There’s a new craze in town and it is called: “I want to retire early.” In fact, there’s even a whole movement around the idea called: “FIRE” (‘financially independent, retire early’).
“Wait, what? I can retire early??”
Retirement is a financial position, not an age. So, you have a measure of control over when you retire. It all comes down to…winning the lottery! No, I’m joking. It’s more boring than that. It all comes down to how you save and invest your money over the course of your life (more details below). If you don’t save money, you won’t have money to invest. If you don’t invest money…well, don’t sweat it, we’ll get to that part in a bit.
“Can normal people retire early? Or only millionaires?”
There are plenty of everyday people with normal jobs actively working towards (and succeeding at) retiring early. In fact, the whole ethos of the FIRE movement is that retiring early is very achievable for someone on an average-ish income. There are plenty of examples of normal people who have done it. Mr Money Mustache is a good example. He retired with his wife by the age of 30, and they have a child as well.
However, there is a major difference between ‘rich people’ and people pursuing early retirement. There are a lot of rich people who are already rich enough to retire. Famous actors, business owners, CEOs of big companies, investment bankers, surgeons etc. These people are not the face of the ‘early-retirement’ movement because…they aren’t aiming for early retirement. Maybe their aim is to get rich and famous, or maybe they just love working (like the Elon Musks of the world). The point is, they’re not working for the sake of being able to retire early. They’ve got other goals and being wealthy is just a by-product of those goals.
On the other hand, for most participants of the ‘early retirement’ movement the whole objective is to accumulate enough wealth so that they can quit their jobs and live completely off their investments. That’s it. They’re not trying to acquire fancy cars and private planes in the process. No. In fact all those rich toys are going to keep delaying their retirement because they cost stupid amounts of money.
Now, obviously there is some overlap. There are people who, in the process of getting rich realise that early retirement is something they want. There are also people who, in the process of chasing early-retirement, end up enjoying the process so much they continue working on the investments and businesses far after the point they can retire.
“Rich people, early-retirees…same thing right??”
Is going to Chinatown the same thing as going to China? Same same…but different. You’ve got to get really clear on what exactly it is you want, because the road to destination A is very different to destination B. If all you want to do is retire early, then that’s a very different pathway to “I want millions of dollars and want to live in a mansion.” They are not the same thing.
This is where a lot of people go wrong. They hear “early retirement” and they equate it with being rich and living a lavish lifestyle. You do not need millions of dollars in order to retire early. In fact, people who are pursuing early retirement often live the opposite of lavish lifestyles because…guess what? The money you spend on rich toys is money which isn’t growing in investments to fund your retirement.
So get clear on what you want: do you want just enough money and wealth to be able to quit your job? Or do you aspire to riches and significant wealth? Those are two very different goals.
“But like…how do I retire early? How does it work?”
Here’s the basic premise: right now, you’re earning money from your job to pay for your lifestyle. Basically, you want to invest enough money and accumulate enough assets so that the return from your investments can cover your cost of living. As soon as you do that, you no longer need your job…and then you can retire!
It’s really that simple…in theory. So, let’s get into the details. I’m going to show you the numbers. It’s really simple and I’ll break it down for you.
Say Joe is earning $5,000 per month and his living costs are $4,000 per month. That means he has $1,000 left for ‘savings’. This means he is saving 20% of his monthly income (and spending the other 80% of it).
Now, how long does it take for him to save up for ONE year of retirement? Well, he’s spending $4,000 a month = $48,000 per year (so that’s how much money he needs saved up for one year of retirement). He’s saving $1,000 per month = $12,000 per year. He has to save for 4 whole years in order to afford just 1 year of retirement ( $48,000 [divided by] $12,000 = 4 years).
How on earth is Joe going to ‘retire early’ if it takes him 4 whole years just to save up for one year of retirement?? At this rate, it’ll take him about 37 years to hit ‘retirement’.
Well, what if we move some of the numbers around? What if Joe could live on $3,000 per month (instead of $4,000 per month) out of a $5,000 per month income. Now, suddenly he’s saving $2,000 a month which is 40% of his monthly income. Over a year, he’s spending $36,000 and saving $24,000 so now…it’s only going to take him 1.5 years to save up for one year of retirement. He saved himself 2.5 years by saving an extra $1,000 per month. Now…he’s looking at about 22 years to retirement instead of 36 years. He just saved a whole 15 years.
This is really key: it’s not just about how much money you’re saving in dollar figures, it’s how much you’re saving as a percentage that is important. So just because you’re earning more money doesn’t mean you’re better off. For example, say Jill is earning $100,000 and saving $24,000 a year. She’s saving the same as Joe ($24,000) but she’s also spending more than Joe. She’s spending $76,000. Since Jill is spending more money, she needs more saved to afford retirement in the first place.
All up, it’s going to take Jill about 33 years to retire…compared to Joe’s 22 years, even though Jill is earning a higher income. So, it’s not about how much you make, it’s about how much you keep (i.e. save). This is the core principle of the whole early retirement movement: if you can increase your savings as a percentage of your total income then you can retire faster.
“But what about investing?? Isn’t that important??”
When I say ‘saving’ I really mean ‘saving and investing’. I don’t mean ‘saving and keeping in a bank account’, or ‘saving for the purpose of spending on a trip to Europe next year’.
But there’s a reason I didn’t go into the investment side of things. Don’t get me wrong, investing is critical. On an average income, if you don’t invest, you cannot retire. But…I didn’t go into it because when you start talking about the investing bit, people often get distracted with a million other questions: ‘What do I invest in?’ ‘What return do I need to aim for?’ ‘What about if I can increase my return?’ It’s a whole other can of worms.
Here’s the thing. If you aren’t saving money, you have no spare money to invest. The more money you save, the more money you can invest. So initially, the key focus of people who are aiming to retire early is to significantly increase their savings (as a percentage) because that is the critical cornerstone of being able to retire.
Don’t believe me? Let’s go back to Joe’s example where he’s earning $60,000 per year and saving $24,000 per year (i.e. 40% of his income). On an investment return of 5%, he can retire in about 21 years. Now, say he was only saving 10% of his income. What kind of return would he have to get to be able to retire in 21 years? Roughly 19%. That’s a crazy high investment return. Unless you are an absolute investing guru (and even then…), a 19% return on investment is just not practical or realistic for most people.
So…this comes back to what you can control, which is your savings. That’s why people pursuing early retirement are so adamant on saving as much money as they can, as a percentage of their total income. Their aim is to get their savings rate (percentage) as high as possible, to fast-track their path to retirement…whilst investing in investments that give them reasonable, average returns over the long-term.
“Alright so…how do I get started?”
Your ability to retire early is determined by:
(a) how low can you keep your cost of living, and
(b) therefore how much of your income can you save (to invest)
So there are a few things you can do to get started:
1. You need to know your numbers: how much you earn, how much you spend, and where you spend it…so that you can identify how far you are from your goal, and where are the areas you can optimise your savings.
2. You need to figure out (realistically) the amount of money you need to live your chosen lifestyle. It’s nice to think “I can live on 50% of my income” but if it’s going to result in a life that feels too restrictive, it may be unsustainable and frankly…not enjoyable. You need to figure out what the right balance is for you, and weigh that up against your retirement goals.
“Okay…that sounds kinda do-able. What’s the catch?”
So I know…it sounds awesome. I mean, you never have to get up at 7am to get to a job you barely even like…Isn’t that like the definition of heaven or something? But I think there’s a big part of the conversation that’s not really talked about quite as much. Retiring early is not as straightforward as a lot of people like to make it seem…
So that’s what’s coming up in Part 2! Stay tuned.