If you have gotten this far, then you have at least some curiosity and perhaps even real interest in early retirement. The lure of true freedom is irresistible to the human spirit.  If you are tired of corporate servitude and find that you have little time for the people you love or things you love to do, then you have come to the right place!

Ten Steps to Early Retirement

1 MOTIVATION Why bother?
2 FEASIBILITY Can you really do it?
3 OBJECTIVE What do you want out of life?
4 PROCESS How to get started?
5 TRACKING How much does your lifestyle cost?
6 MANAGEMENT Can you reduce your expenses?
7 ESTIMATION What about future expenses?
8 TARGET How much money do you need?
9 TIMING When can you retire?
10 EXECUTION Can you speed things up a bit?


If you're like me, motivation is not an issue. What could be better than having the time and freedom to do the things you always wanted to do? To enjoy everything that life has to offer? To have to answer only to yourself and your family? Most people would agree it's a wonderful goal, just not very realistic.  Why even talk about motivation, when it's all about money?  Because you have to want it badly enough to make it happen.  If you are sufficiently motivated, then you can tackle the financial side.

If you still need some help getting motivated, read Why bother?

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Yes it can be done. You have to choose to do it.  If you really want freedom, you will be willing to make the tradeoffs that allow it to happen sooner.

There are two aspects of feasibility that will determine when you can retire: psychological and financial.


Surprisingly, this is the biggest hurdle for many people.  They have never seriously considered life without work.  But once you realize that it is possible, the prospect will haunt you until you decide to do something about it.  Not sure if you're ready? Take the test!


Naturally, this part will be easier for some people than for others.  It sure helps to have a good paying job and a head start on savings, such as a 401k plan.   But it's not absolutely necessary.  The money you accumulate, combined with your lifestyle expectations, will determine how long it takes.  The ten steps listed here will not help you get rich quick.  But they will help you with the planning necessary to realize your goals.  A little discipline will go a long way.  Lots of people with good paying jobs don't bother to plan for their future.  If you follow these steps, I think you will be surprised at the results!

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Time to do a little soul searching.  What do you want out of life?  What things are important to you?  If you really think about it, you might realize that the things you value most don't cost much at all.  Time with family, good conversation, good food, music, the wonders of nature, the chance to help others.  Make your own list.  You can have a happy and fulfilling life without spending a lot of money.  Don't let your expectations be driven by comparisons to others or by the endless commercial hype that is forced upon us at every turn. Think seriously about your goals and concentrate on the ones that are most important.  If you manage your expectations you will find they can be more easily achieved.

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How do you get there from here?  You need to have a plan.  The plan is basically this:  Pay attention to what you spend, reduce your cost of living,   save and invest as much as you can, until eventually you have saved enough to live on the return from your investments. Sooner or later. Hopefully sooner, but that depends on you.  The following steps will explain in more detail what to do.  Going through these steps will allow you to calculate how much you need, and when you will reach that point.  If you are not happy with the projections, you can make some tradeoffs.

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First you have to get a handle on what you are currently spending.  Create a monthly budget with whatever categories are convenient for you.  Then, start counting how much you spend in each category.  Make sure you count everything, down to the dollar.  The longer you do this, the better you can refine your estimates of how much it will cost to maintain your lifestyle.  And, once you have a feel for where the money is going, you will be able to manage the flow.

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Manage your expenses.  Have a monthly allocation for each budget category. Try not to spend more than your allocation.  If you spend less, carry the leftover into the next month, so you can save up for big ticket items.  Don't buy any big ticket items until you have saved up enough in that category to pay for them, without draining other savings.  Include a budget category for "investment."  It may be small at first, but try to squeeze as much as you can out of the other categories.  This is the money you will contribute to your retirement fund.

Try to reduce your expenses as much as possible.  Practice frugal living.  Eschew materialism.  Keep your true values in mind.  Remember that every dollar you save in your monthly budget is like having $150 in the bank.  Why? Because $150 invested at 8% will give you $1 per month.  In other words, for every dollar you can lower your monthly cost of living, that's about $150 less that you will have to save up before you can retire!  Plus, the money you save can be channeled into your retirement fund.  This is the double whammy that can really accelerate the time it takes you to reach your goal.  So it's worth working hard at this part, it can make all the difference in the world.

While frugal living may come naturally to some, others have to work at it.  Think before spending on "status" items like that fancy new SUV. Don't shop as a hobby, and stay away from the mall.  You can purchase all the necessities of life at garage sales, rummage sales, or flea markets for next to nothing, especially if you have an eye for quality.  The going rate for paperback books at garage sales is 25 cents, even in new condition.  You might not find this year's best sellers, but you will find last year's.  Compare that to the seven dollars or more you would pay at a bookstore.  Similar ratios can be expected for kid's clothes, toys, tools, furniture, kitchen items, etc.  Swallow your pride and pretend you're poor.  A little humility never hurt anyone.

Search the internet for tips on saving money.  Here's a good place to start:   frugal living index

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Now you know how much you're spending on your lifestyle, and hopefully you are working at getting that down as low as possible.  Next you need to estimate what your expenses will be after retirement.  They won't be exactly the same as your current expenses.  Think about what things will change.  If you retire early you may have to pay for your own health insurance, so you need to factor that in.  Don't forget about future college expenses, if you have kids.  On the positive side, you can eliminate expenses associated with your employment such as wardrobe, transportation, meals at work, child care.  Consider the impact of geography.  If you are not working, you can live anywhere you want.  Why not choose a place where the weather is great and the cost of living is low?  If you intend to move, factor this into the cost of housing, utilities and taxes.

A note about college expenses, since this is potentially a big item, and for many people I know, the biggest single reason they think they will not be able to retire early.   This is a lot easier to manage if you start early.  As soon as they are born, start setting aside $100 - $200 per month, per child.  That should give you enough for a good public university after 18 years.  If you have neglected to do this, you may have to go with student loans, or perhaps grandparents are willing to help.   Consider moving to California, where the state schools are very good and inexpensive for residents.

Create a "projected" budget, which includes your best estimate of these future expenses.  But what about inflation?  It's tempting to ignore inflation, since it has been so low for a few years now, but that would be a big mistake.   Especially when dealing with projections that may extend far into the future.   So, depending on the time frames, you probably want to include a cushion to cover inflation (see next section). But bear in mind that your own expenses may not necessarily track the official inflation numbers.  As you get older, some of your expenses (such as the costs of raising children) may actually go down.  Also, as a person with a brain, capable of making decisions, you don't always have to purchase the same fixed basket of goods as the prices go up.  You have the option of choosing substitute goods or otherwise changing your behavior.  If inflation gets very high, interest rates will also go up, and you can expect to get a higher return for certain investments.   If things get really bad, here are some emergency measures you could take.

1. Cut down on luxury items and travel

2. Start using up your principle

3. Sell some assets (e.g. collectibles)

4. Move to a cheaper area

5. Get a job

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Your target is the amount of money you need in order to live off the return from your investments.

Some financial advisors will calculate this amount based on your life expectancy, assuming that you will run out of money at that point.  But I prefer to think that I might outlive my life expectancy (50% chance, you know).  In fact I feel better knowing that my lifestyle can be sustained indefinitely.  So I suggest living off the returns and not using up the principle.  It's a bit more conservative so it will take longer to reach the target, but when you do reach it, you will have a built in safety margin.  That margin can be very nice in case of higher than expected inflation, or unforeseen expenses such as medical care.

To determine your target, multiply your projected monthly budget by 150.  Why 150?   Because with an 8% return, that amount will pay your monthly budget.   For example, if your projected monthly budget is $2000, then you will need to have $300000 invested, which will give you an income of $2000 per month (assuming your average return is 8%).  If you don't believe you can make 8% (see investment advice) then do the calculation with whatever number you feel comfortable with, as a long term average.

Add to this any expected major (one-time) expenses that are not covered in your monthly budget, such as college, weddings, moving costs or other major purchases.

Now you're not quite done, because you also want to add in a cushion.  The cushion is to protect you against occasional down turns in the stock market.  Even if you average 8 or 10% per year, there will be years when the market is down. The cushion allows you to absorb these shocks without having to make drastic adjustments to your lifestyle.   Basically it's for peace of mind.  And if things work out right, since you are not spending the returns from the cushion, that money can accumulate as a hedge against inflation.  The amount of cushion you need is a bit tricky, since it depends on your risk tolerance, but I recommend in the neighborhood of 10-20%.

OK, add them all up, and you probably have this huge number staring you in the face.   You might be tempted to give up at this point, but don't.  The miracle of compound interest is working in your favor.  If you are patient you will eventually reach your target.  If you are not patient you can take steps to make it happen sooner.

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Let's calculate when you can expect to reach your target, if everything goes according to plan.

First, add up your assets, including 401k, pension plan, other savings and investments.   Not your home, unless you plan to sell it and move to a less expensive place (then include the difference).  Don't subtract your mortgage or other liabilities if you are paying them off out of your monthly budget. Next, you need to forecast this amount into the future.  You can do this by hand, but it helps to use a spreadsheet.   Here's a simple one in Excel format:  forecast model

But wait a minute! I can't get my 401k money until age 59, right? How can I use that for early retirement?  Well, it turns out that you can get the money out before age 59, without penalty.  You just have to withdraw it as a series of substantially equal periodic payments, over your life expectancy.  Find the rules in IRS publication 590, downloadable from the IRS website. You can also get the life expectancy tables from Appendix E of Publication 590.  Or, you can convert the funds to a Roth IRA, in which case they can be withdrawn after five years.   The tradeoffs between these approaches are a little too complicated to go into here.

If you want to create your own spreadsheet, or do the forecast by hand, follow these instructions.

Start with your current assets.  On a yearly basis, add in the amount of your investment contributions.  (Remember that was an item in your monthly budget.) Also include contributions to your 401k or savings plan.  Then, multiply the new total by your expected investment return.  Continue this out for the number of years it takes until you cross over your target (that's the "crossover" point).  If you are getting close you can do this on a six-month or even monthly basis.

Not happy with the results?  Take another look at the objectives you set in step three.  Focus on the ones that will give you peace of mind. Remove from your budget anything that is not essential to meeting them.  Do some "what if" scenarios.  If you want, you can factor in expected salary increases. bonuses, etc.  Now that you have the numbers, you can see what the impact will be.

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That's about all there is to it, except for the execution.   Here are some ideas to help keep you on track.

Some Investment Advice

There is plenty of investment advice out there, good and bad.  Do your own research and find a plan that is comfortable for you.  But pay attention!   Manage your investments to get the best possible return for your risk tolerance.   Here are some of my thoughts.

We are talking about your nest egg here, so the goal is to maximize your return, but with minimal risk.  Everyone will tell you that stocks provide the best returns (on average), so most of your money should be invested in stocks.  But stocks can be risky, so how do you do this safely?  The key is diversification.  A well diversified portfolio can have some risky (therefore higher yielding) investments, as long as they are not correlated with each other.  This is easier said than done, since in today's global economy, everything is correlated to some extent.  But try to get as much diversification as you can into your portfolio.  This means owning both small cap and large cap stocks, in different market segments, and especially from different regions of the world.

Stick to mutual funds, unless you really enjoy playing with stocks and want to do the research it takes to be good at it.  Buy no-load funds, with low management fees, from a discount broker.  You want your hard earned dollars to be working for you, not going into the broker's pocket! You can find a good selection of no-load funds from Vanguard, Fidelity, or Charles Schwab.  Research the funds first on Morningstar.

Meanwhile, put the maximum amount into your 401k (or equivalent).  Take full advantage of the tax deferred earnings.

Track Your Progress

A good way to stay on track is to graph your progress.  Plot your assets over time.  Also show your target level. You can revise your target as needed (as you get better at frugal living, it will keep going down!).  When the two lines cross over, you've made it! You have achieved financial independence.  You can retire or keep working, but you are free to choose.

It won't happen overnight.  Try to stay motivated. If you need a refresher, read why bother?  Seek out like minded people.

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Further Reading - Books

Cashing in on the American Dream - How to Retire at 35, by Paul Terhorst.  (out of print, may be hard to find)

Your Money or Your Life, by Joe Dominguez and Vicki Robin

Living Cheaply with Style, by Ernest Callenbach

Voluntary Simplicity, by Duane Elgin

Internet Resources - The Retire Early Home Page

Copyright © egw. All rights reserved.     updated October 22, 2004