Ah, the dream of Early Retirement! Almost all of us have that dream at some point in our lives, but few of us actually do it. Why? When you get into the numbers, it’s hard to retire early. Really hard. There’s a reason the majority of folks
can’t don’t do it.
If you’re serious about wanting to retire early, follow these Ten Commandments Of Early Retirement. They’re built on what worked for us during our 32-year journey toward our early retirement at Age 55 (soon, very soon). Age 55 may not be drastically “Early” by the measure of many in the blogging community, but acceptably “Early”, me thinks, when compared to the Population as a whole. These steps put us in a position to retire earlier than most, and they’ve worked for many other Millionaires Next Door. They’ve worked for others, and they’ll work for you.
The more of these commandments that you’re able to follow, the earlier you’ll be able to retire. If you’re too late to retire “early”, you can still apply these commandments to retire earlier than you’d otherwise be able to. You’ve nothing to lose but time (think on that), so review the list below and see how many you can apply in your own life.
The Ten Commandments Of Early Retirement
I. Start Early
I know, you’ve heard this one a hundred times. Sorry, but you’re going to hear it at least once again. Commandment #1 – if you want to retire early, you need to start saving money early. If you’re waking up as a 50-year-old and just now decided you’d like to retire early, go back to bed. It ain’t gonna happen. Retiring early takes years of diligence and patience. I’m sorry if that’s not what you want to hear, but that’s the way it is. Genuine “early” retirement requires the leverage of “Compounding – The Greatest Force In The Universe”. If you missed your chance to start saving early, you’ve severely impacted your odds of an early retirement. If you’re late to the party, remember that the only day better than yesterday Is Today, so start now.
Life happens fast, jump on it early.
II. Save 20% Or More
While traditional advice is to save 15%, that’s simply not going to cut it if you want to get out early. At a minimum, everyone I know who has retired “early” has saved at least 20% of their income, based on personal discussions I’ve had. Realize that the biggest two factors in when you will retire are when you started, and how much you saved.The Biggest Two factors to FIRE are 1) When You Started and 2) How Much You Save. Click To Tweet
Everything else is rounding.
If you want an example of the impact of savings rate on your FIRE date, check out the classic post, The Shockingly Simple Math Behind Early Retirement, by the legendary Mr. Money Mustache. By looking at the chart in that article, you can easily see that saving 20% of your income will result in Financial Independence in 37 Years. Wow, that’s a long time. Yep. It takes years of diligence and patience to achieve Early Retirement.
- Don’t like 37 years? Bump your savings up to 25%, and drop your FIRE date to 32 Years.
- Go to 30%, and drop your timeline to 28 years. See how that works? Save more, retire sooner.
Yep, 20% is the minimum if you want to retire early. Then, you have to patiently wait (and enjoy life) for 37 years. As I said, early retirement takes years of diligence and patience.
III. Increase Your Income
The path to Early Retirement is, at its core, a simple math problem. It it’s most basic form, it’s:
Inputs – Outputs = Savings
Yes, you all know that simple formula. But stop and think about it for a minute, as you decide if “Early Retirement” is right for you. If you can either “Increase The Inputs” or “Decrease The Outputs” (preferably both) you’re moving in the right direction.
The logic for emphasizing “Increasing The Inputs” is based on the mathematical reality that income is, in theory, infinite. You can only “Decrease Outputs” to Zero (in reality, somewhat higher than that to survive), but there’s no mathematical limit to how far you can “Increase The Inputs”.
Therefore, focus on increasing the Inputs. Crush your career. Earn that promotion. Work that side hustle. Earn multiple income streams. Drive for Uber. Maximize the inputs, and make it a high priority.
IV. Live Modestly
As Commandment III begins kicking in and you generating higher income, don’t succumb to lifestyle inflation. This demon can suck all of those extra dollars you’ve worked so hard to build, and bind you in chains that last for decades. Don’t be tempted to buy that new car just because you got that promotion. Buy a smaller house than you can afford. Live a life of Stealth Wealth. Keep your living modest, and watch your investments grow as your increasing income fuels the FIRE.
V. Invest In Stocks
Don’t worry about “the over-valued market”. Don’t even think. Just invest your “surplus” every month (automated, please) into a low-cost index fund in a widely diversified stock portfolio. Think global, and maximize your diversification around the world. Never sell, and don’t try to time the market. Target something like Vanguard’s Total World Stock Index (VTWSX), with an expense ratio of only 0.11%. For the record, that’s the fund we established for our daughter’s investments when she started her career. Our actions mimic our words.
Over time, stocks have historically earned the greatest return. (past performance no indication of future performance. Smiles) , so just load up on a few high quality, low-cost index funds, automate it, and forget it.
VI. Track Your Progress
Now that you’re well set up and dollars are starting to flow, it’s time to start tracking your progress. Use my Free Net Worth template (save a copy to your drive to make changes) and build your first Net Worth Statement. Read my post “How Much Fuel Is In Your Tank”, to learn how to build your Net Worth statement, and why it’s so important. What you measure matters. If you measure nothing else, measure your Net Worth. Do it every Dec 31, and watch your wealth grow.
VII. Manage Your Own Wealth
I’ve got several friends who are financial advisors, and I appreciate that there are times when it makes sense to pay a financial advisor to help in your wealth management. However, I believe that the primary path to early retirement is paved by those who walk alone. If you really want to retire early, you need to self-educate yourself to the point where you’re comfortable managing your personal finances.
You’re obviously a blog reader, so you’ve taken a great first step. Continue to pursue self-education through blogs, podcasts, books and other targeted media. There’s tons of good content available for free, you just need to make it a priority to take the time to learn. If you’re new to the game, start with the awesome Stock Series by J.L. Collins, written to teach the basics to his daughter. JL’s big on keeping things simple and his approach works.
Take ownership of managing your own wealth, and realize that no one cares about it more than you.
VIII. Optimize Taxes
Ok, now we’re getting to the boring stuff. No one likes taxes, but they are a major consideration for those attempting to retire early. While the standard “rule of thumb” is to maximize your tax advantaged retirement accounts (IRA, Roth, TSP, etc.), think through the issues before blindly directing your paycheck into these accounts.There are implications for where you direct your money through your career, and it’s important that you’re making intentional decisions to optimize taxes.
For example, if you’re young and expect to make bigger money in a few years, maximize your Roth now while you’re in a lower tax bracket. If you’re in your peak earning years and expect your income to decline in retirement, max out your pre-tax IRA’s, allowing you to pull the money out after retirement when you’re in a lower tax bracket.
In our case, we’re intentionally delaying our pension for a few years to “force” our W-2 income down to $0. We’ll then use this delay to convert some of our pre-tax IRA money into a ROTH, which will be a taxable event and count as income in the years that we do the conversion. The forced distribution of your Before-Tax IRA’s at Age 70 1/2 (Required Minimum Distribution) can be costly, and you should take steps to minimize the tax bite.
An excellent book on this topic is Dana Anspach’s Control Your Retirement Destiny, one of the best books I’ve read on retirement planning. Dana dedicates an entire chapter to tax optimization, and it’s from her work that we’ve designed our pension delay strategy. Thank you, Dana, for your “Best In Class” work on the topic.
IX. Save Big $ In After-Tax Accounts
If you’re going to retire early, you have to plan to have sufficient investments in after-tax accounts to bridge you to the age at which you can access your retirement funds. While “tax-advantaged” money typically comprises the majority of retirees portfolios, the reality is that it’s difficult to access prior to Age 59 1/2 (there are options, as noted in this post from White Coat Investor).
Do the math, and make sure you’ve “built your bridge” with a sufficient pool of after-tax funds to cover you to the point where you can access your tax advantaged accounts. Don’t be surprised if you find yourself increasing contributions to your after-tax accounts in your final few years of work to ensure it’s large enough to fund your lifestyle through your 50’s.
X. Delay Social Security
One of the risks folks need to consider when they’re approaching Early Retirement is longevity risk. What are your contingency plans if you’re one of the lucky few who lives to Age 100? Have you built that scenario into your retirement cash flow?
In my view, delaying Social Security is one of the best tools you can utilize against longevity risk. Not only do your payments increase 8% for every year you delay, but the inflation adjustments each year will now be based on a higher denominator. In essence, you get two big benefits by delaying your Social Security, and both work as excellent hedges against living to 100. There are few other tools which offer these benefits, and I’d encourage you to build in sufficient cash flow to delay your Social Security as you finalize your plans for early retirement. The majority of people take Social Security as soon as their eligible. This writer is shaking his head in disbelief. Take time to understand this issue, and be intentional in your decision on when to start drawing from Social Security. My wife and I won’t draw a dime until we’re Age 70. If you’re planning on drawing it sooner, make sure you really understand the decision you’re making.
If you’re thinking about an early retirement, recognize that it takes years of diligence, patience, and strong savings to make it become a reality. Don’t let that be an excuse for inaction. Instead, focus on these Ten Commandments Of Early Retirement and apply as many as you can into your life. With a focused effort and a bit of luck, perhaps you can be one of the fortunate few who is able to retire earlier than normal.
If you’re starting late, there’s also value in these 10 Commandments. Regardless of your age, apply as many as you can, and you’ll likely retire years earlier than you otherwise would. Sacrifice a bit now, and you’ll benefit for many years in the future.
Ultimately, it’s a math problem. Dedicate yourself now to building your portfolio to the point where you can generate sufficient income from your investments to cover your living expenses. Once you’ve done that, you’ve achieved Financial Independence, and an Early Retirement is yours for the taking.
PS – I realized after I completed this post that I’m not the first to write an article with this title. After doing a Google Search, I came across this gem from Early Retirement Dude, and wanted to give him credit for having the idea before me! It’s interesting to compare our Commandments (they’re quite different from each other), and I’d encourage you to check out his post. Apologies for copying the title, please consider my imitation as a most sincere form of flattery.