In the last few months, I've received several specific questions on how exactly I envision my own retirement / financial independence and why I value it as a goal so much. I thought it might make sense to spell all of it out in a single article that I can link to going forward that addresses all of these things in one place.
So, let's start with the basics.
How I View Retirement and Financial Independence
In my eyes, "retirement" simply refers to a situation where you're financially able to walk away from your main career and/or job without having financial need to seek a replacement. You might choose to still work for money, but it's not a choice that's forced upon you. You might choose to do it because you enjoy the work or because you want some additional lifestyle perks, but you can live day to day life without the need to do so.
"Retirement" often implies old age - typically age 60 or later - so I often use the term "financial independence" instead of "retirement" because that implies the same concept, except that it can apply to younger people. My wife and I hope to be financially independent at some point in our early fifties, but it somewhat depends on the life trajectories of our children.
The obvious reason that "retirement" implies an age of 60 or above is that people often have to keep working until that age to receive many types of financial benefits that come from a career in the workforce. Social Security doesn't kick in until people are in their sixties, IRA and 401(k) benefits have severe restrictions until then, and many pensions don't kick in until that age (either due to age restrictions or years of service restrictions).
For the most part, I use these terms interchangeably.
The (Simple) Math of Retiring Early
Does the math really work out for retiring early? It sure does, but it requires you to live on substantially less than your income for quite a few years. In the modern world, that's a commitment that many people aren't willing to undertake.
Here are a few thought experiments that might help you understand this idea in the context of your own life.
How much do you need to retire? Let's say, for example, that I were to hand you $100 million. Would you retire immediately? Almost everyone reading this would say yes.
Let's say I were to hand you $10 million instead. Would that be enough to retire immediately? Most of you would say yes. A few more might pause for a bit and then say yes. A couple might say no.
What if that number was $1 million? Some of you might say yes. Others might say no.
I can keep bouncing that number around until I get to the smallest number possible where you'd say "yes." For many people, that number is somewhere in the $5 million range, before they do any research on it. Others might have a lower number; others might have a higher one.
The point of this experiment is to get people to realize that there actually is an amount of money out there that would cause them to retire right now, and it's not as big as they might think that it is. That's your number. That's your target.
The Trinity study There's a well-known research study called the "Trinity study" that concludes that if you withdraw 3% of the balance of a well-invested pool of money each year and live off of it, then increase that number for inflation each year, you can live off of it forever and the balance will never disappear.
So, for example, if you have $1 million in investments, you could withdraw $30,000 of it this year, and then a little more next year ($30,000 adjusted for inflation), and then a little more the following year, and if you stuck to that, the money would last forever. In fact, you'd probably pass away with a lot more than a million still in investments.
This simple tool can give you a pretty close estimate of what your actual "number" is, not just a gut feeling. How much money do you need to live on this year? A good way to start is to estimate how much you're spending this year, including stuff like health insurance that you're not including, then subtract out costs that are strictly related to work (like the cost of commuting each day and the cost of work clothes).
Take that number, divide it by 0.03, and you have your actual target number. That's how much you'd need in investments to retire. Easy enough, right? (This assumes any Social Security money you get is a cherry on top, of course.)
Let's say Sarah and I figured out that we needed about $45,000 to retire and be able to do the things we wanted to do. We would need $45,000/0.03, or $1.5 million, to be able to do it.
What if you needed $75,000 a year? $75,000/0.03 is $2.5 million, so you need $2.5 million in the bank and you can just walk away from your job.
At this point, you've recognized that there is a number and you've figured out roughly what that number is, but how do you get there?
Getting there is the hardest part. It all depends on how aggressively you want to get to that number. That matters more than anything else.
In a given year, you have a certain amount of income and a certain amount of expenses. Ideally, the expenses are less than the income, and the difference between the two is your gap. It's the size of that gap that matters.
Let's say we have a household income of $80,000 a year. We are able to live a happy life on $60,000 of it. That means we have a gap of $20,000.
Given those numbers, our target number for retirement is $60,000/0.03, or $2 million. We have $20,000 a year to save to get to that target.
I like to use Warren Buffett's estimate of an average annual return of 7% on investments. If you toss those numbers into a spreadsheet, you'll find that it will take 31 years to get to $2 million if you put in $20,000 a year and it earns a 7% average annual return. Start at age 20 and you're there at 51.
How does all of this change, however, if you were able to live on $55,000 a year? In that situation, your target number for retirement is $1.83 million, and you have $25,000 a year to invest. You're now able to get there in 26 years. Start at age 20 and you're there at 46.
What if you were able to earn an extra $10,000 a year? In that situation, your target number is still $1.83 million, but you have $35,000 a year to invest. You're now able to get there in 22 years. Start at age 20 and you're there at 42.
You get the idea. The lower your average annual spending and the bigger the gap between your spending and your income that you can save, the faster you get there.
For comparison's sake, Sarah and I didn't really start saving in earnest until just before age 30 and we're hoping to retire early in our early fifties. We are trying to be prodigious savers!
The Practical Steps
So, how does one do that in the real world? As should be clear, the core part of it is to live on an amount of money that's significantly below your income. You can either amp up your income as high as possible or strive to find the minimum amount that can create a comfortable life for you or, ideally, both.
The advantage of focusing on maximizing your income is that there is really no limit to it. There is essentially no limit to one's annual income should they focus intensely on doing so. However, a lot of people simply don't wish to be that intensely focused on their career or entrepreneurship.
On the other hand, the advantage of finding that minimum amount that delivers a comfortable life to you is twofold. One, it reduces the amount of your current paycheck that you're spending, meaning you have more to save for the future. Two, it reduces your overall savings target, so your target number isn't as big as it would be if you didn't give some thought to your spending.
While career focus and entrepreneurship can be really helpful for some, there is at least some value in the lifestyle part of the equation for everyone, so it tends to be the side that I focus on.
Most people respond to this by assuming that spending less than they earn and putting aside some for the future is some kind of guarantee of a horrible life, but the truth is that above a certain rather low level of income, our happiness isn't raised in any notable way by more spending. As we buy into more luxuries and continue to raise our standard of living, other things in our life become irritants, bringing our happiness back down again. For example, a higher standard of living usually comes with a more stressful and more all-consuming job. A fancier car comes with reduced choices in terms of who will repair it, higher insurance costs, and a lot more worry about maintenance and theft. Lifestyle upgrades almost always come with downsides, even if you don't immediately see them.
The trick is to find a low cost lifestyle you're happy with. There are always upgrades and perks to desire, whether you make minimum wage or are a billionaire. The key is to find a day-to-day life you're happy with it, pare it down to the minimum cost that retains that sense of happiness and contentment, and stick with it, using the remaining money you earn to move toward the big goal of divorcing yourself from the need to work for income. Everything else is just optimization tips and tricks.
What "Retirement" Looks Like for Us
For us, a vital part of this equation is the vision of what retirement looks like for us. We talk regularly about the things we will do once our children have moved out and we no longer have to work for a living, which is ideally just ten or so years into the future. That vision inspires and guides us.
Our plan is to spend the colder six to eight months of the year in the community where we currently live. We enjoy living here and have lots of friends in the area - by my estimation, I have more good friends I like having over for dinner or a game night than I have in my entire life, including college.
During that time, Sarah and I both plan to be involved in local charities. I also want to write a series of fantasy novels involving a universe that I've had in my head for many years, devoting at least a few hours a day to it until I'm happy with it. We both have a lot of hobbies and other interests we want to devote some significant time to as well, and we want the freedom to be able to go help our children when needed, particularly financial-wellness/if/when they have children of their own or other major life events.
During the warmer months, we want to travel in a very low key fashion. We're talking the kind of travel where we basically take off with the camper hitched to our vehicle and go around the country, staying in campgrounds and exploring the local area and communities while preparing our own food at our campsite each day. Part of our plan is to visit every single national park, national forest, and national monument in the United States and likely the national parks of Canada as well.
Keeping this vision fresh and in our minds is a big part of how we keep our life on track to achieve that goal of early retirement.
Our Life Today
How does this connect to our life today? We basically strive to keep our day-to-day life as inexpensive as possible without crossing into being unwelcoming to others or into personal unhappiness.
If either one of us feels unhappy about some aspect of our life, we talk about it, not in a judging way but in a "how can we make things better" way. I want Sarah to feel at least content in all aspects of her life, and she desires the same for me (at least judged by her words and her actions).
We both try to keep our spending low, though neither of us is perfect at it. The most effective tool we've found for keeping our spending in check is through automating a lot of our finances so that we have only a limited pool of money that's available to spend as we wish. We automate all of our retirement savings by having money either taken out of our pay or automatically transferred into various retirement accounts so that it never really even graces our fingers.
We're not perfect at this. We both overspend on things, and we both have things that we think our partner overspends on but forgives them for this. I think Sarah overspends on our pets, for example; she thinks I overspend on hobbies, which I probably do. Our solution here is to have each of us have a reasonable amount of money each month that we can spend freely, and purchases beyond that need to be discussed (sometimes unexpected things do happen).
The core of our ability to work toward early retirement in a meaningful way boils down to communication, reflection, and automation. We both communicate a great deal about our goals going forward and about how things are going. We both reflect quite a lot on ourselves, the state of our marriage, our broader family, and other things. We have much of our finances on complete autopilot so that we don't really even have the option to spend that money. Those things all work together to keep us moving toward early retirement.
Isn't This Moot If You Love Your Career?
Many people assume that the only reason someone would focus on retirement so intensely is that they hate current aspects of their life. Why would you do this if you like your job?
Sarah and I both deeply enjoy the work we do. Sarah has been a teacher for almost two decades now, and I've been a full time writer for almost as long. That doesn't mean that it's the only thing we enjoy.
For both of us, doing our current jobs well means devoting a lot of time and energy to it. I spend tons of time reading articles and books, taking notes, trying different money-saving ideas just to see if they work, taking all of those ideas and trying to figure out how to turn them into meaningful articles, and so on. I enjoy the work, but it takes a lot of time, and that's time that's taken away from the other interests I have in my life.
There are many other things I want to do in my life before my years on this earth are spent, and I want to be able to do them with some degree of freedom without the weight of financial need hanging over my head. Right now, I do have a job I enjoy, and that means I have the luxury of being able to do something I value as I'm working toward that point of freedom, but that doesn't mean I'll always like it or that's what I want to be doing every day for the rest of my life. The Shawshank Redemption is one of my favorite movies of all time, but sometimes I like to watch other movies. Writing for The Simple Dollar is incredibly fulfilling, but I'd like to devote large blocks of time to other things during my life, too.
I'm in the midst of a stage in my life that I deeply enjoy, but that stage will end before too long. My children will move out and my life will change in new and unexpected ways. I want to have the foundation in place that affords me the maximum freedom of choice as to what comes next when that happens.
The purpose of this article was to explain in a high level and non-technical way why Sarah and I have chosen to retire early, what that actually means and looks like for us, and how we're actually doing it. My aim was to not get bogged down in the details here, but to approach it at a level such that almost anyone can clearly understand what it is we're aiming for and why it's actually realistic for us.
Of course, the devil is in the details, and there are many. How does one's debts enter into this? (We prioritized paying off all of our debts and have been completely debt free, including our mortgage, for almost a decade.) How does one resist temptation? How exactly does one invest for retirement? (Simple answer: contribute to your available workplace retirement plans until you get all of the matching money, then open a Roth IRA and contribute the maximum, then contribute more to your workplace plan, and put all of it in aggressive investments, mostly broad-based stock index funds.) What if you hate your career or some other aspect of your life right now? (Choose a different goal for a while.) The nuances of this go on and on and on and provide endless points for thought and discussion.
Early retirement is a realistic goal for most Americans, though. It just requires lifestyle choices that tend to go against the cultural grain of the moment. We're encouraged to spend, spend, spend, and this is a life goal that says don't spend, don't spend, don't spend. Happiness isn't found in spending - sure, it can bring a little brief burst of pleasure, but it fades so quickly. Build for something that lasts and you won't regret it.