I wrote The 7 Phases of Retirement in 2011 and it was a great exercise. The idea is that we shouldn’t think of retirement like jumping off a cliff. Retirement would be much easier if we take it in phases, one step at a time. This way we can gradually work toward full retirement and enjoy the journey along the way.
It’s been 8 years since I retired from my engineering career and there have been several major changes in my assumptions. I thought Mrs. RB40 would continue to work until she’s in her 50s. However, she has seen my quality of life improved immensely. Now, she wants more autonomy too. I didn’t think this would happen because she used to be a workaholic. She enjoys working and contributing to society. As I always say – you might like your job now, but that can change pretty quickly. So now she is planning to leave full-time work by 2022. (Or at least take a year off.) That’s just 2 years away. I need to rework my 7 Phases of Retirement and take this into account. We’ll look at this as a married couple who are working toward a common goal.
Here are my 7 phases of early retirement. Take it one step at a time and ease into it.
Phase 1 – Establish Good Habits
This is the start of your working life. Many young people who found a good job right out of college start spending too much money right away. The most important goal of this phase is to establish good financial habits. Keep your spending under control, increase your income, and learn to invest.
- Minimize lifestyle inflation
- Avoid consumer debt
- Buy appreciating or income-producing assets
- Increase your earned income through education, promotions, and pay raises
- Start investing as soon as you can
- Max out the contribution to your 401k and Roth IRA as soon as you can
- Build an emergency fund
Lucky for us, we were both pretty frugal because we came from financially challenging backgrounds. We kept our lifestyle relatively modest and we saved a significant portion of our income as soon as we started working. I also started investing right away in individual stocks and my 401k. I was a terrible investor, but I learn from my mistakes. Now, I have an investing strategy that I’m comfortable with. It took a long time to get here. That’s why you need to start investing and learning ASAP. We also started out with minimal student loans and consumer debt. That helped a lot.
Phase 2 – Generate income outside of your full-time job.
Most households stay in Phase 1 until they retire. Our goal is to retire early so that doesn’t work. Living frugally is great, but there is only so much you can cut. Once your budget is stable, you need to increase your income. Since the goal is to retire early, we’ll look outside of the main job for the additional income. This will help ease the transition into early retirement.
Some people advocate concentrating on earning more income through your main job. I think that’s a good idea, too. However, it would be a more jarring transition to retire. Your big salary would go away and you’ll have to rely on your savings. For us, the path to early retirement comes from having multiple sources of income.
- Rental properties – We started by renting out our old home. It can be a lot of work to be a landlord, but it should pay off in the long run. The nice thing about being a landlord is that rents keep increasing and the property also appreciates over time.
- Real estate crowdfunding – Now that I’m getting older, being a hands-on landlord isn’t much fun anymore. Also, I need to travel more so we’re moving our real estate investment online. It’s been working out really well so far. Check out my real estate crowdfunding page for more info.
- Dividend stocks – I love our dividend portfolio. I used to invest in growth stocks, but I transitioned to dividend stocks when I planned my early retirement. We should receive over $15,000 in dividend earnings this year.
- ETFs and mutual funds – Our retirement portfolio are invested in low-cost Vanguard funds. These funds should appreciate over time and generate capital gain income for us in the future.
- Online income – I started this blog to share my journey, but I also knew that it was possible to make some extra income. Originally, I was hoping to generate about $500 per month from blogging. However, the blog exceeded all expectations and I’m making a nice side income from blogging. Thank you for all your support!
- Mrs. RB40’s part-time work – Ideally, Mrs. RB40 would find a way to generate some income after she retires, too. I would be happy if she can make $1,000 per month or something like that. We’ll work on this over the next few years.
It’s a bit hectic to have many sources of income, but it’s nice, too. If one stream slows down, you have other sources to count on while you try to get something else going. This theory works very well in 2020. Some sources of income slowed down a lot, but we’re still doing okay financially.
Phase 3 – Wean yourself from full-time income
This one is probably the most difficult step of all. Most households depend on income from their full-time job. Losing a job can be devastating. I’ve read a ton of stories about someone getting laid off, losing their home, and having to start over from scratch. Everyone always tries their best to keep a miserable job whenever there is an economic downturn. In contrast, we are actually striving to get rid of our full-time job. That’s what early retirement is all about.
Once you’re fully immersed in phases 1 and 2, then it’s time to prepare for the big step of quitting your job. By 2011, we were able to live on just Mrs. RB40’s paychecks and I saved all of my income. This gave our savings a big boost and it also gave us a chance to test drive our retirement budget. We were able to function financially with just Mrs. RB40’s income and it gave me the confidence to quit my corporate job. For Mrs. RB40, we need to be able to live without her full-time income by 2022*. That will give us a year to try it out. Time is actually pretty short so wish us luck.
*2020 update – Over the last few years, our passive income was enough to cover our living expenses. Mrs. RB40 wants a little margin so she is still working for now.
Phase 4 – One person stops working full time
This is where we are right now. I left my engineering career in 2012 and became a stay at home dad/blogger. It’s been 8 years and we are doing quite well financially. Our net worth increased by about 150% since I quit my job. We haven’t had any financial problems yet. We did it in steps, but you don’t have to. You can skip this step and both retire at the same time if that’s your goal.
Phase 5 – Two persons stop working full time
The target date for this next goal is 2022. Mrs. RB40 will hand in her resignation letter and join me in early retirement utopia. I see several ways to do this.
- Mrs. RB40 works part-time – This will help us pay the bills so we won’t have to draw on our retirement fund until later. We’ll have to figure out what she would like to do over the next few years.
- I work a little more – I can work more and expand my online presence.
- Start drawing down our retirement funds – If we need extra money, we can build a Roth IRA ladder and draw down our retirement funds that way. Our annual expense is less than 2% of our net worth so it should be fine. I really hate to draw down our retirement portfolio while we’re still in our 40s, though.
We’re in a good position today. Our passive income + side hustle income is more than enough to pay for our cost of living. As long as we minimize lifestyle inflation, we should be good.
Phase 6 – Passive income covers the cost of living
This is a very difficult goal to achieve. We achieved financially independent in 2011, but it took several more years for our passive income to cover our cost of living. Over the last few years, we finally grew our passive income to that point. I’d like our FI ratio to stabilize at 120% for a few years.
After Mrs. RB40 retires, we will rely on a mix of passive income and side hustle income to pay the bills. We came a long way since 2011.
Phase 7 – Work optional
Imagine working without worrying about income. Wouldn’t it be great if you can work on what you want, when you want, and where you want? You can follow your own agenda and if that doesn’t align with the organization you’re working with, you can find something else to do. When money isn’t a major concern, you have a lot more control over your destiny.
That’s the best thing about FIRE. I have 100% autonomy. Blog income is way down this year, but I’m not worried. I’ll keep working at my pace and I don’t have to stress out. Work is a dream when money is secondary.
Getting to the next level
In 2011, we were in phase 4. Today, we are at 5.5! Hopefully, we’ll get to phase 6 by 2022. Let’s look at our passive really quickly (from last year.)
We are doing well, but there are some expenses that are hidden. For example, we will have to buy health insurance after Mrs. RB40 retires. That’s why I’d like a little margin with our FI ratio. Side hustle income will help a lot.
7 Phases of Retirement
It’s a good idea to break down retirement into phases like this. You can work on it one step at a time and mark your progress as you go along. If you want to retire early, this can really help you organize your plan. I would love to read about your early retirement plan. I encourage you to work on your 7 phases of Retirement and send it to us for some feedback from our readers.
What do you think of my 7 phases?
You can read previous guest posts also.
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.