Thursday, August 11, 2011
5 Steps To Retire In 12 Years
My underlying purpose of starting this blog is to document my journey on my way to retiring early. I am not sure if everyone out there really has a dream or desire to get out of the rat race early, if at all. It's not necessarily a noble goal and I don't really try to push it on anyone. Some people really like their career, and other people don't mind working. Others genuinely enjoy having a nice house, big car and lots of stuff and are willing to work for it. I don't think any of these traits are negatives. I simply don't share them. If you share my desire to retire young and spend more time relaxing and less working then follow along as I share my list of five steps to take if you want to retire early.
My personal journey started last year at 28 years old. I have a goal to be financially independent by 40 years old. That makes my journey 12 years long. I'm going to put a road map together for others who have such a goal.
1. Save At Least 50%
Saving money is always my number one priority when it comes to plotting out my early retirement plan. If you can manage to cut expenses and maximize your savings to the point of saving 50% of your net income the odds are pretty good that you'll be able to retire young. Let's say you net $40,000/year. That means you are saving at least $20,000 of your total net income. If you manage to earn 8% annually on your $20K contribution you'll end up with a portfolio value of $403,000 after 12 years. That's a basic calculation, not factoring in inflation or taxes..but also not factoring in rising contributions. At a 5% yield, that kind of portfolio would be throwing off a little north of $20,000 a year. This would meet your expenses based on these calculations. Living on a fraction of your income not only maximizes your investment potential, but also puts you into a situation where you need less capital to live on. It's a win-win!
2. Invest Regularly
Some investors classify themselves as traders and look at charts, fundamentals, trading ranges..etc. I don't really bother with this stuff. I espouse regular monthly investing through a dollar-cost-average strategy. That means setting aside a certain percentage of your income or a fixed dollar amount and investing through high and low markets. This prevents you from sitting on too much cash and not earning anything on your money. If you listen to all the financial noise awaiting the next doomsday scenario you'll never invest a dollar. Skip the doomsayers and start investing for your future. I try to have a watchlist of 50 or so stocks that includes my portfolio. Every month I invest in what I think is the most attractively valued business at that time.
3. Get A Second Job
This isn't necessary, but if you are having a hard time reaching goal #1 after cutting expenses, then raising your income and therefore raising your savings rate is crucial. Some expenses simply can't be cut or reduced, and I understand that. The only logical change at that point would be increasing your income. If you are earning just an extra $100 a week working part-time on the weekends and you put that away for 12 years earning the 8% I used above, you'd have an extra $96,000! Some of us work a lot. I currently work over 50 hours a week at my primary job, so the thought of working on my days off is not appealing. But, I'd rather put in a few extra hours a week now to avoid working until I'm 70.
4. Get Fit
You don't want to be just financially fit, but also physically fit. I've laid out some pretty hefty goals already; limiting expenses and working two jobs. It gets better. If you want to have a chance to retire early, you should be engaging in some type of physical activity. You don't have to train for a marathon, but engaging in some type of physical fitness regimen for 30 minutes a day, 3 times a week will be extremely helpful. It doesn't have a direct impact on your portfolio's value, but it will limit your health care costs and therefore put you in a better spot to retire young. You'll boost your energy levels, limit your chances of having large hospital bills due to chronic illness or disease and improve your mood. You'll look and feel better, and it's free! Also, once you are no longer filling a great deal of your time with your job, you'll want to find something productive to fill your time with. One easy and cheap way to stay in shape is to bike to the places you need to go. I currently do that. Not only do you save money on auto costs, but you stay in great shape too. Another win-win!
5. Budget And Keep Track
Goals and progress are hard to see if you don't keep track. How do you know how far you've come or how much further you still have to go if you don't catalog your results? I use this blog, my budget account with Mint, and my brokerage tools to keep track of my progress. What do you do? You should definitely budget your income and expenses to see how close to a 50% savings rate you are. You'll want to track your investments to see if you are on track to reach your target amount. With just 12 years to retire, your margin for error is much tighter than someone who is on a 40 year schedule. You have to stay on course, stay motivated and don't lose track of your end goal.
I'm currently doing all five things I have listed, so I know they aren't too difficult. I'm a very average Joe with a very modest middle-class income. I'm currently making less than I used in my example, but I'm also spending less as well. There are a lot of people who feel that retiring in such a short time frame is impossible, but I really don't agree. I think if you follow these five steps it's very realistic to retire in 12 years.
When do you want to retire?
Thanks for reading.