Seeking the path to early retirement
Whether your goal is 'semiretirement' or the freedom to never work again, you have to focus on these 3 basics.
This post comes from J.D. Roth at partner blog Get Rich Slowly.
Though many readers of Get Rich Slowly have modest financial goals, others are more ambitious. Many want to get rich. (That's not surprising; after all, the blog is called Get Rich Slowly.) But I think most GRS readers are aiming at something in between.
For instance, Charlotte wrote recently to ask about a goal that many of us have. She wants to know how to make early retirement a reality. Here's Charlotte’s message:
My husband is 30 and I'm 28. Our main personal-finance goal is to retire early or become financially independent, so that we have freedom to choose what to do with our time. We understand that to achieve independence, you need to generate passive income that exceeds your expenses. What's the best way to do that?
We're putting aside 10% and 17% into our 401k's, respectively, but if you can't withdraw from your retirement accounts until age 59 1/2, how do you bridge the gap if, let's say, you want to retire at age 52? We know we're a long way from financial independence, but we want to start planning how to get there. We've covered the basics of personal finance (emergency fund, no credit card debt, spend less than you earn, fund retirement). Now what?
When people ask me about early retirement, I mention two books.
The first is the classic "Your Money or Your Life," which has a great section spelling out financial independence and how to achieve it. The authors define financial independence as "having enough -- and then some." They ask readers to track income, expenses, and investment income, plotting each of these on a chart. (Post continues below.)
The entire book is about finding ways to get the investment income line to meet and then cross over the expenses line. At this "crossover point," investment income exceeds monthly expenses. The authors write:
The Crossover Point provides us with our final definition of Financial Independence. At the Crossover Point, where monthly investment income crosses above monthly expenses, you will be financially independent in the traditional sense of that term. You will have a safe, steady income for life from a source other than a job.
Reaching the crossover point means that, if you wanted, you could stop working for money. For many people, this never occurs.
The second book I recommend is the lesser-known (but just as excellent) "Work Less, Live More" by Bob Clyatt. The author encourages readers to reconsider traditional notions of retirement and early retirement, and to instead focus on what he calls "semiretirement."
In semiretirement, you work a little and you play a little. You build your life around your personal priorities. The work gives you some income so that you have to rely less on your savings. (Or, ideally, you don't touch your savings at all.)
Note: Because I sold my blog, I'm fortunate to actually be in a position of semiretirement already. My nest egg isn't large enough to allow me to do nothing -- nor would I want that -- but I do have the liberty to pursue activities I enjoy or that are meaningful to me. (Often, they're the same.) That I'm able to earn a living doing those things is a bonus, and allows me to avoid tapping my savings.
But let's get back to Charlotte's question. What's the best way for her to achieve financial independence? Or early retirement? Or semiretirement? As you can probably guess, it's the same as the answer for getting out of debt or saving for a down payment or pursuing any other sort of large financial goal. That is, Charlotte should focus on earning, spending, and saving.
- Earning is your ability to bring in money. Your goal, no matter what your financial objective, should be to boost your income as much as possible. Last year I described how I earn my money. Bottom line: I try to have many different sources of income, each producing a little bit at a time. This diversification means I don't have to panic if one source dries up. (Of course, writing for GRS is my main source of income.)
- Spending is the other side of the basic personal-finance equation. While you want to boost your income as high as possible, you want to cut your spending as much as you can. Last year, I described how I spend my money, explaining the steps I take to keep costs low. The less you spend, the less you need to earn to support your lifestyle, and the more you can save for future goals -- like early retirement.
- Saving is the final piece of the puzzle. Or, more precisely, investing. Once you've subtracted your expenses from your earnings, you're left with savings. Investing is what you do with those savings. Stupid investing can set you back years; smart investing can give you a jump-start on your goals. When I described how I invest, I emphasized savings accounts for short-term needs and index funds for my long-term investments. That's still my plan.
Charlotte and her husband have been doing things. They need to continue doing them, and to do more of them. Because they're in what I call the "third stage of personal finance," they need to practice patience. In time, they'll reach their goal. For now, they just need to keep being smart with money.
Note: At the same time, Charlotte should be sure she has room in her budget for fun. If she's doing all the right things but not enjoying life, she's going to be less inclined to continue making those choices. It's important to budget for the fun stuff too.
All of this is big-picture stuff, though. It's the road map that Charlotte (or anyone) can use while marching toward early retirement -- or other financial goals. I get the impression that she'd actually like readers to give her some feedback on the details of achieving this dream.
What do you think? What's the best way for Charlotte to reach financial independence? It'd be great to hear from folks who have actually managed this, but I also think it would be helpful to hear from those who have this as a goal. What steps are you taking? What investments have you made? How do you keep your costs down? How do you keep from getting bored during the years and years of waiting?
More on Get Rich Slowly and MSN Money:
became independent in the 90's more or less. My husband's company stock skyrocketed and he took it out immediatedly and held on to it without increasing spending. I inherited a little from my Dad and splurged a little but also daytraded a bit with Microsoft (on the telephone). The kids were both top students and got lots of scholarship offers and we turned down name brands for the offers. Now I am having a nice time in my early sixties. House paid for by 55. Life is good. Go for it!!!
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
ABOUT SMART SPENDING
LATEST BLOG POSTS
Saving just a single month of expenses may take longer than you think. See how your savings rate affects how quickly you can build a solid emergency fund.
VIDEO ON MSN MONEY
BLOGS WE LIKE
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'