There is this thing that crops up on the wide worlds of the internet from time to time. Well, more like all the time.
Some say it is merely a fantasy, and to disregard the people foolish enough to even bring it up.
Some say they are already living in that so called “fantasy”.
This thing is early retirement. There are always people who call themselves early retirees, and many take to the internet to tell you about it, and in some cases, how to accomplish it yourself. But are these people to be taken for real? Or is this just another scam among the thousands of online myths?
While I am not an early retiree myself (seeing as I’m in college and haven’t even started a career yet, I’d say that I’m on the opposite end of the spectrum right now), I have done quite a bit of research on this subject, and have read several blogs that have convinced me, in an overwhelming fashion, that retiring early, even really early, is more than possible. In fact, you can do it no matter your situation based on what I’ve found.
To prove my point, I’ve looked at several examples of people who have retired early, and then I ran the math myself to see if what they claim could even be mathematically true. First, lets take a look at those people who so boldly claim themselves “early retirees”.
Mr. Money Mustache
Mr. Money Mustache is by far my favorite early retiree, and his blog was one of the first financial blogs I followed when he first started writing a year and half ago. Here is the brief summary of how he retired by the time he was 30. (No, that is not a typo, he retired at 30)
- His entire life he has been very frugal, not wasting money in any sense of the phrase.
- He graduated from a local college with no debt.
- After graduation he got a professional job, but still lived with several roommates and drove a cheap used car.
- He then moved to the US (from Canada) and began making even more money, all while spending almost nothing.
- He got married and bought a fixer upper house, which he and his wife worked on fixing themselves (to increase the value of the house substantially without having to pay contractors).
- They spent only around 25% of their disposable income, saving/investing the rest.
- After accumulating a large “money mustache”, they retired at a meager 30 years old.
Can this story be true? Of course it can. The spent almost nothing, and made a substantial income at the height of their careers (they were software developers). Those two things combined mean that they can build up a huge amount of wealth quickly. Wealth turns into more wealth, and then they could easily retire. Now they live off of dividend payments from their investment accounts, rental income from several properties they own, and the occasional side job. They live in incredible comfort, and they get to do whatever they want, whenever they want. Sounds pretty awesome to me. Visit his site and see what I’m talking about here.
Jacob from Early Retirement Extreme
Jacob is another great example of an early retiree. His situation was very different from MMM’s in a couple of areas, but the principle ideas were the same. Instead of paying for convenience, do things yourself and save money so that you can live your life to its fullest. Here are some of the main bullet points of Jacob’s retirement journey:
- Modest income of only $40,000 a year pre-retirement, much lower than the average early retiree, but illustrates that it is possible even at that income level.
- Spends an incredibly low $5000 to $7000 a year. That includes everything (although he and his wife split the finances, so she also is paying half the utilities etc).
- He was financially independent at 30, and retired at 33. Within the decade, his investments could make him a millionaire, despite working a low income job for only a short number of years.
Jacob is an example of how ultra-frugality and hard work can get you to retire very early, even if you don’t have a huge amount of wealth or income. Living on that little amount of money is not easy in the United States, but it is definitely possible if you’re willing to make some sacrifices. You can read about Jacob here.
The math behind early retirement is actually not that complicated, and it shows us definitively that it is more than possible. Let’s look at a couple of different scenarios for people in the United States.
First, a well off family with dual income. They have a combined after tax income of $80,000 a year, or approximately $6,666 a month. This would be considered a very nice income. Because they make quite a bit of money, they live pretty well, spending approximately $3,000 a month, which in reality is a pretty high amount, and way more than what any early retiree blogger would recommend (MMM lives a “life of luxury” for $2000 a month now that he is retired), but they think their hard work and success are worthy of a reward (which they definitely are). Still, they are able to put away $44,000 a year. If they invest this in the stock market and get 7% annual returns, which is the average, they will have about $650,000 in just ten short years. That is all the money they would need to retire. With a four percent withdrawal rate (which is what most experts recommend for retirement) of their investments, they would have $26,000 a year, enough to live MMM’s life of luxury, or four of Jacob’s. Any income they earn from side jobs and hobbies is just icing on the cake. Run the numbers yourself if you don’t believe me, it is more than doable.
What if you don’t make that huge sum of cash though? Let’s say you don’t have a college degree, just a technical certification you use to get a job that pays $45,000 a year. You don’t want to live to quite the extreme of Jacob, but you want to save more than half your income. So you spend about $1,200 a month total, and your after tax income is around $2,700. This allows you to save $1,500 a month, which, after ten years of compounding, becomes $266,000. This doesn’t quite allow you the safe withdrawal rate of 4% you were hoping for. So you simply work a few more years, and you are easily retired.
So, after looking at the two examples above (and several more that I didn’t have the time to share with you), and running the numbers myself, I’ve determined that early retirement isn’t just possible, it’s actually easy if you are willing to live a frugal lifestyle. And while it isn’t the primary focus of this site like it is of those others, the information here will always be helpful to those who are pursuing that path. Early retirement is the ultimate extreme of financial independence, and financial independence is what I hope we can all achieve.