What if I told you that 10 years from now, you’d have escaped the cubicle life and were able to spend every day on the beach? In the minds of most people, this is what early retirement looks like unfortunately this depiction only ever remains a dream and not a reality. Why is that? Because most people allow themselves to fall victim to one particular early retirement mistake. What is that mistake? Let me get into that right now!
As I just mentioned, the thought of retiring early is something that is alluring to most people and this makes total sense. In fact, in a 2019 Gallup poll, 61% of respondents classified their jobs as being either mediocre or downright bad therefore there’s no wonder people would love to leave the working world early and enjoy more time doing what they love. What’s sad however, beside the fact that most people are in one way or another dissatisfied with their jobs, is that they have little to no idea how to actually go about setting up a plan to leave the cubicle life earlier than their peers and enjoy all the benefits of early retirement. What are those benefits? Let me share some with you now and then we will dive into the real reason most people will never retire early!
Benefits of Early Retirement
The first benefit that will be accessible to you when you retire early is overall better health. I hate to say it but most people overlook how detrimental our jobs are on our health. In fact, when you think about it, it’s actually quite a frightening thought. From having to fight traffic 5 days of the week only to arrive at a job that is constantly putting you under pressure from the demands of your work, there’s no refuting the fact that working your 9–5 can start to wear down your mental state.
Not to mention, I think you would agree that humans were not meant to sit in a chair under artificial light for 8 or more hours a day. From screwing up your back to making you go blind looking at a screen all day, work is downright terrible for your body. However, when you’re retired, focusing on your health becomes infinitely possible. Want to go for a 2 hour walk every day? No problem. Want to be a part of 3 workout groups a day? You can do it. Therefore, if living a long and healthy life is important to you then early retirement is a financial goal you’d be wise to strive towards!
The next benefit of being retired is the autonomy you gain. You see, when you’re a part of the 9–5 world, one thing you have little control over is your time. If your boss tells you that you have to be there from 8–4 every day then you know damn well that you need to be there. While most people just accept this reality as fact, I believe that we all harbor some resentment when we’re told what to do even if we work under ideal employment conditions.
However, what happens when your kid has a dance recital or a mid-day hockey game? Do you think your work schedule is going to allow for that? Unlikely. Alternatively, like I just mentioned, what if you want to go for a nice walk mid-day while the sun is out but can’t because of the endless amount of meetings filling your calendar? If you ask me, autonomy, or freedom is what we all truly want and the one way you can get it is through retiring early.
The final benefit is closely linked to autonomy and it’s choice. If I asked 99% of people, they would probably tell me that if they had the means to do so, they would stop working the job they are currently in. I don’t think I need to share another job satisfaction survey for this sentiment to resonate with you and this is why early retirement is so powerful. I think we all yearn for a sense of purpose but gaining it from work you love versus work that pays the bills are two very different things. When you’re retired, you can decide to take on a job regardless of its pay to keep you mentally stimulated and feeling that sense of purpose you desire without having to wonder if the paychecks you receive from said role are enough to cover your bills.
Now, I know personally, those three reasons are more than enough to entice me to retire early and I hope they are enough to entice you too so now let’s talk about how most people go about retiring early.
For most people, the path to early retirement comes in the form of early and consistent investing for a number of years until they reach a point where their portfolio contains enough assets to support them financially for the rest of their lives. While this seems like a simple financial endeavour, which it is, it does require one important activity to be performed which sadly most people overlook. This blunder, if you ask me, is what holds 99% of people back from hitting their early retirement goals. What is that mistake? Let me share it with you right now.
The biggest mistake people make when trying to retire early is not understanding how much money they actually need to retire in the first place. Now, I’ll admit that there is no exact science as to how to come up with this amount but unfortunately, most people have no idea where to even start to be able to set their retirement goal figure. Well, this is why I’m here.
In the retirement planning process, there are three core pillars that must be set: your retirement target, your retirement timeline and your monthly contributions. As I just stated, most people have no clue how much they need in the bank to retire early so let’s dive into how you can calculate this amount right now.
If you’re at all familiar with retirement planning then you’ve likely heard about the 4% rule. This rule assumes you have your money invested 50% in stocks and 50% in bonds and that you will be retired for 30 years. With these assumptions, withdrawing at 4% annually will allow your portfolio to replenish itself every time you make a withdrawal which allows you to sustain your retirement fund over the course of the rule’s stated three decade timeline.
The 4% Rule
So, if we reverse engineer this retirement equation, it means that whatever you anticipate your living expenses to be in retirement should be multiplied by 25 to get to your goal retirement figure. For instance, if you anticipate living off of $50,000 a year then you’d need $1.25 million to retire. Now, like I said, getting to this amount can be tricky because really who knows how much it’s going to cost you to live in the future. Maybe it will cost you less than now given that you soon will be mortgage free. Or, on the contrary you may run into medical issues and have unexpected expenses arise that will put pressure on your retirement funds. It’s for this reason that I recommend people multiply their expected living expenses by 30 or even 35 to give themselves a bit of extra leeway and ensure that their nest egg is sufficient to take them all the way through their golden years. So, in the previous example of needing $50,000 a year to live at a multiplier of 35, you would need $1.75 million to retire. Now, I know what you’re thinking, “how the hell will I be able to get my hands on almost $2 million!”. I know $2 million seems like a lot of money, and it is, but all big goals can be broken down into manageable chunks and saving towards early retirement is no different. However, to be able to break down this lofty goal, we need to discuss the two other pillars of your retirement planning process: your timeline and your monthly contributions.
When it comes to your retirement timeline, ask yourself how long are you willing to continue working before you down your work tools for good. I know the answer you want to give is that you want to lay those tools down now but realistically we both know it’s going to take you some time to get to your retirement figure.
The Path To Early Retirement
So, let’s say that right now you’re 25 and want to retire at 45. This gives us a window of 20 years until your early retirement and would have you retiring roughly 20 years early. Unlocking two decades of free time sounds pretty great right? I think it would be! Now, carrying forward our prior example, let’s say that your goal is to accrue $1.75 million. The final step in your retirement planning process is to determine how much you need to be investing every month to reach your retirement figure. Let’s do the math to find out.
If you want to amass $1.75 million in 20 years time at the average market return of 7%, you would need to contribute $3,400 a month. Now, I know I probably just gave you heart palpitations with that contribution amount and I hope your pacemaker is working properly. However, with any lofty goal comes with large amounts of sacrifice and fortunately I truly believe that most people can put away that kind of money if they try. How do you go about doing that? There are two ways and I will share them with you now.
The first step in unlocking the funds you need to make large monthly contributions is to cut out all of the unnecessary spending you’re currently doing. From those lavish nights out to giving up that extra housing space you never use, each sacrifice you make now will bring you one step closer to reaching your ultimate goal of retiring early.
In fact, if you take the concept of minimal living on a grander scale, the more you can streamline your expenses, the less you may need to save to hit your early retirement goal. For instance, if instead of living off of $50,000 a year, you can manage on $45,000, just that $5,000 difference will allow you to cut down your overall savings by $175,000 or contribute $400 less every single month.
Now, as much as I just preached the importance of cutting down your expenses to speed up your path to financial freedom, the reality is that you will always have some expenses to attend to. As such, you likely won’t be able to reduce your expenses enough to make up the difference in cash you need to hit your monthly contribution requirements which leads us to our other angle of attack which is income generation.
Unlike cutting down expenses, there are no limits to how much income you can make and this is important because for most people, making more money is the key to reaching early retirement. So, how do you go about making more money you may be asking? There are a plethora of different options so let’s go through a few options right now.
The lowest-hanging fruit options if you ask me are working more hours at your current job or picking up a part-time job. Unfortunately, while these options can present you with quick money now, their drawbacks are their potential for incremental wage growth in the future. Chances are, your part-time job is never going to be paying you a ton of money which means that you’re going to be relegated to trading all of your youthful years for freedom down the road.
This is why, if you ask me, your two best options are freelancing or starting a side business. Both do take more time to get off the ground however, once they are in motion, the rewards for your time invested will allow you to make the income you need while also still having some free time for yourself. For instance, I started freelancing to make extra money to invest with and now I only have to work a handful of hours a week to meet up with my monthly contribution targets. This is the power of acquiring valuable skills because you minimize the hours required to be traded for the income you need to invest with and given all the free resources available today to learn these skills, freelancing in my opinion is a no brainer.
At the end of the day, the takeaway here is that making more money is going to be the key to bridging the gap between how much you can contribute now and how much you need to contribute to reach your lofty retirement goals. Will it be easy? No. However, when you’re 45, relaxing on the beach instead of being held up in your stuffy cubicle, all of the sacrifices will have been worth it!