8 Essential Things To Do To Retire Early

8 essential things to do to retire earlyLast 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.

The following two tabs change content below.
Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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47 thoughts on “8 Essential Things To Do To Retire Early”

  1. I don’t think one should wait to have kids as long as one is making a living.

    If one is young enough and ready to have a family then they must also be ready to struggle a little and get focused. Besides, I don’t like the idea of letting your current employer, (whom you may only know for a relatively short time), determine your personal legacy.

  2. I am a 45 yr old engineer. I earn decent salary and is very good in savings, but not a pro in investing. My 401k just lost whole bunch in the stock market fluctuations, I am so worried I can’t quit my job by 52, will be 25 yrs in current job, no pension but some health benefit if work 25 yrs. I really don’t want to work past 25yrs in my engineering job. Any advice ?

    • You probably should talk to a fee only financial advisor. They can probably offer you a comprehensive investment plan.
      You still have many years left to invest so I would concentrate on these.
      1. Invest as much as you can
      2. Keep investing consistently.
      3. Minimize fees
      Don’t worry about short term fluctuations.
      Good luck!

  3. There are very simple formulas in life, but we humans, complicate life a lot.

    WEIGHT LOSS FORMULA: Ensure that Output Calories minus Input Calories > 0

    WEALTH ACCUMULATION FOR GOOD LIFE: Ensure that Output Spend minus Input Spend > 0 (after putting full amounts in 401k)

    In the same vein, there are so many of these very simple things that are mathematical (which does not click with everyone), but for many it is a simple formula that is forgotten so easily.

    I am teaching my kids how to live frugally, but yet, handle the Macro Income/Expense picture really well. For example, we bought a condo by the university instead of paying $12K per year in dorms for 9 month living, and put two kids in the 2 BR / 2 Bath Condo. Savings from being in Condo and eating healthy will pay over 60% of the condo value over 4 years and 2 kids. This is ‘macro thinking’ and ‘pulling it off’. It was NOT easy to pull it off, and it was nerve-racking but it was definitely worth it now that we are into year 2 1/2.

    Buying rental properties when the market crashed is another example. But, all of this was possible cause the savings rates over the years was high, the income was being pushed higher with hard and long hours of work, and living below our means with old cars has been our lifestyle.

    So, this is a great list, and there is NOTHING missing since the list itself is hard to accomplish in one lifetime for 80% of the people out there (and I see a lot of lives with my homes/condos being rented). Just today (Aug 7th,2014) two families came to look at our 2 BR apartments cause the bank is kicking them out of their home after 12 years of being in there. How is that possible, and how devastating, but then how does one get into this situation in the first place when there are two incomes in the family and have a home for 12 years. Without knowing the details of their lives (since they only took the application form, and I have not gotten it back to ask personal question), I have a feeling that they got carried away with ‘living like the Joneses’.

    Keep up the great work RB40 and MrsRB40. Great comments by others also, and very encouraging that you have smart readers and followers.


    • Thanks for sharing your experience. Great job with your rentals. I would be hesitant to rent to a family that lost their home. I’d rather have someone with a good financial track record.

  4. Have been checking out your site and have been very inspired to replicate your early retirement strategies…I am 25 y/o and trying to research passive income strategies. I especially enjoy your blog posts with monthly income/expense summaries showing the breakout. I had a question on your dividend income/passive income piece – is this generated in your IRA with after-tax funds or from your 401k (hence pretax?)…do you reinvest the dividends?

  5. Living below your means is crucial. You give up a little today and but later on the reward is so worth it.

    I’m a huge fan of passive income. While managing income properties isn’t the easiest thing to do but the monthly cash flow eases the stress. You can’t beat going to the mailbox every month and pulling thousands of dollars out of envelopes.

  6. Relocation should be option one should consider. When I was reading the book 4 hour work week, the concept of where, when and how you spend your money will make a lot of difference hit home with me. So if one can, they should be open to relocation.

  7. Living below your means if a big one. If you don’t, how are you ever going to save. Larger salary is big too, how can you save 25K a year, if you only make 20K.

    I am fortunate to have a decent job, plus a lot of passive income. Plus, I live well below my means. And I skipped the kids.

    If I need someone to take care of me in my old age, I can hire it out. That’s all your kids will do anyway, until they figure out how much their inheritance is dwindling. Once they see that, they will pull the plug.

    • Lol, no offense, but your comment is ridiculous. There are many people who will tell you that having children is the only thing in the life that makes it worth living. Big empty houses are not sustainable or desirable. The baby boomer generation that encouraged that lifestyle has ruined the world.

  8. Get a professional job abroad (english teaching probably won’t cut it)! 1st $100k is 100% tax free from the US Government at least, and if you work in a low cost of living area, and it has favourable tax rates for expats the net savings can really add up. For every year I work abroad it’s equivalent to 3++ years of working in the US in terms of net savings. Of course there might be some luck (timing) involved in terms of getting in to an industry or country before the boom times occur.

  9. Joe,

    Great post. And thanks for including me! I think I probably make less than a lot of bloggers out there trying to retire so early in life (by 40), but if it’s not a challenge it’s not fun, right? 🙂

    And I agree with your points here. I think they’re all incredibly important, and all work together. Getting rid of debt and living below your means means you have more excess capital to invest. Investing more means you build your passive income quicker. Building outside sources of income quicker means you’ll be in a position to quit your job faster and take the path less traveled.

    As far as luck goes, I think both hard work and luck are necessary. More hard work than luck, but I’d be lying if I said luck didn’t have a large part to play in my life to now. Getting adopted at a young age and moving me away from a horrible situation literally saved my life. Hell, just being born in the U.S. in 1982 puts me far ahead of most of the hundreds of billions of people that have ever walked the planet, and pretty far ahead of most of the world today. Buffett calls that “winning the ovarian lottery”. I tend to agree.

    Best wishes!

  10. Great list. I think I’m following all of them…just turned 34 yesterday but not sure if I can retire by 40…we’ll see. No consumer debt, but I do have a good about of low interest student loan debt. One main problem for me to retire early is that I live in a high cost of living area: NYC. I’d love to hear about someone who was able to retire early in a HCOL area and how they did it. Or maybe I should just move!

    • I think MMM had a post from someone in NYC that was saving quite a bite. We just visited family there and I think NYC is insane. So cal is not cheap but nothing like NYC. My sister-in-laws live in Manhattan and Long Island, and none of them have been able to save as much as us I think purely to HCOL. Their maintenance fee (what the new york folks call condo/HOA fees) is almost the cost of my mortgage, and even if they pay off their houses their yearly taxes are still upwards of 30K a year. Insane. My brother-in-law took out all the nieces and nephews for icecream and spent $60, $6 a cup for each kid. I told him it would have been the same if I had driven down to Rite Aid and bought a $3 for 2 half gallon of Thrifty ice cream on sale near by house (even throwing in sugar cones!).

      • Yes I saw that article on MMM and enjoyed it. My savings rates is pretty good…just not early retirement good. I live in Queens so the prices aren’t as crazy as Manhattan. The maintenance fee is pretty insane…the 2 br co-ops (around 900 sq ft) in my neighborhood have maintenance fees around $1000 (which includes the property tax). $30k a year in property taxes are really high, but it must be a nice house in a great area. I’m with you on buying the ice cream at Rite Aid!

  11. I think avoiding or paying of debt and having passive income are most important. I don’t think I could ever quit my day job if I didn’t have enough coming in to at least cover monthly expenses. It makes me a little sad knowing that I could probably be “retired” now if we’d invested instead of running up credit card debt, but I’m aiming for 50. It’s not as cool as 40, but much better than 65!

  12. While in no way should this be on the list (as it falls outside the realm of what you can control) but one way to help you achieve the success of early retirement is to follow your parents’ good examples.

    My father, now a retired M.D., had us living well below our means. While we have a nice house, it never had a mortgage attached to it, he drove a truck that was only a few years younger than I before it became too unsafe to drive (he retired it at close to 25 years of use), vacationed occassionally (and never extravegently, but nice enough), and probably most condusive to my financial success – saved early for my sister & my own college education (we both emerged loan free). All that money I would otherwise put to a student loan payment I’m now putting into either my 401k or IRA and I’ve mimicked his below his means lifestyle.

    Setting a good example of frugality, saving, and doing more w/ less can set your kids up with a behavioral set that helps (not necessarily guarantees) them become financially independent (even more so if your own behaviors have left your children with a generous inheritance).

    • Colin that is great! My husband and I are both current MDs and I would say a good half of our colleagues are not very smart about money and life. I always told me premed students I used to advise, that one should go into medicine if it your calling and not for some idea of a some kind of lifestyle. I have many colleagues that are excellent physicians now but are going through bankruptcy personally due purely to lifestyle choices, and I personally think that any pressures one has financially at home will eventually effect your ability to be a good physician. I hope we are trying to do what you described about your father, and we have 2 kids and are saving for them as well. Doctors kids don’t all turn out well, but it sounds like your dad set a great example. I hope my kids still just school age, would say something similar things when they are older. We had kids at 27 and 30 (relatively early our MD friends because of help from grandparents), and are set for early retirement by the time we hit 48. We will both probably keep on working because we love work, but I like to financially plan that way just in case husband/myself burn out/get sick. We have safety exit plan.

      • Yeah, medicine is tough. You don’t start making good money until you’re quite a bit older than other professionals. Most M.D. have huge student loans too.

  13. Thanks for including me. Team work is a huge one. Having someone to support your goals , no matter how crazy they are is priceless.

    Have you ever thought about doing an exercise on early retirement feasibility if it was just you? That would be something interesting to read.

  14. Joe…Here’s another one to add to your list:
    1) Don’t get divorced if at all possible. (However, more than 40-50% of first marriages end in divorce today.)

    My first wife and I had it made in our early years: paying into our pension fund, automatically placing extra funds into a variable annuity, two very secure teaching jobs, living the life of Riley. Then, 16 years later we decided to go our separate ways. Talk about financial complications! Everything was split in half, but most importantly, I lost my pension based on advice from my attorney. At age 45 it didn’t seem like a big deal. At age 60, after I had retired for a few years, I realized it was a huge deal.

    My advice, from the voice of experience…never, never, ever give up your pension, no matter what an attorney or spouse or anyone else says.

    (Actually, I should write an article for you as to what not to do in order to retire early.)

    • I’ll add it under work as a team. I’ll come up with a list of interview question and send it to you soon. 🙂

  15. I think you’ve covered most of the main points. I think the main ones would likely come down to 1, 2, 4 & 5. That said, I’d be interested to know what percentage of early retirees have their mortgages paid in full before retiring. I can see it both ways, but that can add up to a pretty big chunk of money month in month out.

    • We still have a mortgage. It’ll definitely be gone before Mrs. RB40 retire. Perhaps we can get rid of it earlier if things go well.

  16. Joe, thanks for including me on the list of early retiree bloggers! Even though all of us on the list make pretty decent salaries, we all started out at the bottom I bet. I know I did – making under $50,000 fresh out of college in 2004. And after 10 years, my salary wasn’t a lot higher (after inflation) due to the recession and due to choosing an employer that didn’t require more than 40 hours per week. I may be the lowest paid person on your list!

      • We are the 99% Joe! I’m all about the Stealth Wealth movement now.

        I gotta say though, I like the idea that my new consulting gig allows me to comment on blogs at work. I feel so free now!

  17. Joe, I think your early retirement list can be boiled down to three items, the rest of your points would follow. First, live below your means. This means expenses are exceeded by income so implies rising savings and no debt. It doesn’t matter whether your salary is good compared to anyone else’s, your expenses are yours to manage. Second, invest your savings immediately. This allows you to grow your savings over time and is the safest form of leverage. It’s also your side income when you’re working (accumulating). Third, make your family plans around your schedule. If you marry a saver/investor you may reach target sooner by a few years. If you marry a spender, count on an extra decade in the rat-race. Every child adds another 5-10 years.

    • That would make a short blog post. 🙂
      I think we still need passive/creative income. It’s really difficult to replace your income even if you save 50-70%. Having some passive/creative income will enable you to put off withdrawal as well. That’s just as important as investing early, IMO.

  18. Good start from a financial sense. I would add to focus on building happiness along with your wealth. Budgeting can be depressing to someone who thinks they are depriving themselves now for some abstract future. It takes a certain paradigm to realize that a simpler/cheaper life is more enjoyable.

    Also, shouldn’t step 1 be “READ THIS BLOG”??? Just sayin’.

  19. I don’t think people should wait to have kids if they don’t truly want to. In our case, having kids actually forced us to take our finances more seriously. Our kids don’t really cost that much, and the fact that they exist makes us focus on our goals more than we would if we didn’t have them.

    • “Our kids don’t really cost that much.” Have you looked at the costs of sending a child to college these days (or, even worse, the projected costs of college in the future, since the yearly increases far outpace the rate of inflation)? Statistics show that for those having kids today, the cost of a four year degree at an in-state school– tuition alone– will easily be over six figures. These days, a bachelor’s degree is the equivalent of yesteryear’s GED or high school diploma, so it’s pretty irresponsible for those contemplating having children to not also contemplate at least paying their child’s college tuition. That means that for each kid, you would need to save at least $10,000 per year and hope the investments in your 529 plan do well so that the money is there when it’s needed, and your kid is not stuck out in the cold.

      • A few points in response:

        I don’t think a college education is equivalent to a HS diploma and I’m pretty sure the earning statistics will back that up.

        College doesn’t have to be as expensive as the calculators project. They usually assume you will live on campus and not at home with your parents. You could go to a community college first then transfer. There are so many ways to reduce costs.

        Who says you have to pay for everything. I think there is value in a college student sharing the cost of attending college. They are adults and should be vested in their own future. The lesson in personal responsibility might be more valuable than the degree.

        My parents were grateful enough to pay for my first year of college and I paid the rest. I could afford the tuition just by working at a grocery store on the weekends and summers. I’m certain this can still be done today.

  20. I think that you have pretty well covered what it takes to retire early.

    I have rigidly followed the following four for over 30 years.

    * Get rid of consumer debt
    * Live below your means
    * Figure out ways to generate passive or creative income so you don’t need a day job
    * The right attitude to travel the path less taken

    Now that I will be turning 65 this year, the passive/creative income is turning out to be really big for me. I could probably live comfortably off my savings and the meek government/pension programs, but the residual income from my books helps me to live in style like never before. (I wish I could have attained this in my 30’s and 40’s.)

    I like this quotation relating to early retirement:

    “The thing to do is to make so much money that you don’t have to work after the age of
    twenty-seven. In case this is impractical, stop working at the earliest moment, even if it is a quarter past eleven in the morning of the day when you find you have enough money.”
    — Robert Benchley

    Incidentally, I semi-retired in my mid 30’s when I had a net worth of minus $30,000 (due to student loans). Yet I will be pretty comfortable in retirement. Occasionally someone will attack me and say the main reason is that I am single. I have to then point out several research studies that say married people are much better financially prepared for retirement than single people due to several factors.

    Also, some people will say I am lucky. Since I didn’t post anything on the last post relating to success and luck, here are a few of my favorite quotations about luck:

    “Diligence is the mother of good luck.”
    — Benjamin Franklin

    “The worst cynicism: a belief in luck.”
    — Joyce Carol Oates

    “I am a great believer in luck, and I find the harder I work the more I have of it.”
    — Stephen Leacock

    “I believe in luck: how else can you explain the success of those you dislike?”
    — Jean Cocteau

    “Luck is the word most of us give to remarkable achievement by someone less privileged and talented than us. Believe that remarkable achievement is a matter of luck and you will have a lot of lousy luck come your way. Accept that remarkable achievement is a matter of personal commitment and action and you will bask in a lot of good luck.”
    — from “Life’s Secret Handbook”

    “Destiny is a good thing to accept when it’s going your way. When it isn’t, don’t
    call it destiny; call it injustice, treachery, or simple bad luck.”
    — Joseph Heller

    “Any fool can have bad luck; the art consists in knowing how to exploit it.”
    — Frank Wedekind

    In short, retiring early and attaining true freedom takes commitment. I often tell people, “Reasons only make you sound reasonable. They have nothing to do with manifesting prosperity and freedom in your life.”

    Ernie J. Zelinski
    International Best-Selling Author
    “Helping Adventurous Souls Live Prosperous and Free”
    Author of the Bestseller “How to Retire Happy, Wild, and Free”
    (Over 200,000 copies sold and published in 9 languages)
    and the International Bestseller “The Joy of Not Working’
    (Over 270,000 copies sold and published in 17 languages)

    • Hi Ernie, I enjoy your work and books. Joe read “How To Be Happy, Wild and Free” and reviewed it last August, here… https://retireby40.org/work/ You really did take the path less traveled, and the ‘freedom’ you discuss that impresses me most is your ‘freedom’ from fear. Continued success to you!

    • Thanks for sharing your experience. It’s amazing that you retired with a negative net worth and are doing extremely well today. Passive/creative income was the key for you. I think most people overlook that aspect of early retirement. Congratulation on making it to 65. 😉


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