How to Retire Early

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.

Retiring in Your 40s with Harry Sit (Mint)


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What's been said:

Discussions found on the web
  1. Chris Muller commented on Jul 11

    Excellent points. I really think your second point about priorities is a big one. If we can’t live below our means…scratch that, WELL below our means, we will never comfortably retire… Early or not. We as a society need to stop trying to impress others or live up to what we think are social norms and live on less. Great article, thanks for sharing.

    • Ben commented on Jul 11

      Charlie Munger has a great quote about envy: “It’s the one sin you can’t have any fun at.” Buffett has also said that it’s not greed that drives the world, but envy. It’s one of those things that make no sense, but it’s so hard to not care what others are doing or thinking and it gets a lot of people into trouble with their finances.

  2. Mike commented on Jul 12

    Some other factors that you need to be aware of:
    -taxes: if you live in a high tax area it isn’t the taxes today that can get you but the government’s voracious appetite. Tax increases can easily outstrip inflation in some areas
    -spouse: if your marriage is not solid you will part with 50% of your assets should your extra together time be too much to handle

    • Ben commented on Jul 12

      Nice additions. Another point is that it can be difficult for some to retire in cities that have a high cost of living. And great point on the spouse — without having a partner who is on the same page as you financially it could be impossible to pull this off.

  3. MG commented on Jul 12

    I retired early, at age 52. People at work during my last two weeks (after I gave notice) would say insensitive things like “I wish I could retire early. You must be rich!” I would try to remember to reply that they could retire early too, they just have to do what I did, which was live well below my means, and save like mad. They would look at me as if I was crazy, because that was just too foreign a concept for them. I think it was emotionally easier for them to believe I was rich, since then it was out of their control to retire early by making the required sacrifices that I did. Living below my means also meant that I needed less savings when I did retire, since I was accustomed to living on less before retirement, and required a smaller nest-egg since I required a smaller monthly distribution.

    One might now ask me “Was it worth the monetarily slightly lower lifestyle?” I can honestly reply that early retirement has substantially improved my life, and that it was one of the smartest things I ever did!

    • Ben commented on Jul 12

      Nice. I love hearing success stories like this. This is great. You make a great point about the amount you need to retire — if you can both live below your means and keep your living standards under control, you don’t have to have such a huge nest egg to make it work for you. Thanks for sharing.

    • windy lenart commented on Nov 09

      You’re a smart man, MG!

      Here is my advice for young ppl:

      1) Buy mutual funds, not individual stocks to put in 403b/401k or individual IRAs if you don’t have access to a 403b/401k. Trust me, you are NOT smart enough to beat the market. Buy a fund that merely tries to match the indexes.

      2) Pick the funds with the lowest costs associated with them. It isn’t hard to figure out the cost of a fund.

      3) Consistency is the key. Don’t panic when the stock market tumbles, keep putting that money into your mutual funds even when the stock prices are sinking. You are just buying more shares. The market will go up eventually leaving you in a MUCH stronger position.

      4)Don’t waste money on stupid stuff you don’t need. Don’t get $100/month smart phone. I pay $20/month with tMobile. Don’t get $100/month auto insurance. I pay $25/month with Insurance’Panda. Don’t spend $50/month on your gym. I spend $15/month at Planet Fitness. Get the drift? All these expenses add up and end up cutting into your savings.

      5) If you’ve got a mutual fund in you 401k or ira that only has $1000 or so in it, DON’T cash it in! Roll it over to another IRA or into your corporate plan if possible. I bounced around from job to job quite a bit, so I didn’t always have time to build up my 401k to large holdings before I had to look for a new job. I kept an IRA for these small sums just to collect those tiny amounts. Don’t spent it! roll it over!

      6) Never, Ever (NEVER!!!!) take money out of your retirement to make house payments. Sell the house first. Most individual retirement plans are protected from repossession. It’s stupid to take money from a protected asset to help pay off an unprotected asset. What if you get into a bind again in 2-3 years and you’re retirement funds are tapped out? You lose the house and have no retirement.

      Do this and you’ll have a reasonably secure retirement. It’s what I did.

  4. Financial-Fitness commented on Jul 15

    Great, straight forward piece! I only question the need for a “good income” in order to retire early. As you said, lifestyle creep is a tough hurdle. If someone is used to living frugally due to a lower income, then they still may be able to retire early so long as they continue to live within their means.

    • Ben commented on Jul 15

      Good point. That’s one of the best parts about having a high savings rate and a lower standard of living — there’s not as much income to replace in retirement.

  5. Simple Is Better | AlphaBaskets commented on Jul 17

    […] quote is that “you can make more by losing less” which showed up in a The Finance Bluff (via short article on Yahoo Finance that says earnings peak for men at 48 and women at 39. There was a cascade of comments from people […]

  6. John Smith commented on Jul 19

    The only issue that is not address is one’s health. No one can control an unexpected diagnoses of cancer, a traumatic injury and in our older age Alzheimer or senile dementia. The best lay plans of mice and man often go awry. The economic cost of full time care, expensive medication can take a robust portfolio and decimated it within years.

    • Ben commented on Jul 19

      Very true. The numbers I read are that avg healthcare costs will run people $250.000 in retirement and that’s not counting early retirement or the possibility of additional care as you mention.

  7. John Richards commented on Jul 20

    The second to last paragraph is key to my mindset. I hope to retire somewhere between ages 55 and 60 and start another career. Flexibility is key. The decision to have kids resulted in a 5+ year retirement delay (having a special needs child slowed our savings a bit, but certainly no regrets). Having my pension changed multiple times and cut to perhaps 10% of the original plan (depends on your assumptions) certainly cost several more years. We’ve been lucky to be blessed with good health, or there could have been further delays. Planning for early retirement has allowed us to weather a few storms and yet still be on track to retire at a reasonable age with our financial goals met.

    • Ben commented on Jul 21

      I actually think this is where we’re heading with most people — a second act instead of full retirement. As you say, flexibility is the key and it can certainly lead to happier situations for most.