Retiring by 40 is more than possible. Plenty of regular people have done it.
Take “Mr. Money Mustache,” who averaged a $67,000 annual salary working as an engineer for 10 years before announcing his retirement at age 30. Or Jeremy Jacobson and Winnie Tseng, whose combined annual salary of $135,000 was enough to retire in their 30s with a multi-million dollar net worth.
If you want to do the same, consider these tips and strategies from regular people who retired before age 40.
Develop multiple streams of income
“Becoming financially independent requires building up a large amount of capital, a task made much easier by earning a high income,” explain Jacobson and Tseng on their blog, “Go Curry Cracker!”
While a six-figure income certainly helps, it's not essential for early retirees, they note: “For those with no interest in attending college, or those with a degree in a lower income field, time outside of work can be spent on a side hustle ... No matter which path you choose, with hard work and dedication it is possible to grow income over time. By inflating savings rather than lifestyle, this will result in rapid growth in wealth.”
Read about 50 ways to bring in additional income, some high-paying jobs you can do on the side, how you can earn passive income, and the first step to take before starting any business, from an entrepreneur who earns up to $170,000 a month.
Invest the difference
Once you've maximized your income, you'll want to put as much of that money to work as you possibly can. One of the most effective ways to earn more money over time is to invest it, and the earlier you start, the better.
Mr. Money Mustache, uses a simple mind trick to keep his money growing: He thinks about money as something to invest rather than something to spend.
“I like the idea of keeping all money invested,” he explained to Farnoosh Torabi on her podcast. “So if I run into a surplus sometime, I don't think of something to buy with it — I think, 'OK, I better get rid of this money and put it to work again.' So, I sweep it out of the bank account and into regular index funds.”
While a raise, generous birthday gift, or lucky lottery winnings may trigger a shopping spree for most of us, Mr. Money Mustache's instinct is to invest surplus money, which eliminates any spending temptation that may arise. Even more significantly, he's putting that surplus to work and allowing it to compound over time.
Set clear and specific goals
Setting a date is a crucial step to take if you plan to retire early, writes Joe Udo of “Retire By 40,” who saved over half his income and retired at age 38: “It gives you a goal to shoot for and most of us work better with a deadline looming.”
You'll also want to make a retirement budget, meaning you need to sit down and figure out what your income and expenses will look like after retirement, he says. This will depend on how you envision your future lifestyle. For instance, do you plan on traveling a lot, or gifting money to family members? How much will that cost?
“Live large in a small space,” recommend Jacobson and Tseng. “Since the 1950s, the average home size has nearly doubled. Besides extra bedrooms, extra bathrooms, extra closets, and extra garage parking, this also brings extra taxes, extra utility bills, extra maintenance costs, and extra time spent cleaning. By contrast, we chose to live in a small apartment that costs a fraction of the price of a home or condo. All of the savings went straight into our brokerage account.”
Set up an automatic contribution to your retirement savings
You should already be contributing to your employer's 401(k) plan if you have access to one, and taking full advantage of the company match if it's offered. Just like a 401(k) contribution is automatically taken from your paycheck, another smart strategy is to automate your contributions to alternative retirement accounts like an IRA.
Simply choose the percentage of your paycheck that you need to set aside and invest in order to reach your financial goals — the earlier you want to retire, the greater the percentage should be — and set up an automatic transfer from your checking account into your retirement savings every month. You'll never even see that money and will learn to live without it.
“You just figure out how much you need to deduct from each paycheck and then set it up at the beginning of the year,” writes Udo. “You can do the same with the Roth IRA and 529 as well. After you set up these auto contributions, then you're safe to spend the rest of your take home income.”
Invest in more than just your 401(k)
Many experts recommend using investment vehicles in addition to your employer's retirement plan.
“With the grim outlook on the future of Social Security and pension plans becoming a thing of history, relying on your employer's retirement plan to fund your golden years may just not be enough anymore,” explains investment analyst Thomas Walsh on MainStreet. “Contributing to an employer plan such as a 401(k) is a great start for retirement saving, but the more you can save for the future, the better.”
Consider contributing money towards a Roth IRA or traditional IRA, research low-cost index funds — which Warren Buffett recommends — and look into the online investment platforms known as “robo-advisers.”
Build a cash cushion
“Early retirees should probably have about one year of expenses in cash before calling it quits,” advises Udo. “We built a $50,000 cash cushion before I quit my job in 2012. The cash cushion gave us peace of mind and we can use it for unforeseen emergencies.”
Plus, if your retirement goes according to plan and you don't need to tap into that money, you'll have extra money to invest and let grow.
Track your expenses
Do you know how much you spend eating out, on monthly subscriptions, or on coffee? Chances are it's more than you think. If you redirect smaller, everyday expenses towards a retirement account, it can accumulate and grow into thousands of dollars over time, thanks to the power of compound interest.
“Write out all of your spending and analyse it,” advise Jacobson and Tseng, who now travel the world with their son. “Track your dollars. I guarantee you'll find something that either you didn't know you were spending your money on, or you felt was unnecessary.”
Try keeping a spreadsheet on your computer, or consider an app that will automatically track your expenses for you, such as Mint, You Need a Budget, or Personal Capital.
Find pleasure in things that don't cost much — or anything
At the end of the day, the key to retiring early boils down to spending less and saving more.
“Many assume that you have to work 40 or more years to retire, or that long term international travel is only for college drop-outs and dirty hippies living on rice and beans,” write Jacobson and Tseng. “There is really only one thing that determines how quickly you could join us on the road: savings rate.”
The best savers find, and enjoy, the wealth of cheap and free activities out there, such as cooking, hiking, reading, and taking advantage of the free activities offered by your city or town.
“Sure, it’s fun to spend money. I like eating out, travelling, and other entertainments as much as anyone,” writes Udo. “However, I think I found the secret to spending less money. You have to learn to enjoy free or cheap entertainments... There are a tonne of free things to do out there and you don't have to spend a lot of money to have fun. Spending money for fun once in a while is good, but it shouldn't be the norm.”
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