​Is it Possible to Retire Early if you’re Not Already Rich?

Modest Money  |

Early retirement is a hot topic these days. You might not hear about it much through the mainstream media, but if you do a casual web search, you’ll find that lots of people are talking about it these days. What’s more, the conversation isn’t limited to the wealthy, or the old. There are plenty of thirty-somethings, twenty-somethings, and (gasp) teenagers in on the conversation! For the most part, these are individuals without exceptional income and with normal levels of education. For those that are achieving their goals, their regimen is fairly simple (if difficult to maintain). After analyzing many of these conversations, certain techniques stand out. And they are as follows:

Retiring Early for the Average Person

First of all, let’s talk about retirement as it usually occurs. Most Americans aren’t prepared for retirement when they get to age 65 (or whatever age they planned to retire). For those who are a little more prepared, steady investing has been going on for a long time. The future retiree may have invested in stocks, funds (through IRAs and 401(k)), real estate, or any of the other ingredients of the healthy portfolio. Through years of market growth and compounding, the individual will have enough capital saved to pay for the rest of their life, if not more.

The early retiree just wants to accelerate this process. Why save all of your free living for when you are at your oldest? The people who are able to retire early have certain shared traits, but impressive income isn’t one of them. Here’s how it’s done.

  1. Live Frugally and Save. Everyone who retires early lives well beneath their means. Some people making $40k or even less find ways to save upwards of $1500 to $2000 monthly. This requires big sacrifices, when compared to the spending of the average consumer, but it is doable. Couples may find it easier, especially with two salaries to contribute, but it is still possible for the single person to achieve. These savings are put into long term investment accounts, appreciating real estate (including the home the individual(s) lives in), and other investments. Saving at this rate, it is not uncommon to hear of people becoming millionaires in 15 years. It’s not a miracle. It’s math (and compounding interest).
  2. Basic Living Expenses Are Reduced. This is different from the above, because it refers to some of the most fundamental lifestyle changes that early retirees make. Some report moving to parts of the country/world where living is very cheap. One friend moved to Baltimore to buy a home at far below national market value. Other people report moving to Mexico or Thailand to maximize the use of their income and to be able to save more. Any fundamental costs you can reduce (cut down on air conditioning by living in a temperate climate, cut down on rent by buying in a slow market, etc.) will give you a lot more room to grow elsewhere.
  3. Waste is Eliminated and Strategy is Followed Consistently. This is, perhaps, the most difficult part. Financial waste is part of the consumer life. It’s a difficult habit to break. Additionally, it can be easy to get psyched up about something like early retirement when you read web articles like this, but it’s another thing to apply these methods for 15 years or more. Don’t give up!
  4. The 4.00% Rule. The 4.00% Rule is controversial, but it amounts to this: due to market growth and asset appreciation, most people can take out 4% of their investments to live on each year. So if you have $1 million invested, you should be able to live on $40k each year without ever running out. Market strength affects this rule.

You can get more complicated with these methods, but these are the foundational techniques that allow real people to retire early. It’s not about making a ton of money; it’s about living in such a way that few people are willing to live. If you can do it, you’ll enjoy retirement (or partial retirement) while your friends are still slaving away at a career they want to leave behind.

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