When I tell people that I’ve retired early I get a variety of reactions.
But once the surprise (which is always part of the reaction in some measure) wears off, the questions begin.
And the most common one is something like this, “How did you do it? How can a person retire early?”
That’s what I plan to cover in today’s post.
Live Like No One Else
Before I get into specifics, let me say that this quote from Dave Ramsey sums up perfectly how to retire early:
“If you will live like no one else, later you can live like no one else.”
I’m going to give specifics, of course, but the heart of retiring early is that for some time you will have to live like no one else. You will need to do the things others won’t or can’t. They will be difficult, challenging, and against the grain of our consumerist society.
But if you do them, then you will be able to live like no one else, which in this case is to retire early with financial security.
Money Moves that Made Early Retirement Happen
There were several things I did to get to the point of early retirement.
Some were small and contributed a bit here and there. I won’t be covering those today. Instead I’ll focus on the big moves that allowed me to make significant progress.
They are:
1. Earn a good income.
It begins with earning a decent amount of money. Retiring early can be done at all income levels, but the more you earn the more you can sock away and the more you’ll have to fund the retirement you want. And, of course, you’ll be able to retire faster if you do these things.
I didn’t want to downgrade my lifestyle (at least much) when I retired so I needed an income that was fairly substantial to allow me to save a bundle.
Here are the main ways I was able to earn a good income:
- I developed my career. This was by far the lion’s share of the income I made through the years and the reason I write so much about making the most of your career. I know that it works and if you take a few, simple steps you can significantly increase your lifetime income — probably by $1 million or more.
- I developed side businesses. In the 90’s I had a freelance writing business and later on I had a blog (though I donated the profits from it for years). I also worked as a soccer referee (mostly because my son did, but it did earn me a few thousand dollars each year). Each of these generated extra income that at first allowed me to pay off my mortgage and then super-charge my saving.
2. Control spending.
Controlling spending is why retiring can be done at almost any income. If you make $40k and spend $20k, you’re making good progress towards early retirement. The same holds true for making $100k and spending $60k or making $200k and spending $110k. If you want more specifics, see Income and Spending Scenarios and the Impact on Wealth.
If you can control your spending and create a gap between what you earn and what you spend, then you can begin to sock away money for early retirement. The bigger the gap, the more you can save and the faster you can retire.
I am thankful that 1) I am frugal and 2) my wife is more frugal than I am. As such we were able to live on a fraction of what I made. And we were not miserly by any stretch of the imagination.
We have lived in four-bedroom (five now), three-bathroom (four now), 3,000+ square foot homes in good neighborhoods all our married life. Not the best/fanciest neighborhoods where “all the rich people live”, but we wouldn’t really want to live in those places anyway. We’ve lived in middle to upper middle class neighborhoods so we certainly weren’t depriving ourselves.
We took vacations (mostly to see family but also took three cruises with the entire family including my mom and dad (which we paid for)). Because we were happier just with ourselves and our lives, we didn’t really give up anything. We drove new cars (though we got them for good prices), our kids played all the sports/did all the activities they wanted, and we had more fun than a family deserves. And it didn’t cost that much.
A few things that helped us control spending/create a good gap:
- We lived in low cost-of-living cities. We lived my post titled Become Wealthy by Having a High Income in a Low Cost City and benefited greatly from doing so.
- We didn’t waste money on debt. Debt costs a fortune. So we paid off our house early and didn’t use debt in any other way other than credit cards that we paid off each month (and earned thousands along the way as well).
- We had moderate and selective frugality. This influenced what we bought, what we didn’t, and at what price. We always shopped for value (not price) and were willing to pay more if something would perform better or last longer. If it didn’t, we went for the best price. Saving a nickel here and a dime there, not to mention big dollars along the way, really adds up.
Doing these things allowed us to create a solid gap between earning and spending and to save 36% of my gross income over our working years.
3. Invest for growth and then income.
There’s no way we could have saved enough to fund early retirement. But we could take the gap our earnings/savings provided, invest it, and watch it multiply.
Here are a few ways we did this:
- We invested in index funds. I maxed out my 401k for two decades, getting the full company match every year. We saved in addition to that in a Vanguard brokerage account. And when the stock market dropped off a cliff (which it did a few times in all those years), I moved most of my cash into the market and bought more. Needless to say, those investments have done quite well over the past 25 years.
- We bought rental properties. This is where we began to move from primarily growth-oriented investments to a blend of growth (appreciation) and income (rents). As you move closer to early retirement, you either need a gazillion dollars that earns a basic return (like 4%) or much less money that earns a higher rate of return. It’s simple retirement math. My rental units earn about 11% before any appreciation, so that’s a good retirement contributor. Of course I made some mistakes along the way but overall it turned out well. And since I didn’t retire for several years after I got the property, the income generated initially went back into index funds.
- We moved into P2P investing. I did this as I looked to diversify my income sources for retirement. It also helped that we moved from a state that didn’t allow P2P investing to one that did.
Three Basics for Early Retirement
For those of you following along, you’ve probably already figured this out, but all the above comes down to focusing on the following:
And hence the name of this site. 🙂
If you do these three things — earn, save, and invest — and do them correctly and over time, you will be able to retire early as well.
BTW, there are many ways, not just one, to work the ESI Scale and reach financial independence.
Any additional thoughts or comments?
FYI, if you’d like more information on how to retire early, check out my FREE ebook on the Three Steps to Financial Independence.
Jon @ Be Net Worthy says
This is a nice summary ESI. I will second your claim that focusing on your career pays huge dividends. In the 16 years since business school our household income has basically tripled, and that includes going from two incomes to one.
We would not be in our current solid financial position without strong career earnings. We are currently working on paying off the house early and developing some side hustle income. Slowly but surely, putting the pieces in place!
Coopersmith says
Another perspective on how to look at this is do what is contrary to what people actually are doing. (contrarian?). Pay off that 30 year mortgage, buy cars cash and without financing, have no debt, live below your mean, save money instead of spending it all, use credit cards responsibly, take responsibility for your retirement and the list can go on.
Strange how these all became the odd ball and not the norm.
Dominic @ Gen Y Finance Guy says
Like you, I am a big believer in #1, which really sets the pace for #2 and #3. My wife and I have and continue to put the majority of our focus on increasing the income side of the equation.
Since graduating college in 2008 when we were earning a combined $95,000/year, just 8 years later we are earning a combined $326,000 in 2016. And based on what we know now, that will increase to $450,000ish in 2017.
Then in 2015 we adopted the 50/50 law, whereby we decided to save 50% of our after tax income and spend the other 50% guilt free. It was really a free pass to allow for some lifestyle inflation. We also really like this simple rule governing our finances, because for every year we worked we were able to bank a full years worth of spending in the bank!
We didn’t hit 50% in 2015, we actually came in at 42%. But we are on track to hit 50% in 2016. Spending is pretty much flat in 2016 vs. 2015, while our income is up almost 30%.
The funny thing is that we seem to have found a spending sweet spot, where we are able to do everything we want without increasing our spending. That sweet spot is currently set at $115,000/year. Because of that, it now looks like we will be able to increase our after tax savings rate to something north of 60% in 2017.
When you earn a high income, you don’t have to follow the extreme frugality movement. Instead you can practice what I like to call relative frugality.
Like you and your wife, we are working towards paying our mortgage off far earlier than the 30 year term. We set a goal and put a plan in action to pay it off in 7 years. We will probably do it in 5 years, as some of the underlying assumptions have far exceeded our original expectations.
And finally, once you create that gap, it is time to start putting that money to work. Let those dollars go out into the market and clone themselves.
The rules to becoming wealthy are actually relatively easy.
Earn. Save. Invest
Great Post!
BTW, it would be nice to be able to get notifications to comment replies on a post.
ESI says
Great comment! Thanks!
Adding comment emails is my next upgrade. I’m adding one plugin at a time to be sure they work well together. 🙂
Financial Panther says
It’s so simple how you put it. A combination of good income and low spending is definitely key. We’re also expecting to make a very high combined income once Ms. FP completes her residency, and that, combined with our low income, should put us in a position where we can feel comfortable, assuming we don’t let lifestyle inflation take a hold of us!
I also totally agree with the geo-arbitrage point you make. Living in the midwest has been a real boon to us, as it’s allowed us to have a much lower cost of living on the housing front.
Glen says
ESI – You almost sound like me except I didn’t retire early…I did retire last year at 65 1/3…I could have retired early but I loved my job and situation. Had much the same path, with a great education, great income working for Fortune 20 company, index investing, controlled spending, rental properties, side incomes, etc. I did not miss a thing working as my job was creative and challenging and my company valued the contributions of me and my staff. Had 6 weeks paid vacation and 10 holidays which was spent doing a lot of international adventure travel. Also had a second home in the mountains and only one hour and 15 minutes away so was able to spend long weekends and leave early Monday morning for work.
A major difference in our journey to wealth was to use mortgages to my advantage. In fact I still have mortgages on my second home and home but with interest rates of 2.75% and 3.375%…This allowed my to plow serious $ into index funds over the years and able to drastically increase my net worth.
happy1 says
I really enjoyed reading your post. One cost that deserves mentioning is the cost of having children. I have 3 children who are now young adults. I paid for day care, private school and baby sitters for 7 years in Chicago. I then moved to a lower cost city. We lived in a 4 bedroom home in a good neighborhood. I was able to send my children to an excellent public school system from grammar school through high school. During that time, I paid for baby sitters, dance lessons (one child 4 years), swimming lessons ( 3 children 7 years), summer camp (two children 3 years) , professional modeling lessons (one child 2 years), musical instruments (piano, cello and violin) and music lessons ( 3 children 12 years). Braces for teeth, cell phones and car insurance were extra expenses. We went on vacations annually by car and sometimes by air. I realize that many parents would not have spent the money for their children.
I also paid the 4 years college tuition for each child over a ten year period. One of my children attended law school and obtained two degrees a JD and LLM. I partially helped with these expenses. I would like to mention that I was not completely indulgent with my children. They had part-time jobs in high school and college.
The US Department of Agriculture stated in 2014 that to have a baby and raise the child to 18 cost $245,340. I know that I have paid more than 3 times that amount to raise and educate my children. I have no regrets. I am very proud of my children and their accomplishments. I could not have paid for the lifestyle without an good income over $200 K. I have had an IRA for 30 years and put the maximum in my 401K for 25 years. Now that I no longer have the expense of children I will be able to save a significant amount of money.