Last week, I asked Is Your Success Due To Hard Work Or Luck? The comments have been very interesting and thank you if you left your thoughts. Most people agree that it takes determination, hard work, and some luck to become successful. Personally, I feel that I am really lucky. Family and circumstances gave me a good start, but I was also determined to meet my goals and worked hard to get here.
Anyway, I don’t want to discourage anyone from working hard. You need some luck, but if you don’t work hard, it’s very difficult to succeed. This got me thinking about what factors I had control over when I aimed for early retirement. Most of these require perseverance and not that much luck. If you are not rich and you want to retire early, you will need to be diligent with these actions below.
- Get rid of consumer debt
- Live below your means
- Make a good salary
- Invest early
- Figure out ways to generate passive or creative income so you don’t need a day job
- Work as a team (if you’re married)
- Maybe – wait to have a kid until you’re financially stable
- The right attitude to travel the path less taken
I guess I can tack “early” to most of the items on this list. Retiring early by my definition means quitting your day job to do something you want to do. It doesn’t matter whether that earns money or not.
Avoid consumer debt
I hate consumer debt. If you have any outstanding balance on your credit card, a car loan, or any other type of debts that accrue interest, then you need to get rid of them as soon as possible. The money that could go toward building your financial independence is being siphoned off to enrich various financial institutions. The interest you pay every month could go toward building wealth instead. We never carry any balance on our credit cards and we haven’t had a car loan in years. Life is much easier when you don’t have to worry about consumer debt.
The whole consumerism attitude in the USA isn’t good for early retirees. Almost everything you see encourages you to spend more. It’s good that other people are buying more stuff because it keeps the economy humming, but anyone who wants to retire early needs to moderate their spending. Avoiding consumer debt is just the first step to a moderate lifestyle.
*The jury is still out on mortgage. It’s a good idea to pay off your mortgage before you completely retire, but at the current low rate, many people disagree.
Live below your means
This is the core tenet of personal finance. It’s simple – you need to make more than you spend. This will give you some breathing room to start building wealth. You won’t have to worry about how you’ll pay the next bill and you can concentrate on how to make the extra money work for you.
Spending less than you make doesn’t mean you have to eat ramen and wear holey socks. (But you could if you want to…) Increasing your income is another way to live below your means. You just need to make sure to minimize lifestyle inflation as you make more money.
Make a good salary
Early retirement becomes much easier if you have a good salary when you’re young. I think that’s why so many engineers think about quitting their career to do something else. I made about $50,000 when I started my first job in 1996. This was plenty to pay the bills, max out the 401k, travel, and live a comfortable lifestyle. By the time I quit my engineering career in 2012, I was making a little over 6 figures.
If I worked at a minimum wage job, then I wouldn’t have been able to save and invest as much. It’s possible to retire early with less money, but it would be much more difficult to get rolling. Here are some examples from the blogosphere.
- Sam @ Financial Samurai – Finance Profession
- Justin @ Root of Good – Civil Engineer
- Mr. Money Mustache – Software Engineer
- Nick @ Pretired.org – Marketing Director
- Jason @ Dividend Mantra – Jason is a car salesman. This one is more difficult because his paycheck is based on commission and it can be up and down. I don’t know, but he probably doesn’t make as much as the people above so he is more focused on living frugally. I’m sure he can reach early retirement, but it’s harder.
Start investing early and keep investing
Investing early is HUGE. The earlier you invest, the more you can take advantage of compounding. Start investing in your 20’s and your investment will have 40+ years to grow. Invest in your 401k, Roth IRA, rental properties, and anything else that you can think of. Early retirement is possible if you invest early and put off withdrawal as much as you can. I wrote a whole blog post on this, check it out – Start investing as early as possible.
Generate passive and/or creative income
Did you notice that I mentioned put off withdrawal in the previous paragraph? How can you put off withdrawal from your retirement fund if you retire early? You need to figure out some other way to generate income to cover your living cost. Currently, we have income from our dividend portfolio, rentals, peer to peer lending, and my blogs. They help cover a good portion of our monthly bills.
For most people, the main source of income is their day job. To retire early, you need to replace that income somehow. You can either withdraw from your savings or generate more passive and creative income. I think withdrawing from your retirement fund is quite dangerous if you have 50+ years left in retirement. Of course, some people saved up a huge amount before they retire and they can withdraw comfortably for 40-50 years.
I’d like to stress creative income here. Many people retire early because they don’t like their careers anymore. However, we still have a lot of life left. At 40, I’m not ready to sip margaritas by the pool all day every day. I found a creative outlet with blogging and can make a little money doing it. I’m sure most of us can find something creative that we enjoy and make a little income at the same time. It’s a good way to spend your early retirement.
Work as a team
Mrs. RB40 has been very supportive throughout this whole early retirement adventure. I couldn’t have done it without her. If you’re married, you need to work on early retirement as a team. It doesn’t mean you have to both retire early. It just means both people have to work toward the same financial goals. It is extremely important to be on the same page financially or else it could create a rift in your marriage.
BTW, here is Mrs. RB40’s early retirement plan.
*update* David requested that I add – Don’t get a divorce if at all possible. A divorce is one of the 10 Easy Ways to Sabotage Your Finance.
This one is a maybe – wait to have a kid
We waited to have a kid until our late 30s. We weren’t in a hurry to have a kid and it worked out for the best. By the time we had RB40 Jr., we were a lot more financially and emotionally stable. A kid can cost a lot of money and I think it’s better for most people to wait a bit.
I’m not sure if this is really crucial, though. I’d like to hear from someone who had a kid in their 20’s and still retired early.
Path less taken
It takes a certain devil may care attitude to walk away from a stable paycheck. It’s almost like stepping off the airplane when you go sky diving for the first time. Most people wouldn’t understand why you would do such a thing and it will take a lot of work to get family members and friends in your corner. Mrs. RB40 was skeptical initially, but eventually I convinced her that quitting my engineering career was the right move for us.
A majority of employees are dissatisfied with their job, but they keep going to work or just change employers. Only a small minority is willing to make a drastic change in their lives and drop out of the rat race.
Did I miss anything?
Well, what do you think? You don’t need to hit everything on this list to retire early, but the more the better. I’m writing this from my experience so I might miss something obvious. Let me know and I’ll add it to the article.