Saving and Investing for Early Retirement: 3 Basic Strategies
Everybody wants to retire early. Sure, you might like what you do. But if you're 98% of people, you'd like to have more time to yourself, with your family and friends. In the years following the global recession, early retirement (or even regular retirement) seemed like an impossible dream for many. But there has been a growing contingent of young people online who are making it happen. In the upcoming weeks, we're going to look closely at some of these different strategies, and try to help you identify the best way to leave the working world behind, for a reasonable lifestyle of your choosing.
What Does Retiring Early Even Mean?
First of all, Early Retirement isn't the same thing as "Financial Independence". The latter refers to creating wealth so large that the sky is the limit to how one can spend time and money. Financially independent people buy sports teams, travel the world by hot air balloon, and run for President. Unless you have a lot of family wealth, a kickass job, or some outlying factor, you're not going to be able to achieve true Financial Independence. Early Retirement is about living a Frugal, Sustainable life, with enough savings and investments at play to pay for it until you're dead.
Can Someone With a Normal Job Retire Early?
Yes. You don't have to have a "Wolf of Wall Street" job to retire early. But you do have to be willing to live in a way that most other people don't. This means being neurotically careful with your money, living beneath your means, and making certain sacrifices others won't. The thing is, when you look at the numbers, this stuff is doable! Like I said, I'm going to do deep write-ups of each of these methods as we go into the weeks ahead. For now, just know that you can probably achieve one of the following goals, or at least improve your financial standing in big ways.
JUST TELL ME HOW TO RETIRE EARLY!!!!!
All right, all right. Here are the basic three ways that people retire early. Understand that there are endless variations and combinations of these methods. For our purposes, let's look at these as totally different strategies.
- The Massive Investments Method. Many early retirees are heavily invested in stocks, real estate, and other markets. A common benchmark for a couple, both of whom make $35,000/year or so, is $2000 invested monthly. With average market gains, this investment regimen can yield a nest egg of $1,000,000. By using the 4% Rule (controversial; we'll go through this more in a future post), this couple will be able to take $40,000 out of their investment accounts each year, to live on, never fully depleting the portfolio. Ideally, the portfolio just keeps growing and compounding all the live long day, forever.
- The Cash Flow Method. Similar to the method above, the cash flow method is about investing your time and energy in something that will pay off for years to come. Maybe you buy up rental properties, which bring in thousands of dollars each money. Managed by an independent management company who takes a small portion of the products, these properties could bring in more income than you would get from a normal career, with none of the work. Maybe you start a company that continues to pay off with minimal oversight. Maybe you write the 21st century equivalent of the Happy Birthday song, and get royalties for the next 60 years. Whatever the case, you will have created something that pays the bills, which doesn't require you to work for 50 hours a week to sustain.
- The Currency Coasting Method. Finally, many people retire early by leaving their country of origin, to live in a place where their wealth goes much farther. This strategy can (and must) be used in tandem with either of the above, but may require less capital than either. If you move to Ecuador from the United States, you may not need the same amount of investments you'd need to live a comfortable unemployed life in the United States. Your living expenses may drop by ⅘ in Thailand, enabling you to live like a king spending half of what you'd pay to live in London. Lots of people who do this don't retire, per se. They keep working 10-40 hours a week: translating, teaching, blogging, working as entrepreneurs doing this and that. It's not true retirement, but just as many older adults never totally stop working, it's a method of living a more pleasurable life without having to slave away so hard to sustain it.
IT'S NOT THAT SIMPLE!!!!!
Lest you think that retiring early is that easy, let me stop you right there. It takes a lot of effort and consistent determination to pull this off. You'll also need luck to maximize your efforts. Over the next couple of months I will break down each of the above methods, showing how a combination of saving, investment, entrepreneurship, and strategic living can make early retirement possible, if not for everybody, for many more people than presently achieve it. Good luck, and keep reading!