Admittedly, we’re not yet retired.
Which, by extension means that there a still a lot of things we don’t know about early retirement. But what we do know is that more information, more research, more knowledge about early retirement is a good thing. And, that when we implement the best things we’ve learned we will only reach out goal of retiring by 40 sooner.
Based on the thousands of articles I’ve read about early retirement and specifically how to retire by 40, we’ve boiled it down to 5 things that almost every expert (i.e. has either retired early or is an expert in personal finances) that everyone must do to retire early – no excuses, no matter what.
Budget Agressively –
Budgeting really has two purposes when you’re working towards early retirement.
- Lowering your spending
- Determining your financial needs during retirement
Obviously, if you’ve done any reading at all on this site, you know that we budget super aggressively. We try to spend no more than $300 a month on groceries, our house payment is super low, and even though we set really high goals we’ve cut our spending by more than half since I started this little blog nearly 2 years ago. This agressive budgeting has taught us how to cut our spending not only on a daily basis, but quickly when crisis strikes. It has taught us what we can and cannot live without, and how to value quality – in both physical possessions and in non-material things.
We’ve slowly been getting used to a lower level of spending on some things, and a higher level of spending on other things. This gives us an ideas of our financial needs during retirement. What level of spending we can live comfortably at. We don’t want to live like misers, and we don’t want to live so frugally life is not fun. We are slowly finding that happy medium off of which we can base our retirement spending and therefore, savings.
Lock Down Medical Costs
Medical costs are extremely difficult to predict, but if you know for sure you’re retiring from a specific company who has a defined health care plan for retirement, determining your medical costs become much easier. It’s not always that easy to know where you will retire from, especially as company loyalty becomes less and less common. But, in our case, my husband is in the Illinois National Guard and health benefits after retirement are very easy to find and budget for.
Sure, things could change with the structure of the state government (especially in Illinois, where we’re anticipating government shutting down in August because there has been no budget set!) but if there’s one thing we can count in, it’s probably that the government will go into more and more debt to make sure that the National Guard stays up and running. At any rate, he’s been in for 7 years, has another 5 left on his contract, and can retire after 20 years. He’ll get to keep the healthcare, and even though he can’t access his retirement until 65, he can keep the healthcare.
And after 6 years of marriage, I’ve become and expert in anticipating costs for Tricare (the military’s health insurance).
Basically, that’s a really long way of saying that if you can anticipate your healthcare costs, then do it! If not, take your current costs and double them…seriously. Each year, it is also advisable to take stock of your current medical costs (or anticipated retirement medical costs and adjust your retirement planning based on them)
Just because I say “early retirement” or “financial independence” that doesn’t imply a certain age – it only means that retirement is happening before age 65. For us, this means retirement by 40, while for others that might mean 30, 25, or even 50. Everyone has their own goals and that’s perfectly ok. What you need to decide is what you want to accomplish during retirement, how young you’ll need to be for that to happen, as well as your reasons for wanting to retire early. So many things play a factor in retirement plans – especially early retirement and financial independence plans – that you HAVE to think everything through. Discuss your plans with your spouse, share them with your friends, and maybe even your kids, if you feel they’re old enough to understand the significance. Everyone has different goals and plans, and that’s ok – just figure yours out before you get too far down the early retirement planning road. Don’t Forget Passive Income A business that you no longer run, but that you receive profit from. A blog. Commissions that you receive every year but don’t really think about. Real estate. All of these things constitutes passive income: income that you don’t currently do anything for, but that you continue to receive compensation for. Really, it’s quite amazing. Of course, I plan on this blog and others being a source of passive income after retirement, as well as commissions from various things, but that may not be for you – and that’s perfectly ok. Determine what type of passive income IS for you and make it happen well before retirement. The longer your passive income is in place, the more you can save for retirement, and the more solid your passive income sources will be during retirement. It may sounds scary, but research your options, and make some passive income happen. Create a Retirement Budget Now that you know how much you can comfortably live on, as well as approximately what your medical costs will be, it’s time to take a hard look at your budget and decide if there will be any changes to budget lines during retirement.
- Will you have less debt (i.e. no mortgage, paid off cars, no credit card debt)?
- Will you need to set more or less aside to save for things like vacations, new cars, home maintenance?
- What will your income be: 60% of your current income, more, less?
It is a good idea to always over-anticipate all expense lines, as well as anticipate for inflation! Inflation is generally judged at 3% per year, and once you’ve locked down what your expenses will be during retirement, you can figure out what they will be with inflation in 10, 20, or even 30 years due to inflation with this handy calculator. For example, $26,000 of today’s dollars (our expected need retirement income in today’s dollars) would be $40,507.15 in 2030, our expected retirement year.
Figure Out How Much You Need To Save
I’m talking about a total number here. Yes, it’s probably going to be big – after all, you’re planning to live far longer during retirement that most other “non early retirees.”
Most experts recommend using the 4% rule. Here’s how it works:
- Take your total yearly expenses and subtract any pension or passive income.
- Divide that number (after accounting for inflation) by 0.04 (4%)
- This is your total retirement number
Generally, you can count on 7% return on your investments. Of course, you will have a few years that are lower, but most years will be much, much higher! By anticipating living on 4% of your total “nest egg” you cushion yourself against inflation, stock market drops, and of course, unexpected expenses.
In our case, our total retirement number is $650,000 – but yours will probably be very different!
Divide & Conquer
Now that you’ve determined you total retirement number, it’s time to determine how much you need to save per month. Unfortunately, it’s not quite as easy as just dividing your total retirement number by the number of months until you retire. You need to factor in things like how much you can actually afford to save, and how much the money you’ve already saved will accumulate in interest.
Before you get overwhelmed by this craziness, I suggest using an investment calculator like this one and play around with it, assuming a 7% return on investement and different monthly savings amounts until you land on your retirement number. It’s not an exact science, but I love using this calculator because it really shows the power of saving on a consistent, monthly basis.
Don’t Be Afraid of Risk
Basically, develop an aggressive investing plan. You can of course, do this with the help of a trusted advisor, or you can do it yourself, relatively simply. I highly recommend Motif Investing and investing in index funds. Index funds contain stocks from many different companies, but you can invest in them all at one time through the index fund. There are many different index funds that are based on everything from risk tolerance to target retirement date, and even whether you want to invest in small or large companies.
Amazing isn’t it!
I’m not going to get into tons of investing details – expect those to come in a later post – but if you feel overwhelmed, check out Good Financial Cents, a blog run by Certified Financial Planner Jeff Rose. He boils down investing, retirement planning and tons of other hard to digest financial topics in ways that I never could!
Or, you could seek out a trusted investment advisor to help you with the process, it’s really up to you.
Put in the work.
Now that you’ve done the math, the planning, and the budget-cutting, it’s time to actually do the work. If you need to keep your grocery budget to $400 a month and save $1,200 a month for the next 20 years – then make it happen!
It will be tough, there will be moments you will hate it.
But, there will also be moments when you feel a sense of accomplishment as your watch your retirement savings grow, and during those month when you not only finish out within budget, but under it!
Plus, ya know, there’s always the whole retiring early thing…..
What are you must-do’s for early retirement?
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