Early Retirement - One Approach... That Borrows From Many Others

Someone I know is retiring this month in his early fifties. I asked him how he did it. While he prefers to remain anonymous, he was willing to share his secret(s). In his own words:

"My secret isn’t some hot stock tip. It’s just a combination of frugality and investing a lot. I’ve been saving and/or investing around 20% or more of my pay for the last 25 years. I know that neither frugality nor saving that much is for everyone, but feel free to pick and choose what works for you. I’ve put that 20% into a combination of paying off debts, saving for emergencies, and investing in the stock market. It’s important to do all three at the same time – vary the percentage going to each category depending on what’s most urgent for you at a given time, but don’t get in the habit of neglecting a category for years.

Reducing debt/penalties. Years ago I had credit card debt that I kept transferring from one to the next introductory teaser rate, while paying balance transfer fees each time. It was a longer burden than it should have been, but I eventually paid it off. Frankly, it’s better to avoid most debt in the first place, with housing and education being the exceptions considered “good” debt as you’re likely to get a decent return on those investments, but still, keep even those small if you can.

• Credit cards. Finance charges, penalties, and transfer fees add up. I now try to avoid making large purchases (like vacations, or pricey items I’m eyeing) until I have enough saved up to pay the bill off completely by the end of the month.
• Housing. Right now interest rates are so low it’s a great time to look into refinancing your mortgage if you haven’t recently, or to get a mortgage if you’re thinking of buying a house. This alone is saving me over $400 a month now compared to what I was paying before.
• Student debt. I’ve seen a few articles mentioning it’s also a good time to refinance student loan debt, but can’t find the links. Be careful and do your homework if you do pursue this.
• Use your bank's website or app to automate your regular bill payments so as to avoid late fees/penalties.
• If you sign up for credit monitoring, which many credit cards offer for free (but not always; read the fine print), make sure you keep your contact information with the monitoring service up to date as your profile there may be separate from your profile with the credit card. I neglected this, and missed out on an alert about my credit which ended up dinging my credit score much worse due to the delay than it would have otherwise.

Saving/Investing. When you first start contributing to these types of accounts, the balances will be small at first, but within a few years compound interest will help them grow substantially. Resist the temptation to withdraw anything (unless it’s a *dire* emergency)! You’ll only hurt your future returns. The important part is to keep contributing – set it to automatic if you can.

• Do invest in tax-advantaged retirement plans, such as a 401k if you have access to one at work. If you don’t (or even if you do), open an IRA too, either at a brokerage, bank, or credit union (credit unions may allow you to open one with a very modest initial contribution).
• As mentioned at the links, each of the above come in two flavors: Traditional, which provide an advantage “now” (when you contribute); and Roth, which provide an advantage “later” (when you withdraw). Ideally contribute to *both* types to give yourself the most future flexibility. Note that withdrawing from any of these accounts before age 59.5 carries stiff penalties.
• Open a separate non-retirement investment account to be able to access the funds before age 59.5 (but note there’s no tax advantage). Look for low fees, and if you hire a broker/advisor/planner to make stock recommendations, avoid those who charge commissions instead of a flat fee – they have a conflict of interest.
• I’ve had much better luck with mutual funds and exchange traded funds (ETFs) vs. individual stocks (they spread out the risk). See how the choices compare regarding low fees and decent historical returns (not a guarantee of future performance, but a decent indication) to decide which to pick.
• At minimum, an index fund that tracks the entire market (and/or the entire S&P 500) is a good base. As you get more comfortable, add others with different specializations (e.g. value, growth, dividends, tech, emerging markets, commodities, or others).
• Understand that the markets go up and down daily but the overall trend over decades is upward.
• Avoid needless stress by *not* checking your balances often! 😊
• There’s a saying “It’s not timing the market, but time in the market.” It’s better to start as soon as possible and invest continuously than only when some pundit says it’s a good time to. So-called dollar-cost-averaging is your friend (true for all currencies)!
• DO NOT SELL during a downturn! Every downturn is followed by a recovery, and the biggest gains happen early in a recovery. Don’t lock in losses like one of my friends did in 2008 and miss those gains. I stayed invested, and actually increased my contribution rate since the underlying stocks in the funds I was buying were now cheaper. By mid-to-late 2009 I had more than recovered my losses while my friend had a permanent setback.
• Put money you might need soon (i.e. emergency fund) in a high-yield savings account and short-term CDs.
• Check Bankrate for best current rates, and use the FDIC site to verify a bank actually insures deposits.
• Leverage such savings accounts for best advantage. For the past few years I’ve actually had most of my paycheck deposited directly into my online high-yield savings account. These accounts typically limit you to 6 transactions per month, so I have two automatic transfers to my checking account (at a different bank) scheduled a few days before major bills are due each month. This allows me to maintain the highest savings balance for the most days to get the most interest while avoiding late fees on any regular bills due. For any occasional other large expenses, I schedule a separate transfer.
• For retirement planning, be aware of the 4% Rule – whatever you have saved for retirement will last 30 years or more if you withdraw just 4% per year.
• This is the maximum “safe” withdrawal rate determined by financial planners & economists looking at market performance from the 1920s-1990s, and later re-confirmed with data from the 1870s-2010s.
• Look at several past months’ bank statements to figure out your spending rate (don’t forget big once or twice a year payments like auto insurance or annual subscriptions). If you have no other income sources in retirement like a part-time job, rental property, annuities, or Social Security, you will need 25 times your annual spending amount invested and earning 7% or more to retire.
• It thus helps to lower your expenses – you’ll be able to save more each year, and you won’t need as much when you do retire (meaning you can retire sooner). Which brings us to…

Frugality. I’m pretty frugal (some might say cheap), but one doesn’t have to go to extremes. Check out the following to see what might work for you.

• Look into the FIRE movement for ideas (Financial Independence, Retire Early). Many of its adherents retire in their 30s or 40s. Some good sources (there are many others):
• Mr. Money Mustache
• My Money Wizard, in particular this list
• Financial Mechanic
• A Purple Life
• Pretired. This blog’s no longer active, but I had found a lot of good info back when it was, and the old articles are still online.
• Recent Business Insider article about someone who retired early following the same idea.
• Avoid lifestyle creep!
• As your pay goes up, avoid the temptation to let your spending go up too. When I got raises, I would increase my savings/investment rate by the same amount. I wouldn’t always do this immediately since it’s nice to see a bigger paycheck or have a little extra cash to celebrate, but generally I didn’t want to get in the habit of squandering it.
• When I got bonuses or other windfalls, I’d keep a portion to have fun with but invest the rest in my non-retirement investment account. That account is what I’ll be living off of until I’m old enough to access my retirement accounts without penalty.
• Housing and Transportation. These are generally the biggest expenses for most people. Get a home and vehicle you like, but *not* the most expensive one you can afford. Bigger homes/autos not only have bigger loan payments but also bigger utility and maintenance payments.
• If possible, live close to where you work & shop, to reduce wear & tear on your car.
• You might be able to use a bicycle for some trips – helps your wallet & health & the planet.
• Take care of your car so it’ll last long after it’s paid off!
• I’m on year 6 with my current car and hoping to get 20 or more out of it. I got 17 years out of my last car, 13 of which were payment-free (more funds that could then be invested!).
• Many, but not all, personal finance writers recommend buying used cars to avoid the depreciation, but that’s up to you. It’s nice to drive a new car once in a while if you can afford it, but make it last!
• Consider maintenance costs of the model you choose. For example, a new set of tires for a big SUV or flashy sports sedan can be well over $1000, while for a smaller car it can be under $500 (my last set was $550 installed).
• Find a trusted mechanic so you won’t have to rely on pricey dealerships after the warranty expires.
• Learn to do some maintenance yourself or by someone in your household (YouTube’s a great source of helpful videos) – even just replacing your own bulbs, windshield wipers, air filters, or hood/trunk lift struts can save a few hundred dollars.
• Another option to reduce retirement living expenses that I don’t expect to need but might consider (if only for the sake of adventure!) is to move to a country cheaper than the US, but that still has modern healthcare.

Lastly, while there is a lot of great personal finance information available in print or online, be aware that they often include a sometimes not immediately obvious sales pitch. With that in mind, this slideshow is actually a decent high-level summary of a fair amount of the above. As always, do your homework, but don't let fear lead to delay.

I hope I’ve thought of everything! A lot of behaviors have become so ingrained over the years that I don’t consciously think of them anymore – they’re just automatic. Also, for the record, I have no financial or other interest in any of the sites I've provided links to - I've simply found the information there useful. Anyway, I hope these thoughts and resources help you on your own retirement journey."