Can Anyone Retire Early?
This past week I had a conversation with some college kids I work with and another with my cousin’s son who is preparing to enter college. In both cases, issues related to personal finance came up. We normally try to keep our blog anonymous, but on both of these occasions, I decided to just say screw it and tell them that we started it. After all, we started this blog to help others. Our message is most applicable to young people as the path to early financial independence is far easier if you get started early.
Immediately I got the expected responses of (1) we were joking and (2) we must make a ton of money or be some kind of investing masterminds. Neither can be further from the truth. Once I discussed our plans, I could sense some disbelief that this was possible. This got me thinking. Could anyone achieve financial independence and retire early? Luckily for all of these young people, the answer is very simple. YES!
The Math of Early Retirement
Let’s revisit a post from our early retirement blog hero, Mr. Money Mustache, entitled The Shockingly Simple Math Behind Early Retirement. When we started on our journey to financial independence and early retirement, we had no idea if it was even possible, let alone how to do it. With this one blog post, MMM took the work of others and put it together into one simple essay that demystified the path to financial freedom. The math is elementary. You can figure out approximately how long it will take you to reach financial independence. We are a case study. We write all the time about maintaining approximately a 50% savings rate. Looking at the chart in his post, this means we should be financially independent in 17 years. Mrs. EE started her career in 2000 and I started mine in 2001. We project reaching financial independence in 2017. Pretty remarkable how that all works, huh?
Should you pursue early retirement? Does this lifestyle sound desirable to you? Those are questions only you can answer. But there is no doubt that anyone can do it. It’s all in the math.
How Do You Retire Early?
Let’s look briefly at the main points of the article. Is it a bit of an oversimplification? Sure, but it basically gives you the key points that you need to get started today.
- Your savings rate, defined as how much you save as a percentage of your take home pay, is the key factor in determining how long it takes to be able to retire.
- The number of years to reach retirement is a direct result of your savings rate.
- Decreasing spending has a greater impact on achieving financial independence than increasing earning.
- Your savings should support your lifestyle when your investments reach 25X your expenses.
If I Don’t Make Much Money, How Do I Possibly Save that Much?
There are many ways to do it. Do you know exactly what you spend your money on? If not, start tracking your spending today to see where you spend the most money and start there. For most people this is housing, cars, food, and the biggest expense is taxes. Figure out ways to optimize in these areas and you can make big changes quickly. Next look at recurring spending. I know very few young people who don’t have cable TV and expensive phone plans. Can you afford them? If you want to work forever, probably. If you want to retire early check out MVNO options for your phone to save 50-90%. Cut the cable cord today to save 100% of that expense.
Once you start saving, you can start putting all of this money first into tax deferred accounts (IRA, 401(k), etc) until you are able to max them out. This will allow you to leverage your decreased spending with paying less taxes while your money starts going to work for you.
Seriously Though, Don’t You Have to Make a Ton of Money?
OK, making money is important. It is half of the savings rate equation. If you are a low wage earner, you have to find ways to make more money. We have a two income household with both of us bringing home above average salaries during our careers. This definitely makes saving easier. But let’s look at the whole picture.
Neither of us ever earned a 6 figure salary. To get the skills that allowed us to earn high 5 figure salaries, we each have 3 college degrees. We got them all with about $15,000 total debt (for Mrs. EE’s B.S.), which we paid off in our first year of working. Again, our success is at least as much about what we didn’t spend to obtain our degrees as it was about the amount of money we earned because of them.
It is also important to realize that most high wage earners don’t save anywhere near the amount of money that we do. Most doctors, lawyers, etc who make much more money than we do graduate college with massive student loans. They then get caught up in situations where they are surrounded by other high wage earners and feel social pressure to keep up with their peers. To get an idea of who the truly wealthy are, I would highly recommend the classic book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
. I’ll give you a hint, it is not who most people think of as rich.
Finally, I’ll give you this to chew on. Our savings rate was about 50% until about 2 years ago when having our child. Since then, Mrs EE has cut back to part-time work, I’ve traded in salary for increased vacation time, and we have another mouth to feed and diapers to buy (Seriously little EE, get on the freakin’ potty!). With that, our savings rate last year was 75%! Our “low” savings rate of “only” 50% was never because we couldn’t save more. We simply never really paid attention to our savings rate because we never understood the math until reading that MMM post.
So that’s how this whole early retirement thing works. Can you do it? Will you try? There is nothing to lose and a life of freedom to gain! Share your ideas below.
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Full disclosure — we’re for sure helped by having six figure incomes at this point, but that wasn’t always the case. We think there’s a minimum number in the $50-60K range above which anyone can retire early. Below that, and there would be a lot of obstacles. But you are so right that it’s about your attitude and spending more than anything else, and perhaps being willing to live in a place that doesn’t have a super high cost of living.
Of course, hearing your story, we’re super impressed that you all had your financial wits about you from such an early age. We definitely had to grow into our current financial selves, though we’re sure glad we did! And we’re glad that our current income is letting us make up for lost time. But we don’t think of ourselves as high income earners because we actually live on much much less than we bring in, which we hope will set us up for success when it’s time to quit for good.
Jacob at ERE may argue that there is a floor as he writes on living in SF for less than $10k/year. That said I would tend to agree that it is probably not realistic for most. That said, I think the $50-60k/year range is possible for anyone willing to develop skills/talents, work hard and invest in themselves.
I don’t know how much we had it All together early on. We made pretty massive mistakes in the area of investing and lack of tax planning for 10+ years and we started down the road of locking ourselves into the lifestyle of 1.5 hr round trip commutes and too much house before reversing course pretty quickly. We are quite open about our mistakes as I think they are at least as valuable as our successes in understanding our story and helping others learn.
EE