Tuesday, April 28, 2015

Retire Early 3 - Start Planning



In the last Retire Early post, I went over my formula for determining if you can retire now. If you can, that's great! We'll cover some of the headaches associated with retiring early in a future post. For the rest of you, let's talk about getting ready to retire early.

The key to retiring early is saving enough money to do so.  That sounds easy, doesn't it? Some people get jobs that pay well. Some wait to hit it big with the lottery. Just for information, according to statistics, lottery winners declare bankruptcy at twice the national average

I agree with many of the other experts on early retirement, though. The key to retiring early is to reduce your expenses. Let's look at a breakdown of expenses for a family making $50K a year.
Caveat: I believe in supporting my church and the work it does, so I always build a ten percent tithe into my budgets. That's reflected in these numbers.


If there are children, some of these numbers must shift into the School/Child Care category. That can be very expensive and for many couples it is more cost effective for one parent to stay home.

These are generic numbers, of course. You can see that the savings (10) and investments (13) provide only $3750 per year for building a retirement nest egg. That is 7.5% - but it can be immediately increased to $5625 per year (11.25%) if you aren't paying any debts (7).

Let me make a single dramatic statement here: debt is your enemy. When you have a balance on a credit card you are working for the credit card company and not for yourself. They'll retire early and you won't.

If you can pay your house off, you jump to saving $17,875 per year, or 35.75%. Now we're talking.

Mr. Money Mustache has an excellent post: Getting Rich from Zero to Hero in one blogpost.
He makes the surprising claim that "if you can save 50% of your take-home pay starting at age 20, you’ll be wealthy enough to retire by age 37. … If you can save 75%, your working career is only 7 years." I studied his numbers and the math works.

For most of us, saving 75% of our pay isn't feasible, but think about it a minute. You didn't spend much in college or when you first started working. The trick is to keep the expenses low.

Now you might say to me "Sure that might work for some people, but I just can't do that. I'm already forty and have a lot of expenses.

Yeah, I get that. I was forty-two and reeling from my second divorce in ten years (that's an entirely different story). I had no savings, no pension, and owned nothing of value. My car was ten years old and pretty beat up, but it drove well and I didn't owe money on it, so that was okay with me. I lived in a rented two-bedroom apartment in a mediocre part of town for a mere $600 per month.

I still had bills and child support payments. I cut my lifestyle down a bit but didn’t suffer much. I don't do nightclubs; I don't smoke and I rarely drink. I eliminated all my debt within the first year. I wanted to retire, so I started saving - a lot.

Today's society pressures you to buy a new car, to live in a fancy part of town and to spend money on a lavish lifestyle. You can do that and keep working until you drop dead in your cubicle at age seventy-two or you can plan on your early retirement. It's your choice.

You can see from Mr. Money Mustache's post that it takes about seventeen years to build a decent retirement account if you save fifty percent of your income. I started saving as much as I could, which was about a third of my paycheck. Each raise got put into a savings account or into my 401K. When possible I raised the amount I put into savings. Pretty soon half my income went into some sort of savings plan.

Fifteen years later, at age fifty-seven, I retired. I don't travel to the Riviera or vacation in lavish resorts, but I don't need to get up and go to work every day. Now I can focus on doing the things in life that I always wanted to do, like write my first novel.

You can do the same. You just need to find ways to put more of your earned money into savings.
Look at ways to cut your costs. In the next Retire Early post I'll have a list of ways that Darling and I use to save money and that you can start using now.

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