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Keys to Retiring Early

by Melanie on May 30, 2014 · 21 comments

in early retirement

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early retirement

The following article is from Mike, our staff writer

Just about everyone I know dreams of retiring early.  Usually it’s either because they’re stuck in a dead end job they can’t stand or because they want the freedom to spend more time with their family, traveling the world, or following their passions.

For most people, the prospect of retiring early is little more than a pipe dream.  The only action they take towards their goal is buying a weekly lottery ticket and crossing their fingers.  Unfortunately for them, the lottery is just a big waste of money and they’ll never win anything more than a few hundred bucks…hardly enough to retire early.

The truth is if you want to retire early you need to create a plan and stick to it.  Follow the steps listed below to get on the path to success.

Start Early

Joe has already written about how important it is to start investing when you’re young, and I couldn’t agree more. The earlier you start saving the more time your money will have to take advantage of the power of compounding.  Saving as much as possible when you’re young means you won’t have to save as much when you’re older.  Perhaps more importantly, you’ll be forming a positive habit that will help you save regularly for the rest of your life.

Stay Consistent

One of the challenges of saving money when you’re young is that you don’t always have a lot of money to put aside.  You probably don’t make a ton of money and once you pay all your monthly expenses there is probably little to nothing left to put towards savings.  But it is important that you learn to pay yourself first and consistently save money.  You can start by signing up for your employer’s 401(k) plan and contributing at least enough to take advantage of any company match. Before you know it you won’t even miss the money and your retirement savings will be steadily growing.

Avoid Debt

The more money you spend paying off debt the less you have to put towards your own financial goals.  Think about what is most important to you and set priorities.  If you want to retire by age 40 and you figure you’ll need to save 25 percent of your income to reach that goal, then you’ll need to make some short-term sacrifices to make it happen.  Driving a fancy sports car or running up your credit card bills by living an extravagant lifestyle is only going to move you further and further away from your goals.

Spurn the Jones

It’s all too easy to get caught up in a dangerous game of trying to one-up your friends and neighbors, but that will only lead you to financial ruin.  I have one neighbor who never misses an opportunity to show off and make it seem like he’s doing better than he is.  He leases a new car every two years while I still drive my 2003 Camry.  When I got a used swing set for my kids to play with, he went out and bought a gigantic play gym for his kids.  When I splurged on a new grill for my backyard he ran out and bought one even bigger and more expensive.

The funny thing is, I know for a fact that he’s drowning in debt.  His wife has repeatedly told my wife about how much her husband spends and how they can barely afford the minimum payments on their credit card bill.  Yet he continues to spend money he doesn’t have so he keep up the facade.  I could do the same, but I have no interest in following him into debt oblivion.

Do you have a plan for retiring early?  What steps are you taking now to make it happen?

Photo credit: flickr mache

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{ 21 comments… read them below or add one }

John C @ Action Economics May 30, 2014 at 4:49 am

Paying off the house early is a major step for us in achieving early retirement. As far as saving money for retirement goes automating contributions to our HSA and IRA accounts has been the biggest help. I love that I don’t have to do anything now except make sure there is money in the bank for the transfers to occur.

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Bobbi May 30, 2014 at 8:29 am

Same here! I love that things are automated, bills and savings, it makes it that much easier to save when I don’t have to debate about putting money to my IRA every month.

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Frugal Pediatrician May 30, 2014 at 6:18 am

I think the key is making sure one has a high savings rate (ours is now > 50%). I like to read blogs like this one to keep me motivated, and also to keep close tabs monthly about what goes in and what does out. We are not planning on retiring early, but are trying to reach financial independence. My husband is the main breadwinner and is still able to work, but has some medical scares recently. Knowing that we were living on less than half of what we make, having a large safety net, gave us so much piece of mind. He is somewhat better and I think a small part was not worrying too much about money.

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Andrew@LivingRichCheaply May 30, 2014 at 6:40 am

Would love to retire early…the key is of course having a high savings rate…by doing the things you mentioned. The tough part…which I know you (Mike) can understand is that it seems tough when you live in a high cost of living area…the NYC metro area has high costs when it comes to housing so saving 50% plus is tough when housing is 30% plus!

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SavvyFinancialLatina May 30, 2014 at 7:48 am

Drowning in debt? That sucks. I don’t know if I’ll get to retire early, but I would like to have the option. It would be great.

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Sandy May 30, 2014 at 7:52 am

Mike, love the part about your show-off neighbor (seemingly) having it all. I can out do you on that one. My show-off neighbor has 5 cars always new and revolving, 2 boats, 2 wave runners, you name it, in his yard and driveway for all to see. Doesn’t really work. I have two terms for it-debt or trust fund baby! Try to ignore them. lol.

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John @ Wise Dollar May 30, 2014 at 8:06 am

We would love to retire early, but don’t know if it’s in the cards for us with running our business. I also didn’t get started early enough in regards to saving a big chunk of what I make. That said, we’re firmly entrenched with the other areas so we can have options as we get older and our business matures.

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Leeann May 30, 2014 at 9:27 am

One great way to increase saving that I practiced when I was younger was to increase my 401K fund allocations EVERY time I got a raise at my job. If I got a 4% raise, I’d put 2% of that into my 401K. I did this every year until I maxed out my 401K savings. I tell this to every young person I know. I’m on track for an early retirement.

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Ken May 30, 2014 at 9:50 am

Yes, trying to live like the Joneses is really the killer for people the world over. I just had eggs thrown on my car that I was planning to get rid of anyways!!!!! So, I put a poster on the car for the Egg-Throwers, telling them to Move-Out or “Help Pay Tuition for my 2 Kids who are at the University”!

In either case, I live like the poorest guy on the block with the largest home, four cars, no mortgage/auto/credit-card debt what-so-ever (0%), a few 100%-paid-for-rental properties and keep smiling at my situation once inside the home (feeling sorry for the rest). Not the bragging type at all (since no one knows the above) except when my identity is preserved on a site like this.

Bottom line, pay off debt, buy appreciating properties, use depreciating items until end of life, and save 30% to 50% of paychecks for a fabulous tomorrow……

Kenny

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EL @ Moneywatch101 May 30, 2014 at 10:54 am

Once you set the goal and live up to it, anything is possible. Living intentional and having strong will power will get you to retire early. Plus everything else mentioned in the post. The first step is mastering good financial behaviors, then it all falls in place.

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MrsFinancialFreedom May 30, 2014 at 2:56 pm

Overcoming the urge to inflate your lifestyle every time you get a hint of a pay rise is hard in our consumer obsessed lifestyle. I think I may have succumbed a little bit but hopefully I’ve resisted enough that while I am along way from being able to retire early, I’m a lot closer to having financial peace so I don’t stress out every time an unexpected expense drops through the letterbox.

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Melanie @ My Alternate Life May 30, 2014 at 11:50 pm

At this point, I don’t think I’ll be retiring that early. However, if I put the same amount of money to savings as I do debt currently, I will be in good shape (over 1k per month). I have a few years to go, then I’m going to focus on savings, travel, and retirement! Early retirement to me means side hustling, but not having to work for anyone.

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Resilientman May 31, 2014 at 1:41 am

Last evening I listened to this podcast “The Social Conditions for Innovation: dissonance for discovery” this morning as I opened my eyes it occurred to me that it is pretty obvious that the key to early retirement is establish the right internal value to the right things. Once that is done the rest is easy! I came up with the article “Understanding Value, is key to managing your actions. Key to achieving your objectives.” Here I talk about how to “Stay Consistent” by making sure drivers of action match objectives… comments welcome :)

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Chris@ChattanoogaCheapster May 31, 2014 at 4:54 am

My focus is more about FI than early retirement. That and I’m just a natural born cheapster. That said, I’m not going to retire “early”. I haven’t mentioned it on my blog yet, but my main reason for taking my frugality to the next level is the realization that my savings needs will double because my special-needs daughter will need a significant amount for long-term care. Still, I would like to retire by 55 at the latest.

Important to mention health and a happy marriage. Hard to retire early if you have a fat stack of medical bills and/or get divorced. Avoiding both takes work and a little luck.

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HappyLater June 1, 2014 at 4:57 am

My focus have always been on trying to save more than I spend, while allowing myself a few cheats here and there. Me and my wife have clearly defined boundaries between luxuries and basic needs, following this basic rule has helped us save money.

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Chester June 1, 2014 at 10:52 am

This is a nice and simple post not only about retiring early, but about achieving financial independence. For us, it is all about developing good frugal habits and staying consistent with saving and investing. After a while, everything just seems to nicely fall into place!

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Victoria June 1, 2014 at 12:03 pm

Regrettably for me, I haven’t done any of these, I failed to contribute into a pension in my twentys, I have a lot of debt and I am completely guilty of keeping up with the Joneses. But luckily, I had my lightbulb moment and am trying to rectify this. I have no ambition to retire early, I just want to retire comfortably. Great advice

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No Nonsense Landlord June 1, 2014 at 7:03 pm

I am going for retirement at 56, not as early as some, but probably at a much higher level of income.

Starting early, and spurning the Jones are the major keys for me.

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Bryce @ Save and Conquer June 1, 2014 at 7:50 pm

All of the actions in your list are required for most people to retire early. Under the “Stay Consistent” heading, I would add that saving should be automated not only into the 401(k), but also into Roth IRA, and taxable investments/savings. Any time a person gets a raise, a good proportion of the raise should always be added to the automated savings. It won’t be missed, and will increase the savings rate.

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freebird June 1, 2014 at 8:43 pm

Yes I had a plan for retiring early. It involved maintaining an extremely low standard of living and investing the surplus. Fast forward 25 years and financially I’m set, mission accomplished. But I didn’t retire– what derailed it wasn’t the money, it was realizing that I had nothing to fill the free time. I guess I’m lucky that I really enjoy my work, but I’d probably be better off if I had developed some outside interests over the years to have something else to focus my attention on. I never thought this could be a problem, that it’s easy to find distraction when the time comes, but in my case it didn’t happen. I’m still looking for something that will pull me away from the world of work.

My message is if you are planning on retiring early, the financial part is only one piece of the puzzle. Don’t overdo the savings part because if it prevents you from developing outside interests, you may be painting yourself into a corner just as excessive debt could.

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Aldo June 5, 2014 at 12:59 pm

I started taking control of my finances a little late (32 years old), but as of right now I’m on track to be able to retire comfortably at 65. My goal is to decrease my retirement age slowly and who knows, maybe in a couple of years I’ll be on track to retire at 60. Or maybe even 55.

Slowly but surely.

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