idea that it is possible to retire way before you’re allowed to take social security and live a more fulfilling life. A life where mandatory work is optional. One where you have the power to fire your alarm clock because dealing with that alarm until you’re 65 is no joke! That 9-5 might feel exciting during early working years, but it gets old fairly quickly.
Early retirement could be the start of a new you. It’s a way to shave many years off your working life. It’s a way to reinvent your life according to your happiness and this blueprint can help you achieve it.
An early retirement blueprint
Adding the concept of early retirement to your world of finance it’s like having Sofia Vergara in the Modern Family cast: Smart and sexy! Early retirement can also be fun, exciting and a smart way to never have to worry about money.
We’ve been on the path to early retirement since 2012, reached financial independence earlier this year and plan to be out of the rat race no later than the winter of 2019 (my cold weather tolerance level wouldn’t allow for two more winters). Now that we are in the final stages of our early retirement plan, we felt it was the right time to create a blueprint to help you achieve early retirement, based on our findings and what has really worked for us. Put this blueprint into action and you’ll also be on your way to early retirement!
We believe that early retirement is possible for most people and not as complicated as a traditional 30-year plan due to the shorter timeframe. I mean, 30 years is a long time to stick to anything, even a mortgage. Who really takes 30 years to pay off a mortgage? Many people refinance several times during their ownership period to get better rates or cash out.
Well, guess what folks? You can’t refinance your way to retirement. You can’t refinance your savings to make them multiply if you are short in the end. Your only ally, besides time, is compound interest. That same force that will make you pay for your house at least three times during your lifetime, if you stick to your 30 mortgage schedule, will be working in your favor by multiplying your savings over time when you invest. That’s why it’s important to start saving early for retirement.
By following the 7-step plan presented below, we are retiring when we want and will live life on our terms. We’d love to see the same for you, but in order for that to happen, you need to get to work on your plan. Grab financial independence by the balls, and set yourself up to leave the pawn duties behind and become the king/queen of your world!
How to retire early with a bang, based on proven strategies that have worked for us.
1. Craft your ideal retirement plan
Forget about what society thinks about how you should live your life. You’ll have enough money to run your own show. Forget about how bloggers live out their early retirement and even forget about how we plan to live ours. This is all about you! Only use us a point of reference because your plan should reflect you.
External circumstances in the future might interfere with your happiness from time to time, but that shouldn’t stop you from crafting an ideal retirement plan. To craft your ideal retirement plan, you’ll need to think what kind of lifestyle you want to have if you didn’t need to work for a living. Do the exercise in this post by Mrs. Enchumbao on what makes you truly happy and that should eliminate a lot of wasteful spending that you thought you needed to achieve happiness. Research has proven that happiness doesn’t come from being rich and famous, so working on other aspects of your life, like your relationships, can be key to your happiness.
After you go through the happiness exercise, you’ll need to think about your needs and wants. Don’t be afraid to dream and think out of the box. Just thinking about early retirement is already out-of-the-box thinking, so why not continue with this train of thought? Here are some main categories to consider. You may add others that are a priority in your life.
How do you want to spend your time? What would motivate you to get up in the morning? Do you want to live immersed in a rich culture? Do you want to have more time to explore your surroundings? You might even want to be more active in early retirement and by doing so, you help avoid health issues. You entire plan should be designed around your desired lifestyle. Envision your lifestyle after early retirement and make a list of the locations that offer these kinds of activities.
Our activities after retiring would involve swimming, taking long walks by the beach, walking around the neighborhood, doing sports, bike riding, going to concerts, trying out local restaurants, building community relationships, blogging, dancing, maybe teaching, learning musical instruments, singing karaoke, exploring new places… It’s a nice list!
If you didn’t have to work, would you stay living in your area? What’s your ideal retirement place? Maybe you like a climate for skiing and would prefer to move to a location in the mountains. Maybe you’re like us and enjoy the warmer weather and prefer to head to a beach destination.
Whatever your preference is, you should put it out in the open and discuss it with your partner or spouse, if you have one. If you’d like to stay where you are, then it might be enough to have investments to cover your rent or try to pay off a mortgage.
We pay $1,150 in rent a month, but we know that once we retire we’ll be paying a lot less in rent or would just need to cover maintenance, insurance and taxes if we decide to purchase. Since our future state is very different from our current, we calculate how much we’d need for housing in our future state.
Does the location of your choice offer your desired activities? As an early retiree you might want a location that offers more action than destinations that are geared toward traditional retirees. If moving to a location designed for traditional retirees is not your cup of tea, you might want to explore other areas and even venture outside of the U.S. The world is at your feet! Get ready to explore it.
Health and medical care
Reaching early retirement with a healthy body and mind is crucial to enjoying your retirement to the fullest. We understand that some health issues are beyond our control, but we try to minimize health expenses now and in the future by eating as healthy as possible and exercising. No matter your retirement age, the health and medical care available to you will play a role in where you choose to live.
This cost is kind of unpredictable for us because we plan to live abroad, but one thing is for sure – it will be a lot cheaper than enrolling in a US health insurance plan. If we were to stay in the US, we would probably choose a high deductible plan. Being proactive in our health should help lower insurance premiums.
If you have or plan to have children, their schooling needs will also play a major role in choosing your location. Unlike early retirees, most traditional retirees don’t have to worry about schools because they’re usually done raising children by retirement and can move anywhere. Since this is not a priority for a traditional retiree, locations geared towards traditional retirees might not offer the best curriculums for your children.
A drawback, if you’re fortunate enough to be able to retire extremely early, is that you might be forced to follow your children’s school schedule for many years to come, so think about what you would like to do while they’re in school. Caution: Having your own Happy Hour in the middle of the day might not be the best activity when you have to pick up your child from school. 🙂
How about exploring schools abroad?
If you want to live abroad you might have to pay for private schooling since a) public schools might be limited to local residents with low income brackets, b) if you move to a third world country, they might not offer a solid education compared to the U.S. and c) _______ (blank for you to fill out!)
Take Justin’s case as an example. He retired at 33 and lives with his wife and children in North Carolina. He has considered retiring abroad and wrote about the pros and cons on his blog at rootofgood.com. With three children in the school system, he sees school tuition as a big drawback to living abroad.
|In effect, living in Raleigh offers us some really great schools for free (technically, $600 per year or so if you include the schools’ tax that’s part of our $1500/yr. property tax bill). Our oldest kid started school at what is arguably the best middle school in the district, and this school feeds into the best high school in the district. It’s very competitive to get into both schools so we are very fortunate.
If we move away for a year or two abroad, we would struggle to find an academically rigorous program abroad that isn’t cost prohibitive. And we would most likely lose our seat at the awesome middle and high school and have to compete in the lottery process again.
For us, it makes a lot of sense to stay in Raleigh where we know how to navigate the school system and where high quality schools are free. The cost of living is more than Mexico (a likely overseas retirement destination) yet not high compared to the rest of the US.
Staying in the U.S. might be your best bet for your kids to have an excellent public school education.
As Justin points out, being close to friends and family can be an added benefit to staying in the area and it’s definitely something to consider in retirement. Think of how close or far you want to be from your friends and relatives. In retirement, you’ll have more time to spend with them, but they’ll still have their financial obligations tying them to a work schedule. If you don’t visit them often, then being further away might not make much of a difference. The distance might even strengthen relationships as you focus on spending more quality time together, since time will be of the essence.
We decided that we’ll stay in North America for our first leg of early retirement. We’re considering Punta Cana as our first destination home because it’s a central hub that connects us to many countries around the world, while allowing us to fly back to the U.S. within 3-4 hours to visit friends and family. Also, the fact that many friends and acquaintances visit Punta Cana, we could arrange to meet them in their resort lobby and, if we like them enough, maybe we’d take them out and show them what we really enjoy about a life in Punta Cana. 🙂
Punta Cana is close to Florida and has an international airport that flies to many countries that we’d like to visit after retirement. Punta Cana International Airport serves 96 cities in 28 countries. If that’s not enough, there are two more international airports within a two-hour driving distance. These are just a few of the benefits that we see as we explore the area.
If you’re a working couple, you might have two cars to commute to work. But once you retire you might be okay without with just one vehicle or none. Something to consider is having access to public transportation, or being within walking distance from the places you’ll frequent. We see ourselves owning a vehicle in early retirement, but want to be able to walk to places and have access to public transportation as well.
2. Figure out your FI number
The easier way to figure out how much you would need to fund your lifestyle forever is to multiply your estimated annual expenses by 25. This is based on the safe withdrawal rate of 4% a year from your investments, adjusted for inflation. This is meant to be used as a guideline. If you want to be more conservative, then you can save anywhere from 25 to 33 times your spending in your investment portfolio and that would keep your portfolio withdrawal rate between under 4%.
In order to figure out your future estimated expenses, you’ll need to start tracking your current expenses to see how you’re spending your money. We use Mint to track ours. The great news is that if you’re planning for an early retirement, it’s a lot easier to plan for than to estimate your future expenses if you were on the path to retire in 30 years. We figured out our FI number back in 2012 and our expenses have dropped since we started tracking them.
How long would it take for you to reach your FI number? A lot will be riding on your savings rate. It took us three years to reach our number after we got married. We got there a lot quicker than we planned for because our average savings rate during the last five years hovered around 65%.
Don’t get disappointed if your number seems out of reach, as you might be starting with a low savings rate. High savings rate wasn’t always the case for us. Our high savings rate was the result of our motivation to become financially independent and have the option to retire early. Also, your investment gains will help speed up the process along the way.
3. Cut spending
Having more possessions to your name will not bring you long-lasting happiness. It’s the good relationships in your life that will keep you happier. With that in mind, you’ll be able to cut your spending without any deprivation. You can start by lowering your cost of living in 3 major areas: housing, food and transportation.
If you prefer to buy a house, put a humungous downpayment on it, don’t buy more than what you really need and keep upgrades to a minimum. I like the advice of not buying a dream house until one becomes financially independent. Further more, if you’re up for house hacking, check out this episode on ChooseFi, where Coach Carson gives you tips on how to live for free! My biggest mistake was buying a house while having debt and without a good solid financial foundation. Luckily, I corrected my mistake and after marriage decided to rent and not worry about saving for a house until we reached financial independence.
As far as saving on the food category, cooking your own meals, bringing lunch to work and cutting down on eating out do the trick for the most part. We cook most of the time and bring lunch to work. Dining out used to be a big part of our expenses, but as we became more health-conscious, we realized that the best ingredients are the ones that we use at home.
My wife and I work for the same company and downsized to one vehicle, since we didn’t see the need for a second car. We were able to lower our cost of living by moving closer to work. Our commute situation is so good that if we were to hit a major financial setback and couldn’t afford to own a car, we could still make it to our jobs and walk to the nearby stores for groceries and household supplies. The good news is that we no longer need our jobs to survive. Win/win? 😉
4. Eliminate all debt and stay out of it
Pay off your debt, period. Get rid of it by making more money or cutting expenses, or both. Becoming debt free is an emergency.
Sometimes people don’t realize that while they’re paying off debt their net worth is also increasing. Even if they don’t feel it by seeing their bank accounts. So they go ahead and invest the money, even though the debt payment would be a guaranteed return on their investment, because it makes them feel richer and that they’re making progress.
If you pay off a credit card with a 13% interest rate, that’s a guaranteed 13% return on your money! So I would at least try to pay off any debt charging over 3% in interest before investing in taxable accounts. I bolded taxable because sometimes it does make more sense to max out your 401(k) to lower your tax bracket if you’re in a high bracket, than paying off a debt with a low interest rate. Do the math.
5. Invest wisely
Investing doesn’t need to be complicated.
To invest in stocks and bonds, there are investment vehicles like a Target Retirement Fund or a LifeStrategy Fund that makes investing easy for average folks. It can be very simple. We’ve been investing for over 10 years and one way for us to keep it simple is by investing in low cost index-based investments.
Your investments will do part of the lifting, so you won’t have to work for every dollar that you’ll need in retirement. In the chart below, the returns of our investments made up 23% of our portfolio during the first 10 years of investing. The 77% percent in purchases also include employer contributions. Getting passive income is like working three days and getting paid for four, or buying three and getting one free! Your money is working for you day and night.
Create other sources of passive income streams
Real estate is another great way to achieve financial independence and early retirement. Again, it’s all about doing your homework and looking for passive income sources you feel comfortable with. We like to invest in real estate and have a rental property that provides a 10% return on investment.
6. Minimize taxes
Tax minimization is such an important strategy in accumulating wealth that we wanted to give it its own section. When I first started learning about how rich people amassed wealth, I realized that they try to minimize taxes as much as possible. Hence, the obsession of the rich with taxes and politics. Well, guess what? You shouldn’t overlook minimizing taxes as it could get you to early retirement much faster.
We do anything legally possible to lower our tax rates. One way for us to minimize our taxes is by maxing out our 401(k)s. That saves us a ton of money in taxes. How much in savings are we talking about here? We save at least $9,000 annually in taxes. That’s $9,000 more per year that is growing in our accounts tax free. Icing on the cake are the dividends that are being reinvested and continue to compound. We might be able to withdraw this money tax free or at a very low tax rate. It will depend on future tax laws.
Another way to save on taxes is by investing in Roth IRAs. Roths are usually funded with after-tax dollars. You basically pay taxes now, if you feel that you’ll be in a higher tax bracket after retirement, therefore saving on taxes.
We’re most likely going to be in a lower tax bracket after retirement, but we still invest in Roth accounts. Since we already max out our 401(k)s, we have to pay taxes on the rest of our income. By contributing this money to the Roth accounts, we shield the dividends and capital gains from taxes when we withdraw them in the future. You can also withdraw your contributions at any time, without penalties, while the gains keep growing tax free in the accounts.
7. Prepare to retire
Work on your exit strategy
As you get closer to your retirement date, you want to execute your exit strategy and prepare to hang your boots. Start to put your next life in motion. That might involve buying or selling real estate, figuring out when to move to a new place, finding a new school for your kids or even starting a family, if you’re retiring much earlier in life.
Once you reach your FI number, you’re financially ready to retire. It’s a good time to finalize your withdrawal strategy from your accounts in retirement in the most optimal way. Also, review your asset allocation to ensure that it addresses your future needs. We expect to cover our expenses in retirement with dividends, long-term capital gains and real estate income.
Retire early to live your life on your own terms!
You’ve made it in your shiny armour made of FU money. You saved and invested wisely. You cut expenses and your quality of life increased as a result. And the best thing, you’re happier than you’ve ever been. The only thing left might be to pull the plug on your job.
Quitting your job might not be as easy as you probably thought! Leaving a career behind that you worked hard for might make others think that you’re crazy. But who cares anyway? They might have been thinking that you were crazy from the moment you thought that early retirement was possible. They might have thought that you were insane to think that you could live off your investments for the rest of your life. Well, yes you can!
So take a moment to pause, breathe and live this moment. YOU HAVE MADE IT. CONGRATULATIONS! ¡FELICIDADES! You’re now free. It’s time to retire to something much bigger than you can imagine, certainly much bigger than mandatory work.