A reader asks:
I am hoping to retire early and would be interested in your thoughts on early retirement, how to plan for early retirement and how to approach saving/investments in order to meet an early retirement goal.
Harry Sit, who writes The Finance Buff blog, is someone who is actually at the point where he can retire early. He’s shared many of his personal experiences and advice on how he’s gotten to this point. Here’s what he had to say in a profile on Mint this week:
The goal isn’t necessarily to retire, but rather being able to retire. Having enough money to retire in our 40s gives us the freedom to choose what we do. It could be to work in a venture for personal and professional achievement. Or it could be freeing up time for hobbies outside work.
While early retirement may sound like a dream scenario for people in their 20s and 30s who are still trying to find their calling in life, priorities and career objectives change over time. It’s possible you get into your 40s or 50s and realize you still have some work-related goals you’d like to accomplish. As with all financial goals, you have to keep your options open.
There’s no secret to early retirement, either. This was Harry’s advice on how to make this dream a reality:
The strategy is simple and obvious: earn a good income, save a large part of it and invest the savings well. Each of the three parts is important, and I would say a good income is the most important. Without a good income, you just don’t have as much to work with. A good income also makes it easier to save a large part of it. When you invest it well, you are then adding more to a larger sum.
Here are a few things I would add to Harry’s tips for early retirement preparation:
- Lifestyle creep is probably one of the biggest hurdles over time for building a large enough nest egg to retire early (or retire at all for that matter). It can be difficult to resist the urge to spend all of your income gains over the years as you start to make more money. One of the hardest things for people to do is be happy with what you have and keep your standards of living relatively constant over time.
- Figuring out ways to save money is the easy part; getting your priorities straight is the hard part. Unless you’re banking on a large inheritance, or earn a large salary, you’ll have to save a fairly large chunk of your earnings (I’d estimate 40-60% depending on your spending requirements). There will likely have to be sacrifices made when it comes to things like big houses and new cars.
- The average life expectancy continues to rise. You have to take this into account when considering early retirement. If you retire in your 50s, your investments could have to last you another four decades or so. Your retirement years could actually end up being longer than your working years. The planning required to make this happen is no easy task.
- Now for the boring considerations no one wants to hear when dreaming about living on the beach for the rest of their life:
(1) Depending on when you retire you’ll need taxable investments and savings to carry the load until you’re 59 1/2 and able to draw down your tax deferred retirement accounts such as an IRA or 401(k). You also have to wait until your 60s to start receiving social security checks.
(2) If you quit your job and don’t have a spouse that continues to work, you’re on the hook for your own healthcare costs until Medicare kicks in during your 60s.
(3) I would say the biggest financial goal, in addition to the simple steps laid out by Sit, would be to have all of your debts paid off. That means no mortgage, no student loans, no car loans and no outstanding credit card debt to allow for maximum financial flexibility.
I think it’s great that young people are thinking about these issues because the nature of employment has changed drastically in recent decades. We no longer work for the same company for our entire career and retire with a pension and our healthcare costs taken care of. So the only other piece of advice would be to develop enough marketable skills to be able to make yourself very employable in case something goes wrong or you realize that you’d like to continue working, just not in your current role.
The way I look at it is that having your financial affairs in order gives you the flexibility to pursue the type of work that makes you happy, keeps you driven or provides you with the most satisfaction in life. Most of the people I talk to that want to retire early hate their jobs. So I prefer to think about this question in terms of how you can create enough flexibility for yourself so you don’t have to stay in a career field or position that makes you unhappy.
Early retirement is possible, but it takes sacrifice, hard work and the right mindset to pull it off.
My new book, A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, is out now.