Financing Early Retirement – Simple, Not Easy
When people find out about our slow travel early retirement plans, questions are always asked about our finances and how we pulled this off. “You’re both so young! Were you born rich?” Or some variation of that.
This is a perfectly understandable question, and I get why we are asked. The answer is an emphatic NO. We just took matters into our own hands. The process of financing early retirement was actually pretty simple, but it wasn’t always easy.
A Little Bit About Us
We both came from lower, middle-class families that emphasized frugality, avoiding unwise debt, and finding cheap ways to have a good time.
So in this way, Rhonda and I did strike it rich because many couples do not have this financial synergy. We have always been on the same page about our finances as a couple. And tolerance of the adjustments required to achieve early retirement and financial independence was baked into our genes by how we were raised.
That, and we do not have any children. I don’t have to explain the financial advantages of that, but there are couples out there doing what we are doing even with children in tow. I tip my hat to them.
So how did we arrive at our current situation financially, retiring early at 52 and being reasonably confident about our financial future? The answer is complex and is best answered by where we were financially and career-wise at different points in time.
For those people in a rush and want me to get to the point, jump to the TL;DR version HERE. But for the rest of you, I think our financial story may be helpful.
Early Career
From our late 20s to early 30s we purposefully reduced car and student loans while contributing to tax-sheltered employer-based retirement plans. We contributed enough to achieve the maximum contribution match by our employers, but no more. We maintained a cash reserve to cover us for a few months of living expenses in emergencies.
And our salaries were in the low/mid-5-figure range at this point of our careers.
Bottom line, aside from aggressive debt management, we only really went through the basic motions of preparing for retirement.
Mid Career
During our early to late 30s, we finished paying off our car and student loans and were now aggressively paying off our mortgage. We still contributed to tax-sheltered employer-based retirement plans (Rhonda) but I was now contributing to a state pension due to a job change. We also started contributing to Roth IRAs. At this point, we probably had about 6 months of living expenses saved in the bank.
And our salaries were in the mid-5-figure range now, as a point of reference.
So at this stage, we were doing better preparing for retirement. But still not good enough to retire early.
Late Career
This is where the rubber hit the road setting up early retirement.
Starting at age 40, the writing was on the wall regarding the long-term viability of our professions. We educated ourselves about investing and took our savings rate to another level to protect ourselves when the downward spiral became too much.
We continued to contribute to retirement accounts as normal, but we saved and passively invested 50% to 60% of our take-home pay, and continued to do this until we retired (12 years total). We also paid off our mortgage during this time. And at age 46, I changed jobs after becoming vested in my (modest) pension and started contributing to a tax-sheltered employer-based retirement plan again.
Our salaries were in the upper mid-5 figure range during this time but sadly, we never came that close to breaking the 6-figure barrier at any point during our careers.
Starting Early Retirement
This brings us to the present day (2022) as a 52-year-old couple. We currently have 25 times our USA annual spending rate saved in our taxable investment brokerage accounts, plus Roth IRAs, plus modest pensions that activate at 60 years old, plus 403b accounts, plus whatever Social Security we might get at 70 years old.
So for us, the goal is for our taxable accounts to carry us to 60 years old. At that point, various buckets of income/investments become available that give us sizable pay raises at key ages. Our current travel budget (spend an average of $2,500/month) is less than the average growth rate of our investments (minus inflation), so we expect our investment portfolio to grow while we are traveling.
A win-win situation.
You may be wondering if we lived like hermits during the last 12 years and were miserable.
We weren’t.
During this time I learned to travel hack and we went on pretty extravagant self-planned international trips every year for pennies on the dollar. Also, we bought a used teardrop camper and explored the campgrounds and hiking trails of the Eastern USA for cheap. I even had a stint as a “mystery shopper” which allowed us to eat some pretty fancy meals at restaurants for free, in exchange for detailed reports on my experiences.
There are lots of ways to have fun for cheap if you look hard enough.
The Early Retirement Set-up Process
So what does this all mean and what would I suggest to anyone interested in retiring early?
Here are my major recommendations, in order of when you should do things:
1. Reexamine ALL of your expenses and jettison ones that aren’t 100% necessary – Anything that generates an unnecessary financial drain is harmful and should be reexamined for cheaper options, or dropped completely.
Cable? Gigabit internet speeds? Subscription to the Luchador Pro Wrestling channel? Your monthly manscaping bill at the spa because you deserve it? The luxury 5 bedroom apartment for 1 person when an efficiency will do?
Do you REALLY need these things? Be ruthless, cut costs, and find cheap ways to have fun and live life.
2. Pay off all non-mortgage debt ASAP – Use the money you just freed up to pay extra on your debt principal, and never take on any new non-mortgage debt. Using credit cards is fine, but you need to pay off the entire statement balance each month to avoid interest charges.
3. Take full advantage of tax-sheltered employer-based retirement plans, making sure to get every cent of employer matching funds – Free money opportunities are rare in life, so take advantage of employer matches. Put extra money into these accounts if you are so inclined, as the investments will grow tax-free.
4. Save your take-home pay like your life depends on it – Once you’ve paid off your debt, save all that freed-up money. More if you can. How much you should save per month varies depending on your goals and how quickly you want to retire. If you are serious, I recommend at least 30%. Preferably 50%. Anything is better than 0% though.
5. Passively invest the money you save by Index Investing – Investing your savings will supercharge your net worth growth over time. Index investing is a simple, passive method of investing that allows you to do this. Basically, you develop a portfolio of different Exchange Traded Funds (ETFs) that work together during different economic conditions that allow your portfolio net worth to grow. If you can open a bank account online, then you have all the skills you need to index invest.
How do you invest your savings?
To a person new to index investing, I suggest visiting the outstanding index investing website Portfolio Charts and reading the information on the front page to see how index investing works. Then peruse the ETF portfolios described in Portfolio Charts. Find one with an inflation-adjusted return rate you like, with a volatility level that won’t induce a bowel movement when the economy goes sideways.
Each portfolio described at Portfolio Charts has a calculator that will tell you how long it will take you to retire based on your savings rate and your annual spending needs.
Awesome website. Can’t believe it doesn’t get more press.
Once you identify an ETF portfolio you like, you need to open a brokerage account and purchase shares of the ETFs you need. This is done at places like Vanguard, Charles Schwab, or the investment brokerage of your choice.
You can index invest in Roth IRAs and taxable brokerage accounts. I’d do both.
The more you save and invest, the quicker you will reach your early retirement goals. If you are not confident in how to open a brokerage account and buy ETF shares, just Google, “How do I open a brokerage account at Vanguard” and “How do I buy ETFs at Vanguard”. There are tons of websites and videos that will show you how.
Financing Early Retirement – Simple, Not Easy
So there it is. Simple, but not easy.
But once you make the early psychological adjustments, you get used to the process and take great pleasure in saving big chunks of your paycheck and watching your portfolio grow. My only regret was not aggressively saving 5 years earlier because the gods of compound interest smile favorably on those who start investing early. Those five years would have increased our net worth by another 50%!
Now it is up to you to get started if early retirement is your goal. The longer you wait to begin, the more money you lose out on!
Drop a comment below if you have any questions. And feel free to share this post if you know someone who might find this information useful. Thanks for reading!