How to retire before 40 without $1M

More than half of adults surveyed by GOBankingRates said they don’t expect to retire until they’re 65 or older.

But there are people who have managed to leave the 9-to-5 at a much younger age — people like Billy and Akaisha Kaderli, who retired at the age of 38 in 1991. Over the last 26 years, they have traveled the world and lived life on their terms.

The Kaderlis didn’t win the lottery or inherit a windfall that allowed them to quit their jobs. In fact, they didn’t even have $1 million saved. The Kaderlis retired before 40 with about $500,000. If you want to grow your savings and retire early, keep reading to learn more about how they did it — and you can, too.

Find Your Motivation

If you think you want to stop working full-time, one of the important questions to ask yourself before deciding to retire is, “Why?” Billy and Akaisha found their motivation a couple years before they made the leap to early retirement.

After working as a chef for a restaurant that he and Akaisha owned in Santa Cruz, Calif., Billy made a career change. He landed a job with financial firm Dean Witter Reynolds and became a branch manager and vice president of investments. He worked weekdays, while Akaisha worked nights, weekends and holidays running their restaurant. As a result, the couple hardly saw each other. “It was not working,” Akaisha said. “Our relationship went through a real crunch.”

While trying to deal with the stress in their relationship, Billy was hearing stories from clients about how they had taken monthlong European vacations or other exotic trips. “It was a tease for me, but it let me know there were people out there who could do it,” he said.

That’s when the seed was planted. “Billy had this idea,” Akaisha said. “‘Why not see if we can live off the money we have invested and travel the world?'”

Calculate How Much You Need to Save

Once the Kaderlis got the idea to retire early, Billy started crunching the numbers to see how much money they needed to invest to make it happen. “If you want to know how much money you need to maintain your lifestyle today, you need to figure out how much you’re spending and multiply it by 25,” he said.

They figured they could live on $20,000 a year. Multiplied by 25, that meant they would need to have $500,000 saved. Billy figured that amount would allow them to withdraw 4 percent annually — $20,000 — while the rest remained invested, continuing to grow and provide enough income for several decades.

Cut Spending to Boost Savings

The Kaderlis were 36 years old when they set their savings goal of $500,000. That’s when they began eliminating unnecessary expensesto set aside more money in savings. “We started investing every penny we could,” Billy said.

Akaisha said that it wasn’t that difficult for them to cut their spending because neither one of them was a big consumer. Plus, they had a strong motivation not to spend. “We were being pulled forward by the dream of being able to travel for long periods of time,” she said. “We were thinking, ‘I’d rather be doing that than what I’m doing now.'”

Over two years, they managed to build up $500,000 in savings through investing and the sale of their home and restaurant, and in January 1991, at the age of 38, they quit their jobs.

Create a Money Machine

The Kaderlis have taken advantage of the power of compound interest to grow their retirement nest egg. While building their savings, they invested their money into index funds that tracked the performance of the S&P 500. “Since we retired in January 1991, the S&P 500 has averaged a 10 percent [return] per year,” Billy said.

So their initial $500,000 investment earned interest, and interest has continued to accrue at about a 10 percent annual rate on both the principal and the interest that has accumulated. “When you’re spending 2 or 3 percent, that leaves 7 or 8 percent that continues to grow,” Billy said. As a result, their net worth is actually higher now than when they retired.

“We created a money machine,” Billy said. “That’s why I was confident this was going to work out.” 

RELATED: Take a look at the things you shouldn't hold off until retirement: 

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1. Create a Post-Retirement Budget

How much you spend in retirement might differ dramatically from what you spent during your working years. That's why pre-retirees need to create a post-retirement budget, said Emily Guy Birken, personal finance expert and author of "Choose Your Retirement."

"To do this, you will need to determine your retirement income, including how much you expect to withdraw from your investments and what you expect to receive from Social Security or a pension," she said. "Going into retirement without a post-retirement budget is a good way to overspend in your early years."

Do what you can now to ensure you're not someone who doesn't know how you're paying for retirement.

2. Test-Drive Your Post-Retirement Budget

Once you have a budget set, try living on your post-retirement budget for the year leading up to retirement, said Birken. Doing so "will help you acclimate to the changes" and "psychologically transition to your post-career life," she said. It'll also give you time to figure out if you're even ready for retirement or not so you can tweak your plan before the big day comes.

3. Avoid Lifestyle Inflation

The years leading up to retirement are when your income will likely be at its highest.

"Keep your budget the same in spite of salary raises," said Pauline Paquin, owner and founder of personal finance blog Reach Financial Independence. "That will boost your retirement nest egg and allow you to live on a fraction of your last income in retirement."

4. Reduce Living Expenses

"Start streamlining your lifestyle now in preparation for retirement," said Carla Dearing, founder and CEO of online financial planning service SUM180. "Take a close look at your monthly expenses and identify those items you can do without. This gradual approach will let you significantly cut your monthly expenses without feeling the shock of adjustment."

5. Check Your Savings Numbers

"Although this sounds like a no-brainer, it makes sense to double, triple and quadruple-check [your retirement numbers] before you abandon the safety net of a regular paycheck," said Robert Steen, enterprise advice director for retirement at USAA. "We recommend having roughly 10 to 12 times your final salary saved up before you start your retirement."

6. Identify Income Sources

Review and list guaranteed income sources — like Social Security, pensions and existing annuities — as well as income-generating investments such as IRAs, 401ks, taxable investment accounts and savings accounts, to get ready for retirement.

"If you have any doubts about your ability to cover any of your retirement expenses, or legacy goals, get some expert help," said Steen. "A financial advisor can provide additional perspective, advice and solutions to help you reach your retirement goals."

7. Plan Your Second Act

Some retirees pursue a passion project, while others seek a little extra income on the side to make ends meet. Dearing recommends using your last year of employment to plan for your post-retirement career.

"Build the skills, resources and professional network you'll need to earn additional income after you leave your current job," she said.

8. Coordinate Timing With Your Partner

"It is fun to think of retiring together and immediately embarking on your elaborate travel plans, but if you stagger your retirement, more of your retirement assets will stay invested," said Dearing. "You'll also have the continued benefits from one of your employers; the medical coverage alone might have a significant impact."

9. Boost Retirement Savings

"It can be difficult for many people to max out their retirement accounts throughout their working lives. But during your last year, strive to sock away as much as possible," said David Hryck, personal finance expert and partner with New York City tax law firm Reed Smith. Your last working year is the final opportunity to put away as much as possible and pad your retirement savings account.

10. Take Advantage of Catch-Up Provisions

"The government encourages saving in the final years leading up to retirement by allowing catch-up contributions to retirement accounts," said Daniel Zajac, partner with Simone Zajac Wealth Management Group. For people 50 years of age and older, the IRS allows a pre-tax deferral of $24,500 into an employer-sponsored retirement plan.

IRA participants age 50 and older who meet income requirements can also contribute an extra $1,000 per year. "I've never heard a retiree complain that they saved too much for retirement," Zajac said.

11. Consolidate Financial Accounts

It's easier to keep track of your investment income if your accounts are in as few places as possible. Hryck suggests consolidating financial accounts to simplify record-keeping and achieve easier cash flow tracking as you get ready for retirement.

However, he warns individuals to "consider the consequences from a tax perspective prior to making any moves, such as selling stocks or mutual funds."

12. Reduce Your Portfolio’s Risk Profile

"The worst time to take a negative in your portfolio is right before retirement," said Tom Till, financial professional and owner of APPS Financial Group, which helps families and individuals with financial planning. "It will directly affect how much you can live on during retirement."

Contact a financial planner or take an online survey to determine your risk tolerance and adjust your portfolio accordingly. "I have seen people have to work an extra two to four years because they failed to take this step when close to retirement," Till said.

13. Create a Distribution Strategy

The accumulation and distribution of assets require two entirely different strategies and, particularly for those with a long retirement horizon, there will likely be a need for simultaneous accumulation and distribution plans.

"It is key to work with someone who is knowledgeable about distribution in this phase of life," said Till. Distribute too much or earn too little, and you risk not having enough capital to make it through retirement.

14. Eliminate High-Interest Debt

The fact is that high-interest debt is one of the biggest threats to a retirement budget, even if it's well-funded.

"Credit card debt can carry an interest rate of up to 20 percent," said Till. "Student loan debt never goes away, and the government can choose to withhold your Social Security benefits if you have outstanding student loans."

15. Relocate for Retirement

If you're planning to retire elsewhere, Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group in Scarsdale, N.Y., suggests moving or buying a second home while still employed.

"While many retirees can qualify for a mortgage, it's much easier to prove you have the income to support a mortgage if you make the move while still earning a full salary," he said.

16. Work Extra Hours

"Some pensions and severance payments are calculated based on the income you earn in your last few working years before retirement," said Sullivan. "Therefore, working additional hours or taking on additional projects in your final working years can give you extra income now and in the future."

In other words, a little extra hard work now can create a substantial payoff once you transition out of the workforce.

Click to find out which jobs still offer pensions.

17. Secure Long-Term Care Insurance

"Lack of adequate insurance coverage can lead to high unexpected costs that might cause you to go into debt," said Harrine Freeman, financial expert and CEO of H.E. Freeman Enterprises. The majority of bankruptcies result from an unexpected, expensive medical concern. Long-term care insurance can help defray the high costs associated with an unforeseen ailment or potentially needing long-term care.

18. Refinance or Pay Off Your Mortgage

"The thing you absolutely must do is straighten out your mortgage financing before retiring because you might not qualify with your reduced income after retirement," said Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage." "If you don't do this, you might find yourself with too high an interest rate that you can't get rid of, too high a payment for your new, lower income or plenty of equity but no way to access it readily."

19. Declutter Your House and Mind

"Clearing our mental clutter is an essential step to getting ready for the next chapter in our lives, which often includes getting rid of stuff," said Catherine Allen, co-author of "The Retirement Boom: An All-Inclusive Guide to Money, Life and Health in Your Next Chapter."

Not only are these items unlikely to be worth as much as you think, but the odds are also good that your family members won't hang on to them.

"Our kids and grandkids are minimalists and don't want to save Aunt Hattie's china or Grandpa Paul's stamp collection," she said.

20. Know How Your Income Affects Your Taxes

"When an individual's 'combined income' — defined as half your Social Security benefit, plus your other adjusted gross income — exceeds $25,000 as a single person, your benefit becomes taxable," said personal finance writer JoeTaxpayer. "Simply put, the tax burden on $30,000 of Social Security benefits and $20,000 from retirement funds will be far less than if the two were reversed."

Everyone's situation is unique, but a sit-down with a tax expert can help you to reduce your overall tax burden in retirement.

21. Know When to Start Collecting Social Security

Most Americans take Social Security before full retirement age, according to the Social Security Administration. "Once you start, it's irrevocable, and you can leave hundreds of thousands of dollars on the table," said Steen.

"For each year you delay benefits past age 62, you gain a 6 percent to 8 percent increase in lifetime annual benefits. That adds up quickly," Steen said. You can check your personal Social Security benefits at SSA.gov.

22. Engage in Your Interests and Hobbies

Many pre-retirees forget to account for how they'll spend their time once they're no longer headed to the office each day. "Chart out your time both at the macro-level (annual vacations, trips, etc.) and at the daily level — what will you do immediately after waking up?" said Paula Pant, personal finance blogger and founder of Afford Anything.

If you fail to plan ahead for retirement hobbies, "you'll develop restlessness, spend too much money out of boredom and potentially jump back into the workforce due to a lack of anything else to do," she said.

23. Apply for a Reduced Real Property Tax Program

"Many of the elderly lose their homes due to the inability to pay their real property taxes and in some cases, the amount owed is less than $1,000," said Freeman. "Owing taxes during retirement will reduce your monthly cash flow and might put you in a financial bind that could take months to recover from."

Many states offer property tax relief for qualifying seniors, so do your research to find out what can be done with your taxes.

24. Renew Your Home Warranty

"Home repairs can range from hundreds to thousands of dollars per repair, and might lead to usage of credit cards if you cannot afford to pay for the repairs on your fixed income," said Freeman. An up-to-date home warranty can cover many unexpected repair costs, which can help keep a retiree from busting the budget.

25. Build an Ultra-Emergency Savings Account

"The standard advice for emergency savings accounts is to have six to 12 months' worth of living expenses. However, if you plan to no longer have earned income, increase your emergency savings to 18 to 24 months' worth," said David Auten and John Schneider of The Debt Free Guys blog.

"For the 12 months leading into retirement, cut your expenses and put all additional savings into your ultra-emergency savings account," they added. That way, it can help keep invested assets secure, if and when an unexpected financial emergency occurs.

26. Review Family Financial Obligations

An emotional drive to help loved ones financially can erode a nest egg.

"Helping out family and friends is great, but don't do it at the expense of your retirement savings," said Steen. "Outliving your resources is a real risk. So, even if you think you have the cash available, seek professional advice before making a decision."

27. Review Life Insurance Coverage

When you retire, you might lose the group life insurance coverage offered through your employer.

If you "still have financial obligations such as dependent children, a mortgage or a car loan, consider buying a private life insurance policy if you're entering retirement with debt, or if you would lose benefits if you or your partner dies," said Steen.

28. Consider Healthcare Coverage

"Knowing exactly what to expect from your healthcare benefits is vital for retirees," said Birken. Fidelity has calculated that a 65-year-old retiring couple will need $275,000 for healthcare over the span of their retirement.

The first step she recommends is a meeting with your human resources department to find out if you're one of the lucky few who will receive employer-covered healthcare during retirement. If not, find out when your health benefits will lapse in retirement and, if you're under age 65 when you retire, you'll need to do to sign up for COBRA.

29. Get Organized

Organization doesn't just make your life easier in retirement; it also ensures loved ones can easily find key documents in case of an emergency and if you're unable to access them yourself.

"Compile critical information in a safe place, such as a fire safe," said Allen. "Keep paper copies of important documents, in case you lose the electronic."

You should also make a list of all your online accounts and passwords, such as your bank and investment accounts, so your family can easily find this information when the time comes.

30. Check Your Emotional Readiness

"Just because 'everyone' retires at age 65 doesn't mean you have to do the same," said Steen. Before leaving your career, ask yourself if you're retiring because it's something you look forward to or because it's something you expected to do at a particular age milestone.

If you're constantly asking yourself, "Am I ready to retire?" and never pulling the trigger, you might want to hold off on quitting your day job.

"If you are very unsure of the decision to retire, and have a choice, then don't do it," said Steen. "Working longer, perhaps at something new and different, can help you maintain yourself, both financially and mentally."

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Travel on the Cheap

Being able to travel was one of the key motivations for the Kaderlis to retire early. But they’ve had to find ways to do it cheaply to keep their annual spending below $30,000 a year.

The Kaderlis do own a small manufactured home they bought for $2,000 in an active-living adult community in Mesa, Ariz., in the early 1990s. But they rent it out for most of the year and travel full-time.

Since 1991, they’ve visited more than 30 countries in Europe, Asia and Latin America and have kept costs low by housesitting, staying with family and friends and renting apartments for several months at a time. Sometimes, they even stay in hotels, but get a deep discount by asking for a monthly rate rather than a nightly or weekly rate, Billy said.

They buy fresh, local food rather than packaged imported items. Because they do not own a car, they often take public transportation, walk or even hire a private driver in countries where the cost is low, rather than rent a car. And they’ve saved thousands of dollars a year by finding restaurants and hotels that cater to locals rather than pricier options near tourist hot spots, Akaisha said.

Billy said that Mexico currently is the best value for the money if you want to retire abroad. They know retirees living well there on less than $1,000 a month.

Keep the Cost of Healthcare Down

Retiring abroad has allowed the Kaderlis to take advantage of low-cost healthcare, which helps them keep their annual spending low. They had a health insurance policy with a deductible of about $10,000 to $12,000, Billy said. But they dropped their policy because they found it was cheaper to pay cash for medical care in the countries where they have traveled and lived.

How to Save: Retirement Survival Strategies for Rising Healthcare Costs

Most years, they’ve spent about $3,000 to $4,000 on all of their healthcare — including medications, glasses, dental care and even emergency surgeries. The care they have received has been fabulous, Billy said, noting that many of the hospitals they’ve been to overseas even provide translators.

They did enroll in Medicare recently when they turned 65 and signed up for Part B coverage, which covers doctor visits, services such as lab tests and surgeries and medical supplies. Even though Medicare typically can’t be used outside of the U.S., the Kaderlis avoided a potential penalty by enrolling now rather than waiting to see if they will need it if they ever return to the states. That’s because the monthly premium for Medicare Part B goes up 10 percent for every year you qualify but don’t sign up.

Track Spending Closely in Retirement

To avoid blowing through their savings too quickly, the Kaderlis track all of their spending in a spreadsheet, Billy said. That doesn’t mean they set strict spending limits for themselves, though. They spend happily and still get ahead.

For example, if they spend a lot one day, they’ll eat only the food they already have and won’t spend money on anything the next day, Akaisha said. They know the average amount of spending they can afford on a daily basis so they can keep their annual withdrawal from the investment accounts to about 4 percent a year. You can see the sort of spreadsheet they use and how they track their spending in their book, “Your Retirement Dream IS Possible.”

Invest Social Security Benefits

Billy and Akaisha decided to claim Social Security early at 62, even though it meant a permanent reduction in their benefits. If you start collecting Social Security at 62 rather than at your full retirement age, your benefits can be reduced by up to 30 percent, according to the Social Security Administration.

But Billy calculated that they would be better off financially by collecting Social Security as soon as they were eligible and investing their benefit checks. If their investments grow 8 percent annually, they’ll end up with more money than if they had waited until their full retirement age at 66 to collect a larger benefit.

Have a Stash of Cash

When the Kaderlis retired at 38, the entire $500,000 they had saved was invested in the stock market in index funds. “We had very little cash,” Billy said. After they went through several market crashes, though, they started putting cash aside in a money market account.

The reason they did this was to avoid having to sell investments at a loss in a downturn to have the cash they needed for living expenses. Billy recommends that retirees who are nervous about the market have enough cash in a savings or money market account to cover a year’s worth of expenses.

Saving Is Simple: 35 Ways to Save for Your Emergency Fund

Don’t Let Boredom Wreck Your Early Retirement

Many people likely think that they can’t afford early retirement. Some, though, simply wouldn’t know what to do with their time if they weren’t working. In fact, the Kaderlis are often asked whether they’re bored or feel like they’re wasting their lives.

The answer to both questions is “No.” Akaisha said that she always recommends that before people retire, they make a list of places they want to see and things they want to learn how to do. “When you feel like you’re getting bored, you look at your list,” she said. The Kaderlis have worked hard to stay busy, avoiding a common retirement planning mistake.

If you travel outside the U.S., you can keep your mind sharp by learning other languages, or at least some common phrases, Billy said. And there is need around the world, so you can always volunteer.

Plus, by retiring early and traveling the world, you can gain experiences and meet lots of interesting people, from diplomats to rock stars, Akaisha said. “We have a gazillion stories to share,” she said. “It’s hard to put a price tag on that.”

Keep Having Adventures

The Kaderlis are currently in Guatemala in the Lake Atitlan area, surrounded by ancient Mayan culture. They have been living there off and on for about seven years, also visiting the Dominican Republic, El Salvador, Mexico, Panama, Thailand and the U.S. during that time. Next spring, they plan to visit some places in Asia and Europe they haven’t been to yet. “We would like to continue our traveling lifestyle as long as we can,” Akaisha said. “Seeing as we are ‘only’ 65, we figure we have some years yet to go!”

Up Next: The Cheapest Places to Retire

This article originally appeared on GOBankingRates.com: 11 Ways to Retire Before 40 Without $1M

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