How to Retire Early

20 February 2014 · 20 comments

The best way to retire early is to be a non-conformistEvery morning when I get out of bed, I pour a cup of coffee and sit down at my computer. While I wait to wake up, I browse my favorite websites. This morning, as I was browsing Ask Metafilter, I stumbled upon an intriguing question. A user named House of Leaves and Grass wrote:

I’m turning 30 this year. My husband and I are discussing a retirement plan that includes a farm in South Carolina. Can you recommend some resources (blogs, persons willing to email, books, etc) so that we can make an informed decision about whether to do this and what sort of financial planning we’ll have to do to make it happen?

Talk about something that’s right in my wheelhouse! For years, I had a similar dream. I wanted to retire with Kris to a farm in the country where we could raise goats and grapes and filberts and corn and more. That’s not how things worked out, of course, but I still remember reading about this (idealized) lifestyle for hours at a time. And, of course, I’ve been thinking a lot about early retirement lately.

As I waited for my coffee to kick in, I dashed off an answer to this would-be farmer. Here’s an edited version of my response.

First, be open to the idea that your priorities may change. That is, plan for this future and make it your mission right now, but be aware that it’s very hard to predict what the Future You will actually want.

Countryside magazine is awesomeI found that Countryside magazine was one of the best ways to get a feel for what this sort of lifestyle really entailed. This publication is largely written by readers, all of whom are into the farming/homesteading lifestyle. They share their experiences and expertise with real-world situations. It’s great stuff.

As for the financial planning stuff, I can address that too. (I’m a personal-finance writer by trade.)

I’m not going to go deep into the theory behind any of this stuff, but my advice to you is:

Begin saving as much as you can as soon as you can. The two factors that make the biggest difference in how much you’ll have saved in retirement (or at any point, really) are how much you’ve contributed and how long you’ve been contributing. Your investment returns do contribute to the final number, but they’re not nearly as important as saving early and often.

What is early? Well, now. Start saving now. Not much more to say about that.

How much should you save? Most traditional advice is to save ten or twenty percent of your income, and for years I’ve spouted that line too. In the past few months, however, I’ve come to realize that this advice is inadequate. If you save just ten or twenty percent of your income, it’ll take you forty years to have enough accumulated to retire (or to pursue whatever goal you have).

Instead, aim to save fifty percent of your income. Seventy percent is even better. If you can save at this rate, you’ll be retiring to your farm in South Carolina in ten or fifteen years instead of forty. The math behind this is shockingly simple, yet most people miss it. And most people complain that they could never save fifty or seventy percent of their income. Meanwhile, there are plenty of people who do manage this amazing feat. These industrious folks quietly retire at age 35 while their peers continue to say that it can’t be done (all while buying into the modern adult lifestyle).

How do you achieve such a high saving rate? There are only two things you can do to boost it: spend less or earn more. You should do both. When most people try to cut spending, they focus on the small, easy stuff like clipping coupons. That’s great — and you should definitely do that — but you’ll have a greater impact on your bottom line if you go for big wins. Housing and transportation are the biggest expenses (by far) in the budgets of most Americans. If instead of spending the average 33% on housing, you spend (say) just 15% of your take-home pay on housing, you’ll save a ton. And if you can live without a car (or with a beater), you’ll save a second ton. Meanwhile, finding ways to boost your income will also accelerate your savings.

Where do you put these buckets of money you’re now earning? Tuck it all into a low-cost stock-market index fund, such as VTSMX or FSTMX. Maybe add a total bond index fund too. Resist the urge to own more. Resist the urge to move money in and out of the market. Ignore the financial news. Ignore what your friends are doing with their investments. Just funnel your money into these funds and stand pat for the ten or fifteen or twenty years that you’re accumulating cash to afford your farm.

If you do these things — slash housing and transportation expenses, boost income, invest in index funds and leave the money alone — you should be able to build a sizable nest egg in half the time you’re planning to spend on the project. During that time, keep dreaming the dream and building your skillbase.

If you want moral support while trying to save fifty or seventy percent of your income (your friends and family will think you’re crazy and say that it can’t be done), read Mr. Money Mustache, Early Retirement Extreme, and Afford Anything. I’d recommend my own blog too (Get Rich Slowly), but sadly the focus isn’t on this sort of financial behavior — it’s more geared toward those in the modern adult lifestyle.

How I Found Freedom in an Unfree World

As for books? Check out Early Retirement Extreme, Your Money or Your Life, Cashing in on the American Dream, and How I Found Freedom in an Unfree World. (The latter isn’t about money but philosophy. Ignore the libertarian politics and focus on the personal behavior stuff.)

There. You’ve just received the sum of the financial wisdom I’ve accumulated over the past decade of reading and writing about personal finance. Put it to use, and you’ll have your farm sooner than you think!

I don’t know whether this Ask Metafilter user will put my advice into practice, but I hope she does. Regardless, it was a hell of a lot of fun to encapsulate my current financial world view into just a few hundred words. This is what I’ve spent the last four months writing about for my ebook. And here I’ve summarized everything in a matter of minutes.

1 kathleen February 20, 2014 at 08:20

Seriously. We’re working on a spreadsheet that would tell us where we could relocate in order to save more money. We’re getting taxed out of the neighborhood!

2 martin February 20, 2014 at 08:36

I have been working on financial freedom/early retirement since 18. One key is that you need to risk your time and sometimes your money. I took a huge risk by buying a rental property that just recently paid off!

3 PawPrint February 20, 2014 at 08:54

While I like all the advice you gave, I particularly like that you mentioned changing priorities. Even in the past five years, my priorities have changed. I love gardening and had a large garden and a large yard. When my husband was ill for 18 months, the burden of all that yardwork really got me down. The older I get, the more I want the freedom to be able to do other things rather than be tied to yardwork every weekend. My suggestion would be to experience living on a farm as they near their retirement age. Many working farms offer volunteer experiences, which would give this couple an idea of what they can expect if they had their own farm.

4 Ryan February 20, 2014 at 09:20

I like it, J.D. My philosophy has recently drifted in this direction. I want to simplify my current lifestyle so I don’t have as many financial obligations. It’s all about having more options – financially, professionally, and most importantly, personally. All of these options increase exponentially when you have fewer obligations on your time and money.

5 Adam Kamerer February 20, 2014 at 09:32

What is early? Well, now. Start saving now. Not much more to say about that.

I think this is so important. When it comes to things like saving, “now” is always going to beat “later,” no matter how soon you get around to saving later.

6 Matt February 20, 2014 at 10:37

Awesome. I have been working toward the same goal and try to base all of my decisions on how it will impact my timeline. Start saving right now is probably the best advice you can give, followed closely by spend less and earn more.

7 Tyler Karaszewski February 20, 2014 at 11:29

This made me want to look up my progress on my 401k plan. I started a 401k in October of 2012. I had one before, but had rolled it all into an IRA. At first, I started contributing to the 401k at the rate that would max out my employer’s match. I actually reduced the contribution for a while (after my wife got sick, and when she died I actually took some money *out* of my IRA to cover expenses. I know you’re not supposed to do that. Oh well.). In the last couple of months I’ve raised my 401k contribution to the maximum allowed.

So, a little under a year-and-half into my 401k plan, where do I sit? It’s worth right around $22,000, after about $14,500 in my own contributions. The rest is employer match or market changes (I’d have to look pretty closely to figure out exactly which).

But hey, over $20,000 in not much more than year when I had sen *reduced* my contribution for a while! Not bad! At this rate, I’ll have $40,00 by next year.

I also still have about $40,000 sitting in that IRA, which is a lot better than nothing. Looking back, I could have had more in there, too, but at this point that’s water under the bridge. I’m 32, I’ve got about $60,000 in retirement savings, and I’m on track to save fairly quickly.

Will I retire at 35 at this rate? No. Will I be in a good financial position compared to nearly everyone in my age group? Yes. I’m following J.D.’s “don’t let the perfect be the enemy of the good” advice here, and acknowledging that while I may be able to do even better in the future, doing pretty good now is a good start.

8 moneystepper February 20, 2014 at 11:45

That magazine looks awesome!! :)

9 Daizy February 20, 2014 at 12:27

I have a similar dream except in miniature. I have 4 acres in the AZ desert and it is my hope to semi-retire in 5 years when I am 46 and have some sort of micro-farm. I have my spreadsheets with my budget, projects, and goals for where I want my house price to be before I sell it. It is quite easy to find homesteading blogs to learn from other people’s successes and mistakes (mistakes are really important!). I have a whole list of blogs I check daily on topics such as farming, tiny homes, natural building, etc…. as well as links to Countryside and Backwoods Home magazines for their online articles. Also, many skills can be tried out now such as food preservation, gardening, and a few animals. Last month I bought a half dozen quail to see how hard they would be to raise. I didn’t want chickens because they need to be on the ground and I have dogs who would eat them. So far it is going well and raising quail is something that I am considering expanding on when I semi-retire. Next project is a very small aquaponics system. I just need to buy the fish. It is easy to spend too much money on hobbies so I have to be careful to stick to my savings plan. If all goes well, I will have both the money and the skills to make my mini-farm a success.

10 Edward Ferguson February 20, 2014 at 12:38

Great summary, JD!
Like many, I wish somebody would have told me all of this much sooner in life. I have never carried debt, always lived modestly, and saved 15% of every paycheck, doing what I was told like a good little squirrel. I then started watching Gail Vaz-Oxlade’s show, “‘Til Debt Do Us Part,” and became more interested in waste and saving money. Her blog led me to GRS (when you wrote it all) about a year later (and I loved it!), which eventually brought me to MMM mid-2012. I now *easily* stash away 50% of each paycheque and notice no difference in my lifestyle at all compared to 4 years ago. Hell, I don’t even know what I was doing with that extra (apparently completely disposable) 35%. Take out pizzas? DVD boxsets? Stupidity? I’m 42 now and would easily have been retired at this age if I did the 50% thing my whole career. …I still plan on getting out earlier than everyone else though. :)

11 chacha1 February 21, 2014 at 10:16

Those interested in this question may want to track over to Raptitude … he wrote recently to the effect that the amount of money you EARN is much less important than the amount of money you KEEP. I am trying to get my husband around to this way of thinking, because at 54 he has not saved enough to cover more than one year’s expenses in retirement.

My 1st advice for the questioner is Talk Now & Talk Often. If both partners are not 100% on board, early retirement is functionally impossible. Something as simple as hanging onto the beloved fuel-inefficient vehicle can add up to years of lost savings.

My 2nd advice is to take JD seriously when he says Do Your Research. When you are 35 and vigorous, running a farm “in retirement” sounds do-able and kind of fun. But it is hard, physical, and unrelenting work. There are no days off. There are no vacations. And there is constant worry about weather, water supplies, sanitation, regulations, etc. If you are talking about subsistence farming, that’s one thing. But if you propose to sell any of your products for retirement income, you do not get to choose which rules to follow.

12 Lila February 22, 2014 at 20:14

I’ve read “How I Found Freedom in an Unfree World” as well and I loved it. Dreams change sometimes but what matters is if you are happy where you are in life.

I’m saving for early retirement because I have no desire to live in a mansion, a yacht, or shop at Chanel so conscious spending or frugality isn’t a sacrifice for me. I just don’t have enough desire within my psyche to work for those things. Don’t get me wrong. I don’t judge people who want to own mansions, yachts and shop at luxurious stores, if they are happy then I’m happy for them. :D

I’m trying to say those things are not that important to me. I just want different things out of my life. What I value more is my freedom and being able to choose how I spend my time and not being at the beck and call of my job. I have found that most jobs are very boring for me.

I can’t wait until I’m no longer at the beck and call of my alarm clock. I’ve been in the corporate world enough that I’ve seen backstabbing co-workers, bosses that play favorites, one company I was a part off did a lay off a few weeks before Christmas and New Year’s. That seemed really cold.

Society tells you to go to college so you’ll be more intelligent, educated, well prepared at work but it’s sad when college educated graduates act like this in the corporate world. I’m happy to say that I’ve changed jobs and now work at a better company. Still, I want to eventually leave and do my own thing.

I can’t wait for your new ebook! :D

13 TS March 6, 2014 at 08:08

JD, I’m curious about something. You wrote, “I’d recommend my own blog too (Get Rich Slowly), but sadly the focus isn’t on this sort of financial behavior — it’s more geared toward those in the modern adult lifestyle.”

What exactly do you mean by “the modern adult lifestyle”?

I’ve always thought of GRS as encouraging saving for retirement and encouraging financial responsibility at all levels. What is the distinction you are trying to draw by saying GRS focuses on “the modern adult lifestyle” vs. hardcore saving for retirement?

14 Cindy March 7, 2014 at 09:41

You wrote “How do you achieve such a high saving rate? There are only two things you can do to boost it: spend less or earn more. You should do both.”
Well what about Saving? Our society has virtually ignored that we should be “Paying Yourself First”. Especially with ridiculously low interest rates, there is no incentive. “Saving” isn’t buying something on sale to ‘save’ a few dollars and putting it on a credit card, thus creating even more debt! OurCollegeSavingsPlan.com is a virtual guide for parents to save for their child’s college tuition before they even get out of High School, but it could also be applied to that retirement you seek on a country farm. Connecting people to the “correct way to move money” is essential, and most people don’t know how to do it. I hope this information helps.

15 Trenton March 14, 2014 at 08:44

Retire early has been my goal since college.

I had already figured out that employees do not get rich. So I always had the mindset of a job instead of a career. A job is what you do while a career is who you are. If you love your work and have a satisfying career then good for you! Since I could not sing, act or play well with a ball I figured I had three options: investing in companies (stocks), real estate or business.

You have to take a hard objective look at your personal balance sheet – not money but your personal assets and liabilities. For instance I knew that I could not sell dollars for dimes, so business was out. I naturally had an interest in investing. It was fun, worthwhile, interesting and rewarding. It was no problem for me to learn to read financial statements and make judgements about businesses.

I inspect plants for an insurance company, so I learned about business “on the street.” I would sit for as long as they would let me keep asking questions. I found that the people usually liked to talk about their business, so all I had to do was keep asking childlike questions “why..how…” etc. On long trips I listened to cassettes of Tony Robbins and Napoleon Hill and let the anger of having to travel on Sunday motivate me. And then my company offered unintended motivations.

On my first day the district manager, an elderly Mr. M. sat me down to go over things including his rule that an employee was not allowed to earn more than 5% of his income from outside sources. Though I sat on the edge of my seat and said “yes sir” (fresh out of college and poor) I was infuriated. I was extremely motivated to beat that as fast as I could. That old man was trying to financially keep me under his thumb and mercy.

I lived with my parents and saved until it hurt. I bought some electric clippers and cut my own hair. Eighteen months after that chat with Mr. M. I had saved a year’s gross salary in an American Express money market fund yielding 8% (this was 1990). At that time the dividend checks came in the mail, and it was so wonderful to receive that money I had not worked for. I found in that experience the difference between sweet money and sweat money. In some respects my personality was well-suited to investing as I am a nonconformist and very much an individual. I did my own thinking. By end of the Clinton presidency I made my first million.

I’m trying to work six more years so that at 55 (Lord willing I am able and healthy) I can get a small pension which would be comforting to me to have that safe income in addition to the other assets. Almost daily I plan how at 55 plus one day without warning I’ll hand in a tersely-worded statement terminating my employer’s privilege of employing me and remind them of the times they stuck it to me. There is that risk to balance – retire now and risk running low on money due to lower income from near-zero interest rates, or another great recession or some emergency etc. or work too long and die in-harness or soon after retiring.

16 LeisureFreak Tommy April 12, 2014 at 18:19

I didn’t retire the first time at an extreme young age. I was 51 and even though I traded less pay for a pension benefit, by the time I reached pension eligibility the company had been bought out after I was over 20 years into it and the pension was in a shambles after the new company was given the federal government’s blessing to pay severance pay out of it for the multitude of “synergy” caused layoffs and subsequent economic collapse. I guess the point I want to make is life happens. I was saving in the 20% range as I paid off all debt including my kid’s college and subsequent weddings but was eventually able to ramp up to 50% retirement savings for the last few years before retiring the first time. Save as much as you can and live a balanced life without feeling deprived. Frugality is necessary before and after retirement but if you stick to your plan, a plan you can live with and set your own timeframe, and live a balanced life that always asks what is needed vs. wanted, you will get there. Financial freedom to do what fulfills and rewards you is worth any minimal and smart sacrifices it takes to get there.

17 MoneyTree May 29, 2014 at 04:06

I achieved early retirement at age 52. I’ve also invested 10,000+ hours studying the US financial and political systems. I’d like to share a few tips that can get motivated people to early retirement in months rather than years or decades.

First, we need to take a look at what savers up against. REAL inflation is actually running nearly 10% (ShadowStats.com). If you’re surprised at this, it is only because you’re unaware the federal government keeps changing the formula to make inflation look lower than it actually is. This means that your savings and investments must earn 10% per year just to MAINTAIN your purchasing power. Anything less and you actually become poorer, despite your saving and investing.

In 2013, the average rate of return on a one-year, $100,000 bank CD was 0.24%. That’s a quarter of one percent. In 2013, the grocery division of Hormel, the makers of Spam, grew by 24.0% (twenty-four percent). We live in an investment world where a can of Spam earns 100 times greater rate of return than $100,000 cash sitting in a bank. You should fire your banker and hire your oinker.

In addition, the federal government has just created a “retirement account” called myRA that invests in treasury bonds. Why? Treasury bonds are what the federal government sells to get the cash to pay its bills. The federal government is insolvent right now and actually borrows or counterfeits (via the Federal Reserve) about 50% of its budget just to pay the bills. Many suspect that the feds will soon be so desperate for money that they’ll force ALL retirement accounts to invest in treasury bonds.

Even worse, US banks are tweaking their deposit agreements to allow “bail-ins” where if the bank suffers a loss, they can steal depositors’ money to cover that loss.

So in today’s world, saving is a losing proposition for most people and your savings are not nearly as safe as you’re led to believe.

But the good news is that you are motivated to retire early! That gives you the power to read anything and ask people who have already retired how they did it. If you’re truly motivated, you can retire in months. Here’s how.

Experts tell you the way to retire is to work for decades and save and invest a million or two and then live off the interest or earnings. Millions of seniors who have followed this advice for decades are now shocked to see this isn’t working. Banks are paying 0.24% on one-year bank CDs which is $2,400 per year on a million dollar deposit. Or they buy 5-year CDs to get a 2.5% return and earn $25,000 a year on their million. No one can live on that. So they are forced into riskier “investments” and still earn less than 10% on their money, which has them losing purchasing power, which makes their lifestyle continually decline.

If the goal is to gain a passive, monthly income that exceeds your monthly personal bills so you can retire, there is a much easier way to do this.

Just teach yourself how to BUY an income stream. There are millions of businesses and properties that generate passive income. Hundreds of thousands of them are for sale right now. Just buy one and gain the passive income for yourself!

After 35 years of working jobs and running my own businesses, I did this with multi-unit residential rental properties. Specifically, trailer parks. I self-educated myself on how to buy them and operate them and then used my writing skills to write the proposals to banks and sellers that closed the deals. I bought my first park for just $1,000 down. It earns enough to pay all park expenses, a manager to run it and all my personal bills too. It is 95% passive. I now own two parks and my only “job” is to manage my managers.

I “retired” at age 52 but had I known this shortcut earlier, there’s no reason I couldn’t have retired by age 25.

There are many other forms of passive income. You’ll likely choose something else. But the point is, learning how to buy passive income streams is the short route to retirement. And owning an income stream that you can touch and control is far more secure than paper or digits sitting in a bank or brokerage account.

You’re motivated! You can read anything, interview anyone who has already bought income streams and become your own authority on passive income.
If you use the money in your retirement account to do this today, you can “retire” tomorrow. If you don’t have any money saved yet, you can self-educate yourself on how to buy income streams with little or no money down. People are doing this every day.

“Retirement” is immediately possible as soon as your passive monthly income exceeds your monthly bills. You can achieve this at any age. You don’t have to work 40 years and scrimp and save until you’re 65 to do this! You can trade several months of self-education and gain financial freedom for the rest of your life!

Two resources that made all the difference for me were the free How-to and Success Stories at Creative Real Estate Online (CREOnline.com) and the first Rich Dad Poor Dad book, “What the Rich Teach Their Kids That the Poor and Middle Class Do Not.”

Only 5% are financially free. The conventional advice of “save up a big nest egg and live off the interest” no longer works for most people. It requires trading up to 40 years of your life to even have a shot at it. Then inflation eats up those gains and even people who have done “all the right things” STILL can’t retire.

Buying your own passive income stream saves decades, puts your income in your own control and is a realistic way to retire THIS YEAR.

Good luck!

MoneyTree

18 MoneyTree May 29, 2014 at 04:33

P.S. Wife & I had the hobby farm dream too and bought a fixer-upper, six acre hobby farm as a second home in 2011. We spent two summers rehabbing it and then realized farming really required 12 months to do it right. We also learned that having two homes prevented us from fully relaxing in either. So we sold the hobby farm for a tidy profit and are adding more “farm” at our main home.

So yes, your dreams change over time. Being financially free allows you to fully explore and experience them. I also agree with Harry Brown that being a contrarion is the best way to gain freedom in an unfree world. Becoming your own authority is the fastest way to wealth and happiness.

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