Early Retirement

Many want it, few achieve it. Why?  

This post is particularly important for those in their early twenties or younger because they still have lots of time, but it will help anyone looking for help on how to build their retirement nest egg. It may surprise you, but retiring early has little to do with how much you earn.

Is It Really Possible?

I am on track to retire at 52 (that is not many years away for me). It is two years later than my original goal but still well ahead of most. In this post I will outline a few things that I believe have been key in my making early retirement a reality.

The Goal:

Without a goal you will never make it. There is always something to do with your money. I don't care how much you make, there is always something you would like to spend that last dollar on.

You also have to adjust your thinking from a retirement age to a retirement amount.  The amount is how much you need each year to live a fulfilled life. Obviously the higher the amount the older you will be when you hit retirement.

To figure out my needed amount, I picked an annual income I felt I could be happy with and then multiplied that amount by 20 to get my needed savings. That means that I would be spending 5% of my savings each year. Which also means I need to earn, on average, at least that 5% or my savings pool would diminish (I believe that is a realistic target). I then had to adjust my number by inflation (It was going to take me many years to accumulate my retirement amount). See the "mathematical example" at the end of the blog for how to do this in an easy manner.

Collector Mindset:

I developed what I call a collector mindset. In my mind, saving is more than just setting money aside. It is a collection. What am I collecting? Companies and funds. Just like a baseball card collection or an art collection. This mindset helps me in the following ways.

1. I get excited about expanding my collection and what I am going to purchase next.
2. I do not like to sell, unless it is so I can buy a different fund that I like more.
3. I get excited when I can buy the stocks or funds for less (Just like some people get excited about finding a new pair of shoes on sale).
4. I don’t look at saving as giving up money I could have spent, I have just spent it on my collection, on something that has a high likelihood of being worth more later.

Consistent Collecting:

It is important to investment regularly. It needs to be a regular habit or it is too easy to skip it once and never go back. This also ensures that you are buying at different parts of price cycles which is beneficial. Over time you actually benefit from "dollar cost averaging".

Risk taking:

It is critical to maintain a decent level of risk at all times, cash will not get you anywhere. But my returns have been greatly enhanced by adjusting risk in a counter-cyclical way (what this blog site is all about).  It takes a very strong stomach to do so, but the best investments I have made were risky assets when no one wanted to touch them.

If possible, save more when things are difficult. This is often made easier as others will be tightening their belts as well but can be difficult if you lose your job during a downturn (as many do).

Milestones:

Make milestones for yourself. Pat yourself on the back each time you hit one. This will help reinforce what you have accomplished and will create a desire to not spend the money saved (as that would take you back below the milestone you had achieved). I would suggest making many milestones starting with small ones.  Maybe $1000, $10,000, $50,000 then $100,000.  In my experience the first $100,000 is by far the hardest to save. Once you get to that point a good return year will add $20,000 to your investments above and beyond what you contribute. At this point you will begin to see your investments multiply quickly. It is hard to get to that level but milestones helped me a lot.

Mathematical Example:

If $50,000 in today’s dollars would be your desired retirement income then you multiply that by 20  which equals $1 million. Of course you will need more than that because inflation will eat away at how much you can buy with those dollars.  

The rule of 72 will help here. The rule of 72 tells you how many years it will take to double your money at a given interest rate. Simply divide 72 by the interest rate and you have the number of years to double.  

If you used the Feds target rate of inflation (2%), the rule of 72 says it will take 72/2 = 36 years to double. This means that if it takes you 36 years to save your retirement amount, you will actually need twice as much. Everything will have doubled in price, so you will need $2 million in savings and you will be spending $100,000 per year (which will be about the same as spending $50,000 now because prices will have doubled).

If you like this post and want to dig deeper, I would recommend Mr. Money Mustache as a good resource (maybe a bit over the top at times) for ideas on how to achieve early retirement Mr. Money Mustache — Early Retirement through Badassity.

DISCLAIMER:

Past performance is not a guarantee of future performance.  This strategy is presented for informational purposes only and is not a solicitation to buy or sell any securities. October is one of the peculiarly dangerous months to speculate in stocks in.  The others are July, January, September, April, November, May , March, June, December, August and February. ~ Mark Twain