I don’t care how much you love your job, there’s going to come a day where you wake up in the morning with your back aching, your knees cracking and your body telling you that you’re done working. Unfortunately, this day will come for us all, however the question is, will we have the money to lay down our work tools and start the next chapter of our life? For those earning lower-incomes, the idea of retiring early is probably a pipedream however it shouldn’t be because with the right strategy anyone can achieve this financial event and here’s how!
Debt Management
The first step that is absolutely critical to your ability to retire early on a low income is to remove all harmful debt from your financial life. Notice how I said “harmful debt”? This is because there are forms of debt that can be extremely useful in your quest to require early. Examples include acquiring a mortgage that finances a rental property or a business loan that helps get your operations off the ground.
When I talk about harmful debt, you probably already have a good idea of what I mean but I will explicitly say it anyways: high-interest debt. I’m talking about auto loans, credit card debt and the criminally destructive payday loan debts. I want to make something clear right now, if you can’t remove these forms of debt from your life, especially as a low-income earner, you have absolutely no chance at retiring early. Why is that? Because high-interest debts are wealth destroyers. Here’s an example to illustrate what I mean.
Let’s say you had a credit card balance of $6,000 at 18% and only paid the minimum $200 payment every month, it would take you 41 months or almost 3.5 years to pay it off. Not to mention besides repaying the initial $6,000, you’d also end up handing over $2,000 in interest payments as well! Let me ask you this, ask a low-income earner, do you really have $2,000 extra dollars to just be handing over to your creditor for fun? I don’t think so and this is why avoiding this kind of debt is key to making the necessary strides in your finances that will allow you to actually retire early.
Now, it’s all good and well for me to tell you not to play around with these costly forms of debt but what if you’re already neck deep in debt? Well, then you have some work to do and here’s how you can dig yourself out of that debt hole and find your way back to the surface. First, you need to take account of your current debt situation. Assess which debts are outstanding and how much each one is costing you. Then, organize your debts from the ones with the highest to lowest interest rates and start paying them down one by one. I’ll be honest, if you’re not making a decent-sized income then this process will be rather slow but if you’re motivated and willing to take on more hours or supplement your income with a part-time job, it will be less worth it until you’re back in the black when it comes to your overall net worth.
Financial Practices
Now, once you’re high-interest debt-free you’re basically retired early right? Not quite, there’s still a ton of work to do. The next step in setting yourself up for drinks on the beach in Mexico is to ensure your financial practices have been perfected. What do I mean by that
Let me explain.
When you’re earning a low-income, you need to compensate for your low income with tactical financial management skills. In short, you have to masterfully deploy and manage your money. Whereas a high-income earner can loosely oversee their money and can afford to miss investing contributions from time to time, as a low-income earner you need to have your finances on-point, 100% of the time. So what best practices should you have in place. A few come to mind.
First off, you need to commit fully to two financial management practices: frugality and automation. Let’s talk about frugality first. Not to be confused with being cheap where you spend as little money as possible, being frugal means only spending money on value-added items. For instance, spending money to increase your education or skill set requires spending money and if it can give you a leg up financially then it may be worth the outlay whereas if you were cheap you would probably pass on this opportunity all together.
However, to be clear, value-add items do not include things like buying a new purse because it adds value to your outfit or buying a new golf club because it will take 2 strokes off your game. Again, because your income is limited, you need to really have a good grasp on your wants versus your needs and focus your money on the latter.
Now that you know that I will be breathing down your neck whenever you spend money, let’s move onto automation. No, I am not telling you to go out and buy a robot because again this would be a want and definitely not a need item. When I say automation, I mean automating your savings efforts.
By setting up automatic saving deductions from your pay with your employer, you can ensure that part of your paycheck is saved every month and that you are in fact making the progress you need to be to reach your goal of retiring early.
Now, you may be thinking, "but I am a diligent saver, do I really need to automate saving?”. Well, I’m a strict eater but that doesn’t mean that from time to time the cheesecake I have in my fridge doesn’t call out my name to be eaten. The point is that you want to take any risks to your financial progression off the table. Over the course of your retirement savings journey, you will run into moments of weakness and by having a system that ensures saving rather than leaving it to willpower, you can set yourself up for success.
Once you have these two critical financial practices in place, the next step is to create your retirement plan. It baffles me how many people have early retirement aspirations yet when you ask them how much money they need during retirement or how much they plan to live off of in their golden years they look at you like a deer in headlights. Well, this won’t be you because you’re going to have a plan in place!
In your retirement plan, you’re going to need three things. You are going to need a target retirement amount, an investment amount and a budget.
Your target retirement amount is going to be the total amount you’ll need to have invested. This is the pool of money that you will withdraw from throughout your golden years so it’s essential that you properly calculate this figure. Generally, the rule is that this number is 25 times your annual living costs. However, given that I don’t want you having to work the cash at Walmart at 95 years old I recommend you use a more conservative 30 times your annual living costs instead.
Therefore, if you currently live off of $30,000, you would need $900,000 invested to move into the retirement phase of your life. Now, for some people, the thought of saving up $900,000 may seem impossible. First of all, if I can get a date then it’s proof that nothing is impossible, however if you’re still feeling uneasy about this number you always have the choice of learning to live off less. Simply put, the less money you can live off of, the less you need to save.
Once you have this target retirement amount calculated, the next step is to determine how much you have to set aside every month in order to meet this financial goal. In the case of saving up $900,000, investing $750 a month, assuming a 7% rate of return, would allow you to reach your financial goal in just 30 years. This means that if you are 25 now, freedom 55 is just a few decades away! Now, the question is, does your budget allow for you to be putting $750 or whatever figure you’ve calculated for yourself away every month?
This is where your favorite six letter word comes into play: your budget. Hate them or love them, they are an essential component to you achieving your early retirement goals. Why is that? Because they are the key to unlocking the money you will need to fund your early departure from the working world.
For instance, if you set up your budget with your after-tax income and all your expenses and realize that you won’t have enough money to spare to contribute towards your retirement account then right there you’ve identified your first retirement roadblock. In this case, you can make adjustments to your budget until you can plug in that investment figure you need to meet.
However, what if, no matter how hard you try, you can’t seem to free up enough money to meet your required monthly contribution? Well, roll up your sleeves because you need to get to work. There are going to be times in life where you will need to make sacrifices to achieve your goals and if you find yourself lacking the funds required to meet your investment obligations then this is one of those times. In this case, you have no other choice but to make more money.
Now, you may be thinking, “but you said I could retire early on a low-income!” and trust me I won’t be asking you to suddenly start making half a million dollars a year overnight — however if you can that would definitely help! Instead, just calculate how much you can afford to contribute monthly and plug the rest with extra work. So, if you are trying to invest $750 a month and can only muster up $400, working an extra shift a week can get you to that goal contribution amount with relative ease. Again, I know the thought of having to work more sucks but it’s going to suck more if you have to keep working when it means having to listen to your boss for an extra 10 years or giving up time with your grandkids — because as they say “they grow up so fast!”.
Once you have access to your required contribution amount, we will defer back to the robots to help you meet your retirement goals. Similar to automating your savings, you will want to automate your investing efforts. To put it bluntly, as a low-income earner, you cannot afford to miss any investing contributions if you want a chance at retiring early. As such, like your savings, you have to take the risk of human error off the table. How do you do this? You do this by setting up an automated system that pulls money from your bank account every month and invests it towards your goal retirement amount. This way whether you’re swamped with work, are on vacation or get sucked into an amazing new show on Netflix, you won’t neglect your retirement duties of making sure your money ends up where it needs to! At this point, you have all the information you need to retire early. Congratulations!
However, I know some of you are sitting there struggling with the thought of even working another 30 years. Hell, you probably don’t even want to work tomorrow. This sentiment begs the question, how can you speed up this process even further?
While you can’t speed up time or make compound interest work faster, you can break your identity as a low-income earner. If right now you are earning a low-income, I’m sure you’re well aware of how inefficient this approach is to getting ahead financially. You probably even look around and see people working a fraction of the hours you are and making double or triple your income while you are there giving away every waking moment for a paycheck that barely gets you by.
The truth is that the best way to speed up your retirement timeline is to make larger contributions. However, to do this, you need more money which means you need to significantly increase your income. I know for myself, when I started freelancing, the extra two or three thousand dollars I was making a month really accelerated my timeline to retirement.
Think about this. If you are contributing $1,000 a month at 7% towards a target of $1 million, it would take you 30 years to acquire this amount. Investing $3,000 a month however, cuts this time down to just 15 years. In short, the more you invest, the less time you wait to retire. Now, I know making more money is easier said than done but the idea I want to get across here is that just because you’re earning a low-income now doesn’t mean you have to be cashing small paychecks forever. By acquiring value skills and experience, you can exponentially raise your market value and as such never work for a low-wage again. Trust me, when you’re sipping a cold beer on the beach in Mexico at 55, you won’t regret having broken out of your low-income rut!