Picture yourself waking up, pouring a leisurely cup of coffee, and heading out to your back deck to sit in the morning sunshine.
Maybe you’ll spend the day finishing a good book, or perhaps you and your spouse will hit the golf course for a bit of exercise.
At dinner time, you might cook a healthy meal together, preparing a recipe you’ve never tried before.
And it doesn’t matter what time you go to bed, because you can do the exact same thing the next day.
Does that sound like the perfect Saturday to you? What if it could be your perfect Monday, or Tuesday, or Wednesday?
If that sounds impossible, keep reading. Many people are discovering that working 40-80 hours a week until age 65 (or higher) is just no way to live. And they’re making plans to achieve early retirement so they can spend their days how they want.
What is Voluntary Early Retirement?
Voluntary early retirement is something many people dream of achieving. The good news is that voluntary early retirement isn’t just for the wealthy. Perfectly ordinary people achieve early retirement all the time.
So how do they do it? It varies by person and family, but many middle-income people who retire early use a combination of one or more of the following strategies, although there may be others not listed here.
Strategy 1 and Strategy 2 below are more or less mandatory for anyone who wants to plan to achieve early retirement, while Strategies 3, 4, and 5 are options. There’s no one right way to achieve early retirement, so you have to create a plan that works for you.
1. Early Retirees Know Their Target Numbers
Many people who retire early don’t just get lucky and decide to retire one day. More likely, they created a plan to reach a specific goal years or decades prior and have been diligently working toward that goal.
That’s why knowing your target number is an important first step. If you dream of being able to retire early, you need to create a plan for how you’ll achieve that goal. Here’s how to begin:
Start by envisioning your ideal life once you’re able to leave your career. With that vision in mind, project how much that ideal life will cost you per year. Add up your anticipated expenses including housing expenses, cost-of-living expenses like food and transportation, and the type of leisure activities you want to be able to do.
Will your mortgage be paid off? Will you have downsized into a smaller home or a lower cost-of-living area? If your early retirement dream involves traveling around the world, your expenses may be higher.
On the other hand, if your early retirement dream involves living in a remote mountain cabin, your expenses might be lower. Be honest with yourself about how you want to live and estimate how much money you’ll need to spend each year in retirement.
From there, you can use a common rule of thumb other early retirees have used, which is the rule of 25. The rule of 25 states that you’ll need to save about 25 times your estimated annual expenses in retirement to safely withdraw the amount of income you’ll need to cover those expenses. So if you estimate that your annual expenses in retirement will be $50,000, you’ll need to save $1,250,000 to get there. (Keep in mind that this is a rough estimate, and an experienced financial advisor may be able to help you determine a more accurate goal.)
Once you know your target number, work backward to calculate how long it will take you to save and invest this amount of money based on how much you’re currently investing each month. If you’re not happy with the number of years you come up with, keep reading. The following strategies can potentially help you ramp up your savings rate and reduce the amount of time it takes to reach that goal.
2. Early Retirees Cut Expenses that Don’t Add True Value
Many people who want to retire early are focused less on achieving maximum possible wealth and more on enjoying maximum value from their lives. Therefore, people who want to retire early do their best to cut expenses from their budgets that aren’t bringing true joy or value.
This does not mean that you have to live in a state of extreme frugality. Cutting expenses from a values-based standpoint just means that you actively reduce your spending on items that don’t matter much to you. For some people, this means they don’t often buy themselves new clothes. For others, it means they don’t eat out regularly because they would rather go on nice vacations with their families.
In fact, the phrase ‘cut your expenses’ might not be entirely accurate in this context. Instead, ‘cutting your expenses’ simply means that you’re very intentional about what you choose to spend your money on and what you choose not to spend it on.
Take some time to figure out what items in your budget truly add value to your life, and what items can be painlessly nixed. Of course, the more items you can nix, the lower your expenses will be. This means you’ll be able to save and invest more now, and it also means that your annual expenses in early retirement may be lower. You’re already closer to achieving your goal!
3. Some Early Retirees Invested in the Markets
The following three strategies are all ways that other people have used to increase their income, which is another important component of your early retirement plan.
How you increase your income is up to you, but it’s important to guard against the temptation to spend more when you increase your income for early retirement. If you increase your income but end up spending more now, you’re no longer accelerating your progress to achieve early retirement.
One popular method other early retirees have used to increase their income is to invest in the market strategically. The truth is, you can’t just save your way to early retirement. You have to develop an investment strategy that takes into account your early retirement goal and balances that goal with appropriate risk management.
Some who achieve early retirement prefer to design a strategic, diversified portfolio with the help of an experienced investment management professional. Others have used a mix of index funds to more passively diversify their portfolio, which are essentially baskets of stocks that mimic the performance of other underlying investments or market indices, such as the S&P500.
How you structure your portfolio to reach early retirement is up to you. But strategically investing your savings is essential if you want to retire early.
4. Some Early Retirees Invested in Real Estate
Others who have achieved early retirement invested in real estate to create passive income streams in the form of rental payments or profits from successful house flips.
Real estate investing can be a great way to make progress toward your goal of achieving early retirement. Real estate investors who accrue properties over time – especially multi-unit properties – can end up generating reliable passive income through rental payments that cover their monthly expenses.
As with all investments, there are risks associated with real estate investing and it’s certainly not the right option for everyone hoping to achieve early retirement. Investing in real estate requires time, effort, and money, as you’re responsible for finding qualified tenants, maintaining the property, paying for repairs as needed, and paying insurance and property taxes.
5. Some Early Retirees Started a Small Business
The last common strategy we’ll cover here is to start and run a small business. Many who have achieved early retirement started a small business to generate extra income alongside their full-time job. (See examples of people whose side business replaced and exceeded the income from their full-time jobs here.)
Not only is a small business a great way to increase your income and ramp up your savings, it’s also a good way to keep generating income when you do reach financial independence. Just because you’re able to retire from your existing full-time job doesn’t mean you have to stop working entirely, and many people enjoy their small businesses so much that they continue running them after they ‘retire.’
Plus, strategic small business owners often find ways to scale the business so they can rely on systems and staff to run the day-to-day operations. By scaling their business, smart entrepreneurs will still receive income from the business even when they don’t have to work at it every day.
Caviness Wealth Management Can Help You Strategize for Early Retirement
At Caviness Wealth Management, we help clients who are working toward early retirement create plans for how to manage cash flow and expenses once they’ve reached their goals.
There are many things to consider if you’re planning to retire early, such as what you’ll do if the markets are volatile, how you’ll cover emergency medical expenses, and how you’ll make your savings last your lifetime.
To see if we can help you create a plan to sustain yourself and your family through your early retirement leisure years, click here to schedule a conversation today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
