I’d love to tell you that after all this time that I have all the answers. That there was some kind of easy solution or magic bullet. However, I’m still a long ways out and seem to have a lot further to go. The path to get there has been more of a puzzle than I originally thought. Each piece containing it’s own unique challenges and scarifies.
Here are my observations on the various paths that I’ve found thus far:
Option 1 – Live Ridiculously Cheap:
One of the first things you notice when you hit the personal finance blog scene is that there is a huge number of people that devote themselves to this illusion that early retirement can be achieved by living way, way below their means. Think like $1,000 per month, give or take. These kinds of people draw inspiration from a lot of the mainstream extremists like the guy from Early Retirement Extreme or Mr Money Mustache.
On paper this may seem to make sense. If you require less money to live on, that means you require less money to save for your early retirement. Thus squirreling your money away for 5 to 10 years in theory could achieve a fortune big enough to produce the $1,000 or whatever you need to “retire”.
Don’t get me wrong. I believe that being frugal and mindful of your spending is necessary on all levels of income. But I also know myself and my family enough to know that this type of lifestyle would never work. Therefore I have little support for this type of strategy.
We’re not prepared to live in a smaller house. Not drive cars. Live in a foreign country. Hell – we spend about $1,000 per month on just groceries and household products alone. I’m not sure how people make this work as their cap to their total overall budget for housing, taxes, gas, food, etc.
The other thing that bugs me about this is the fact of the unknown. Say you ARE able to pull off this lifestyle for 5 years and make it work. But then suddenly you find out you have cancer. Or maybe the neighborhood you live takes a turn for the worst, and you feel its time to move. Or maybe you have diabetes, want to secure your family’s financial future and have to buy life insurance as a diabetic, resulting in premiums you no longer can afford. Or after a while your kids want to go to college and you don’t want to see them saddled with tens of thousands of dollars of debt. These are all very real things that DO happen. I should know – each of them happened to people in my life.
Option 2 – Save and Invest Like There’s No Tomorrow!
Okay – maybe that’s a little extreme. But there are tons of people out there where this is their plan. They live normal regular frugal lives like you and I. But the difference is that they take a significant portion of the money they make and stash it away. Simple compound interest is proven that the more you are able to save at a younger age puts you in the best position possible to have the biggest nest egg you could possibly have as you get older. Sam from Financial Samurai is one example of a guy who has really made this type of system work. Integrator from Get Financially Integrated is another blogger who’s progress I’ve been watching and really cheering for as he gets closer and closer to his goals.
Notice the key here is “intelligent” investments. They max out their 401k’s, IRA’s, buy real estate, focus heavily on safe large cap dividend stocks. Notice every one of these are stable income generating assets. No one is buying hot-tip penny stocks or something they read about on Mad Money. The wisest investors realize that on average you can never beat the return of the stock market indexes, and that this is probably the best place to invest.
In addition to that: The wise investor also is mindful of 1) when they will be able to access their money and 2) what taxes will be owed. A smart way to go about this is to invest some money in a taxable brokerage account that you can access anytime before you reach age 59-1/2 (the age when you can start taking withdrawals from your normal retirement account), and then put the rest in your regular retirement accounts for access later. Understanding the tax implications to both sides of the fence could end up saving you thousands of dollars in mishandling if you do it the wrong way.
When it comes to how you handle your money, NO ONE cares about it quite the way you do. That’s why you really need to use your brain and make cautious decisions about where it goes and what you put it towards.
This strategy has been a part of my own early retirement planning for a long time and is a topic I explore quite regularly here on my blog. You can see my full plan here. Though I don’t save anything close to the ridiculous 75% figure I mentioned earlier, I do regularly make sure that my taxable and tax-deferred retirement accounts are heading in the direction I want them to go. I max out my 401k, our IRA’s, and only invest in what I understand or feel comfortable with.
The only setback I see with this strategy is that you become limited by the confines of 1) how much you are able to invest or save (which is usually closely related to how much money you make at your job) and 2) what the returns are on what you invest. I wrote about this topic a little while back about how at times when you follow the conventional financial advice of putting aside 10% of your paycheck, the whole retirement scheme feels rigged because it ropes you into having to work 30 to 40 years to finally get to a nest egg that will sustain your current income level. That’s NOT financial freedom.
Unfortunately since there is no magic bullet to make more money than they often quoted 8% return that a stock market index fund will produce, I guess you are only left to focus on the first challenge: How to make more money that you can stash away and get yourself closer to that financial freedom goal?
Option 3 – Go Beyond Your Paycheck and Create Passive Income Streams:
So you live modestly, save a decent amount of money, and invest wisely. But you still aren’t ready to declare early retirement? What gives?
Because your job or industry is somewhat limited as to how much money you will ever be able to achieve (and it is in case you haven’t figured that out yet), your only recourse is to make money using other resources. Namely by using passive income methods. This could be from owning rental properties, selling something like an eBook online, or even by owning a blog such as this one. Another way to really kick this into high gear would be to own your own business where you have employees working for you that multiple your own physical efforts and make you even richer.
Passive income is an area that I have been particularly focused on this year. My ambitions to start a series of niche websites have proven to be a growing venture that I plan to continue to flourish. Though the income is small now, I see the potential and it gives me great hope that I will be able to keep the momentum going.
My plan: To take that income and accelerate my early retirement planning efforts beyond what I was doing before. Even if I am able to save a few extra hundred or thousand dollars per month, that is much more beneficial than trying to sacrifice necessary expenses or slave away more hours at a job.
Early Retirement Planning Is Still Work:
It doesn’t matter which of my strategies you agree with. All of them are not easy. Each one requires ambition, discipline, sacrifice, and patience. They are all hard work. But it’s a kind of work that could be more beneficial than the path you’re on now. It’s all a matter of priorities. It’s asking yourself what you want for your life and what are you willing to do now to get there.
What are you willing to do?
Image courtesy of FreeDigitalPhotos.net
Great post MMD and honestly I am planning a combination of them all. But by doing them all I mean within reason. We are saving a lot of money but not 75%. The wifey and I bought a home and have used cars however we could have easily decided to get all new cars with more expensive payments. We also invest and right now I am working on passive income with plans to moving abroad. The main thing though that its work and a lot of work. You have to be willing to stick it out for the long haul.
You are right – it definitely all is work and there are no shortcuts to the process. But I do believe we can put ourselves in better positions to make the dream happy sooner rather than later.
Where are you moving abroad to?
I don’t like the word retirement in the traditional sense. I feel like as long as I am doing work that I enjoy that retiring early isn’t necessarily my top priority. I am definitely in to increasing my income. After I do that I want to save a good portion. I am already use to living on a small budget and there is now way I would want to or see possible to cut that back.
For some people early retirement is not really a priority. And that is fine. However I often use the words early retirement and financial freedom interchangeably even though there are subtle differences. After reading many of your posts and seeing all the great progress you’re making, I’d say you are on a path to achieve financial freedom.
I’m working on options 2 and 3. So far 2 is doing WAY better than 3, but each day my passive income grows and so with time it should hopefully work out that I can quit my job and move to a full time online income.
Option 1 is no good for me, I find that being super cheap is no fun. You only live once, so you may as well have some fun!
I fully agree on NOT using Option 1. I don’t make money to not spend it. It would be a sad, sad life if you never opened your wallet and cut loose with living a little. Where’s the fun in that?
Nice post MMD! We’re focusing on a combination of #2 & #3 personally. There’s an ebb and flow with it, though we’re fairly balanced between the two.
We’d be no good with #1. I am all for living frugally, but I like my warm showers too much. 😉
Somewhere between 2 and 3 is where we’re at too. Though I’d love to rock out No 3 a little bit more. Like all things it will come with time the more I plot and chip away at it.
I think 2 and 3 are the best options when it comes to building your retirement funds. But If I were to pick just one, I’ll go with 3. I can save for my retirement much faster by adding more sources of income and saving most of them.
Having more income certainly helps out and accelerates the situation quite a bit. I think a lot of people still respect number 2 even if just a little bit because no matter your income is you still have to keep your finances in check. I’ve met a lot of +$100K income families that struggle to live within their means because they forget that [ Expenses > Income ] is not going to help them achieve financial freedom.
Great stuff here. Each person will have their own view of the world and their own lifestyle they’re trying to achieve, which will to a large extent which of these approaches is best for them. Personally, I think that a healthy balance of each of these approaches is best. Just as with investing, diversification is your friend.
Good point. You can learn a little something from all of these strategies even if you don’t fully adopt or subscribe to them completely. That’s one of things I love best about being a personal finance blogger: I get to take the best of the best ideas and put them into practice towards my daily life and financial future.
Definitely takes a lot of commitment, risk, and diversity. Oh, and time too. Sometimes it feels so painfully slow. I’ve shared my 5 blowups on today’s post.
So long as we are headed in the right direction, sooner or later we’ll get there!
Sam
Well said Sam, and very much an inspiration that we can and will get there if we’re ready and willing to take on those challenges.
Early retirement is definitely on our minds. We really want to start working on passive income and building up our investments further.
You’re probably closer to this dream than most of us with all the great income your freelance work brings in.
What kinds of plans do the two of you have for building up passive income?
Man you are so right about the extreme frugal living thought that is so prevalent on PF blogs. Come on. I don’t want to live like that and hate my life so I can retire a few years early!
As for passive income…the the PF blogger who got me into blogging said to me, “There’s almost no such thing as passive income. It almost always takes work. And there is absolutely no way to get rich quick.”
I’m right there with you Todd. Why did I work hard and save up all this money if I didn’t plan on using it for life’s best adventures? To me early retirement isn’t living off of $800 each month. I’m not aiming to put myself in poverty; I want to have the lifestyle I have now but also achieve financial freedom. And I know its possible but it will take a lot of true time and effort to achieve. To some degree that blogger may be right that passive income in its purist form truly does not exist. However when I wake up in the morning and see my Adsense balance over $100 and I didn’t really do much to make that happen, its a much different feeling than knowing I’ve got a +50 hour work week ahead of me at my regular job to earn my regular income.
Nice post. We try to live within our means and we have some retirement savings and some investments. Would love to do more with creating more income passive or otherwise. I especially loved that you brought up “the unkown.” There is so much that is out of our control that can derail the best laid plans. You are not at all out of line in bringing up cancer. This year alone we have had to deal with my mother-in-law having a sudden fall and breaking her wrist while attending a wedding out of state. A very long story very short, several hospital stays and admitting to nursing home leading to complications and her passing all in 3 months time. This followed by my own father’s hospitalization due to heart problems and worsening of Alzheimer’s. He is now in a nursing home. The cost of all these things is unbelievable and the stress is almost overwhelming. Sorry but all the frugal living and extreme saving could not have prepared me for this.
Suzie, I’m very sorry to hear about MIL and father. It kills me when I read blogs from young kids either fresh out of college or 5 years into the workforce who think that saving up $500K and retiring on $1000 per month is going to be their ticket out of their bad job for the rest of their life. Ever since I hit age 30 my wife and I have had all kinds of weird things happen medically that I would have never imagined, and I’m sure we’re in for many, many more. We as people simply don’t know what the future brings, and all we can really do to prepare for it is simply acknowledge that we don’t know and cushion ourselves in some way financially to prepare for it. Dismissing it doesn’t make it go away or make it any easier. It simply leaves us unprepared.
I just really want the option of retiring on my own terms. Still have a while till I am there but i am working towards it.
Agreed! I think that’s what we all want when it comes to being financially well off or reaching a point where we could retire if we wanted to. Then no job can dictate your income level. You do!
I think it’s possible to live on around $2K per month, but that assumes you own your home and don’t have a mortgage. Otherwise, that would really be a sacrifice for most people.
I really admire Sam and Mr. Money Mustache, and I don’t know the other one you mentioned, but they did have jobs with salaries well over $200K per year. It’s much harder to save 75% of your income when you only make $50K per year or so.
For us, the whole passive thing will hopefully play a big part of our retirement strategy. I’ve certainly wasted lots of money in the past on stupid things, but buying my business was a good move, even if I didn’t see it at the time. Hopefully, when it’s finally sold, that income will get us much closer to where we want to be.
There may be some slant to those who make over $200K and are able to retire quicker. I agree that the average person making $60K is going to have a much harder road to climb to get to where they got to. I see passive income as the main opportunity for most of us to increase those chances, and that is why it is a reoccurring theme that I love to promote here.
Save early, save often. There’s really no other way to maximize the amount of money that will be available in all of your retirement accounts once you retire. Investing in stocks for the long run and bonds for income will provide a sound floor for the portfolio, but sometimes a little extra boost is needed for those who start saving late or for those who haven’t made much money during their working years.
Do you have a financial number in mind for financial independence. I have mine and once my family hits it, it’s time for me to go.
Yes. For me it is $3000 per month in stable income. That could be from my dividends, capital gains, blog income, or whatever means I am working on in the future. The big key for me is stability.
After mapping out your long-term strategy for early retirement planning, it’s important to stick with it. By living within your means, investing your money early and over time and taking advantage of all the income-building investment options out there, you can realize the dream of early retirement and be secure knowing you’ve got income to last you for the rest of your life.
If we want to retire young and rich, there are no “maybe, I’ll try…” Just go for your dreams. We need dedication and hard work to attain our goals. No more excuses to ourselves, if we want change thus we need to make the necessary actions upon our goals. It is attainable if we work on it. Those dreams will materialize if we start believing on it and having a leap of faith.
Well put! There is no maybe. You just do it, go for it, and then keep trying different things until you get it right.
I’m with you on not being focussed on extreme frugality as a path to independence. I want to live my life without making too many concessions. If that means it takes a few extra years to attain the target income number to achieve my goal than so be it. It’s too restrictive to be focussed on living on $1k/mth. Having said that, taking opportunities to cut out waste in spending is something that I’m actively focussed on. If we don’t use it or don’t need it, it gets cut, but we aren’t restrictive in spending on stuff we enjoy and love.
Thanks for the mention by the way!
You’re welcome for the mention! Your posts and strategy to build up your portfolio have been an intriguing story to follow as well as inspiring for my own efforts.
I found myself nodding my head as I read this post. Yup, we can only live so frugally. Yup, save and invest as much as you can. Yup, find ways to earn more. Yup, invest in low-cost index funds. Yup, it’s hard work.
Well done.
Thanks Bryce and welcome to the site. I’m glad we share similar opinions on how to tackle early retirement.
Postpone living in the hope of a better tomorrow…. How much of that makes sense?? The only one way achieve early retirement is by increasing your income level — maybe with passive income methods, by doing two jobs, or by working for more shifts. This will help you reduce the chasm between you and retirement https://goo.gl/0VPHg. By the way, great post. Really enjoyed reading it.