Early Retirement: What You Should Do For The Long Haul

early retirement girl in sun

Unless you’re really in love with your job, the idea of turning up day in, day out until you’re almost 70 years old probably fills you with dread and despair. But don’t give up hope just yet; early retirement is becoming increasingly commonplace, and it might just be an option for you.

See Also: Top 10 Reasons to Retire Now!

So, for those of you who are tired of working the principles of retiring early are as follows:

  1. Cut down on spending
  2. Save more money
  3. Establish some form of post-retirement income

I’m now going to describe how each of these steps works in practice and give you tips for creating an early retirement plan of your own.

It should be stated that the younger you start, the longer you have to save and put your retirement plan in place. But early retirement is not an ambition reserved only for twenty-somethings. In fact, middle-aged workers are arguably in just as good a position, as they’ve reached their peak earnings and are likely finished with child-rearing expenses.

In other words, wherever you’re at in your career, you can use these principles to get out of the rat-race that much quicker:

1. Tighten Your Belt

To free up the kind of cash needed to pull this off, you’re going to have to cut down on living expenses—a lot. Start by looking at your major outlays first (home, car) and seeing where you can make cutbacks. Cook everything at home to save on the cost of eating out. Cancel your TV service and get out and about more. Take low-cost vacations or none at all—remember, you’ll have the freedom to travel the world once you retire if that’s what you want.

Get comfortable with having a DIY mentality and doing more for yourself rather than paying others. You could learn everything from basic home and car maintenance to cutting your own hair if you put your mind to it (be sensible, though—it’s OK to do your own dry cleaning, but not your own dentistry). Any time you reach into your pocket to pay for a service, ask yourself "could I do this myself, or even learn to do it?"

If it’s within the realms of possibility, consider moving somewhere with a lower cost of living (relocating from New York to the Midwest, for example). If not, at least consider moving to within walking/biking distance of work.

If you’re not sure about all this, just try it for a while—say, a month. You might be surprised at how happy you can be once you stop trying to "own" things and start engaging in low-cost activities like cooking, walking and gardening. Don’t fall into the trap of assuming that spending less will lead to a more miserable life; in practice, the opposite is almost always true.

2. Save, Save, Save

Having tightened the purse-strings, you should have freed up a lot of your income. Now you’re going to save as much of that as you possibly can. Some people like to put an arbitrary figure or percentage on this, but realistically you should just try to save every single penny that you don’t absolutely have to spend. Just for the sake of it, let’s say you can live on 25 percent of your income and save the other 75. In one year, you’ll have put enough cash away to cover a further three years of expenses. See how that works?

If you’re in debt, you need a get out of debt plan. Fast. And don’t take on any more. It reduces your cash flow and diminishes your ability to save money. When you pay interest on debt, you’re literally throwing your money away. Cancel your credit cards, pay off any loans or overdrafts, focus on getting your expenses well below your income, and ruthlessly save the rest.

If you can increase your earnings, you’ll reach your goals even quicker. Whether you get a new, higher paying job or a promotion with your existing employer, keep your basic living expenses the same and save the surplus. If you’re seriously determined, you could take on part-time work or start a side-business outside of your regular job. Just don’t burn yourself out.

The combination of tightening your belt and saving everywhere you can will not only help you reach your retirement goal, but it will also condition you to live on less money. This will be a huge advantage when you finally wave goodbye to your employer and go it alone.

3. Learn About Investing

It might seem complicated and boring, but financial investment is not just for the slick-haired, pinstripe-suited traders on Wall Street. Making your money work for you is going to be critical to your early retirement plans. The key is to look for safe investments with decent returns to maximise the potential of the money you save.

To illustrate how investing works for the early retiree, let me introduce you to a savvy young couple called John and Jane Doe:

John and Jane are both 25 years old, they earn roughly $70,000 per annum between them, and they want to retire by 35. Here’s their situation:

  • They’ve got $15,000 savings in the bank
  • They’ve calculated that their basic minimum living expenses would be $24,000 per annum
  • Therefore, they believe they can potentially save $46,000 every year

John and Jane take their $15,000 savings and invest them in a portfolio with an annual yield of 6 percent (this is actually a pretty conservative estimate of return—clever investors can manage 10 percent or more). They also begin ruthlessly cutting back on their living expenses and embracing a frugal lifestyle.

By the end of year one, they’ve hit their goals and saved $46,000. They add this to their portfolio (which is now $15,900), and reinvest the lot—around $62,000. If we extrapolate that over 10 years (original investment + return + new savings), the couple will end up with just over $630,000 by the time they reach 35:

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Now the fun begins. If John and Jane can maintain a steady 6 percent return on their investments, as they have been doing, they can afford to draw down 4 percent of their total savings every year and still watch their portfolio grow. Taking 4 percent out of their $630,000 savings gives them just over $25,000—more than enough to cover the couple’s basic living expenses for the next year without shrinking their investment or having to add to it again. In practical terms, it means John and Jane—at just 35 years old—can now safely retire.

The best part? Their investment portfolio keeps growing by 2 percent each year, as does the amount they are able to withdraw. In fact, by the time John and Jane reach the traditional retirement age they will have almost double the amount of cash-in-hand required to cover their basic annual living expenses, without having to work a day past 35!

4. Have a Post-Retirement Plan

OK, so now that you know how it’s done, it’s time to put your own plan in place. First of all, set a target date for your retirement. To do this, you’ll need to know:

  1. How much you need to cover your basic annual living expenses
  2. How much you think you can save every year
  3. The return you expect to get on your investments

You can consider yourself free to retire at the point in time when you’ve saved/invested enough to withdraw a year’s living expenses without negatively affecting the growth of your portfolio.

This approach simply leverages your savings and investments to give you the financial independence to do whatever you want. There’s absolutely nothing stopping you from taking up work again post-retirement; the difference is that it will be on your terms, and you have the freedom to walk away anytime.

Of course, you should have some idea of what you want to do once you retire. If your whole plan is just "not having to work," then you’ll probably get bored very quickly once you leave the office for the last time. Think about your hobbies and interests, and see how you can develop them. Go after some of your long-lost passions—some of them may even lead to additional income. And remember, most of your peers will probably still be living the 9-5 life, so be prepared to fill your day by yourself.

Early retirement might seem like pie in the sky to you, and it probably looks difficult to pull off. But it’s definitely possible, and many who’ve gone before you have managed it.

You’ll need to wholeheartedly embrace—and even learn to enjoy—frugality, and your family will need to be completely on board; if you or your partner insist on continuing to spend recklessly and accumulating stuff, it’s not going to work. Take the time to truly understand the personal and financial freedom that comes with early retirement, and you’ll feel liberated rather than deprived.

Most of all, you need to believe that early retirement is possible. Be positive and optimistic, and embrace your new lifestyle. Doubt and pessimism inevitably lead to fear and paralysis, which will only keep you stuck in a rut as you watch the years pass by.

Do you want to retire early? How do you plan on making it happen? Let us know in the comments below