The concept of being able to retire early has fascinated me for years – even back into childhood. It’s not that I want to be lazy, and it’s not that I don’t want to work. I just love the idea of working because I want to, not because I have to.
Imagine walking into work every day knowing that you would be completely fine if you quit, or were fired, at any moment. How great would it be to spend a year helping a nonprofit – without any fears of how you would support yourself afterwards?
Retiring early gives you the freedom to work because you want to, not because you have to.
Because I am eager to determine what is required to retire early, I have done a whole lot of reading and thinking on the subject. In fact, that was even one of my interests when first entering the PhD program (that I dropped out of).
Here are the three elements to incorporate into your life if you would like to develop a plan to retire early.
1. Maximize the Amount of Money You Make
The traditional retirement plan has been to save up enough money to cover your lifestyle for 20 or so years after you retire. The goal is to make enough during your career to cover your expenses for the rest of your life.
Although this isn’t the end goal if you want to retire early, it is still a good strategy to have.
By finding ways to maximize the amount of money you make, you will obviously have more money for when you want to retire.
Several methods of doing this include:
- Confidently asking for raises.
- Being willing to jump from one organization to the next to move up the corporate ladder.
- Investing your savings rather than letting them sit in the bank.
- Developing “side hustles” – or ways to make money in your free time with your own part-time business from an interest or hobby.
Although this is obvious, if you want to retire early, you need to maximize the amount of money that you are making.
2. Keep Your Spending to a Minimum
Studies have revealed that most people believe they would be financially comfortable if they were making 30% more than their current salary. In other words, someone making $30,000 believes he could cover his expenses if he was making $33,000. Meanwhile, someone making $300,000 believes that he needs another $30,000.
It is all too easy to grow our expenses to match our income. People who are already living at the edge of their budget, continue to do so after a promotion or raise. Why? Because there is always a bigger house, nicer car, and fancier restaurant.
If you want to retire early, you need to learn to live below your income level – both before and after you hit your retirement mark.
Being successful with your personal finances comes down to: make more than you spend. The bigger the gap, the better off you will be.
To help yourself monitor your spending, create budgets, place any raises you get into your savings for the first year, and think of inexpensive activities for when your friends want to do something.
3. Develop Residual Income Streams
Steps one and two are just as essential for regular retirement as they are for those interested in retiring early. And although it is possible to retire early by just following those steps, it is not nearly as easy if you leave out step three.
Residual income is money that you make without doing any work (sounds like the dream, right). Ok, fine, sometimes you have to do a little work, but it’s minimal.
Several ways that you can develop residual income include:
- Owning rental properties.
- Writing books or blogs.
- Investing in the stock market, or better yet, successful startups (although risky).
- Starting your own business – with a plan on how to make it manage itself.
If you can get to a point where your residual income is greater than your annual expenses,you are ready to retire! Of course, it would be a good idea to have enough saved to handle several years of no income, but once you reach this goal, freedom is in your hand.
It’s Not As Hard As You Might Think
I have read about, and known, many people who have retired early. I know one man who retired at 40 – after having spent most of his life as a teacher/principal. We all know that they don’t make much money!
How did he do it? He saved intelligently and, once he decided to retire, purchased a foreclosed house with cash.
He now has no mortgage or rent expense, and has enough coming in from his investments to cover food, a vehicle, and some travel expenses. No, he is not a millionaire, but he is able to live the lifestyle he wants – and he is free to explore careers and hobbies because they interest him, not because he is desperate for a paycheck.
What do you think? Could you retire early? Would you want to retire early?