If you think building up enough cash reserves and income to retire within ten years is impossible, think again. The reality is, early retirement is absolutely possible. All you need is some education, some street smarts, and dedication to your goals to make it work.
Don’t believe me? If retiring early sounds unrealistic, consider a few people who have done it already. Take the blogger behind the website Mr. Money Mustache, for example.
MMM, as he’s commonly called, worked together with his wife to live frugally and save bountifully, starting in their early 20’s. By the time they were in their early 30’s, they had over $1 million in investments stashed away.
These days, the Colorado couple lives off the interest they make on the investment accounts – and they have been doing so for more than ten years.
The difference between Mr. Money Mustache and most of the world is that most people don’t think too much about retirement life until after they’re retired. Only then do they find out how unprepared they were, and how many things they should have been doing all along.
In other words, they find their shortfalls by looking at life through retirement’s rear view mirror. But, we all know what “shoulda, woulda, coulda” gets you – not a lot.
Being intentional and planning ahead is the most important part of acquiring enough money to retire or retire early. You might think that retiring early means you must have a large income, but in fact it’s possible to do this with many levels of earnings.
Once you realize how early retirement works for others, it’s a lot easier to imagine how it might work in your own life.
Follow the steps below so that you can retire in less than 10 years.
The Basics of F.I.R.E (Financial Independence Retire Early)
Step 1: Create a Retirement Budget
Before you climb a mountain, you size it up. The retirement equivalent of that is setting a post-retirement budget.
You need to know what you want to spend in retirement in order to understand what you’re shooting for. Once you do, you’re off to make it happen.
If you have a budget now (and the longer you’ve had one the better), setting an estimate should be easy. If you’re the type that has been budgeting fo years then this step should simple.
If you haven’t, you’ll need to start from ground zero. You should develop a budget for the next year (we’ll use it more in a few steps) as well as draft an estimate of your retirement spending. The best sources for spending estimates will be bank and credit card statements.
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Step 2: Work to Grow Your Career
A career is the engine that drives the early retirement train. The income you make from your career will be your main shovel to help fatten up that retirement account.
It’s important to try and maximize the dollars you earn in your career by working towards raises and bonuses. This will help speed up the time frame of getting to early retirement.
To grow your career fast, demonstrate your value to your employer, broaden your knowledge, and refine your skills. Familiarize yourself with how your company operates in order to maximize your productivity. Work on projects that expose you to new contacts and skills, and keep a record of your achievements.
Become an industry expert by learning during your downtime and pursuing all professional development opportunities. Don’t be afraid to change jobs every few years. You’ll make more money, challenge yourself, and encounter more advancement opportunities.
Step 3: Scour Your Budget For Savings
As your earnings grow, also look to increase the gap between earning and spending by regularly updating and reviewing your budget.
As you become more familiar with it and see how the money is flowing out, you’ll be able to identify steps to maximize your savings rate.
I recommend reviewing your budget and making adjustments monthly. This is what we did and it was quite effective.
By this process of regular review and changes, you’ll ensure your budget is efficient as possible.
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Step 4: Begin Investing Immediately
As you create an ever-larger amount of savings (as your income grows and your expenses decrease), you’ll want to get that money working for you immediately.
When it comes to investing, time is your biggest asset. The more time invested, the more your savings will grow.
Begin investing immediately as it can make a huge difference. This is the area of my biggest financial mistake — I waited for five years after high school to begin saving and investing and those five years are worth a fortune. So don’t waste them.
Investing can be difficult if you have a short time horizon, but as long as you have 10-15 years, I’d start investing with low cost, US stock-based index funds to maximize growth.
Get as much money as you can working as fast as you can and soon your money will be helping you achieve financial independence.
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Step 5: Develop A Side Hustle
Having a side hustle can help your finances in a couple ways. First, having an extra income will allow you to earn more and thus save more in a shorter period of time.
Second, a side business in retirement will mean you’ll need to earn a lot less from your assets, speeding up your retirement date by many years.
There are many side hustles that can be started these days. I’ve made extra money as a freelance writer, blogger, and an online ESL teacher. I’ve considered ideas like becoming a pet-sitter or developing my own product for sale.
Take some time and consider the options, then pick something you enjoy, has fair earning potential, and teaches you skills.
Step 6: Don’t Accumulate Debts
During this entire process, debt will be an absolute killer. Yes, you may already have some debt which will impact your numbers for sure, but don’t make it harder on yourself by adding more.
Drive used cars, try to live rent free, and don’t succumb to the constant urge for the latest and greatest gadget.
You are focusing on SAVING money with this plan, not SPENDING it haphazardly (i.e. spending so much that you have to borrow).
Of course, you’ll have money to spend and enjoy while you’re working on early retirement. But spend within your means and don’t go into debt or you’ll definitely delay your retirement date.
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Step 7: Stay Persistent
Implement the above steps and stick with them. Time will take care of everything else.
Run your numbers at least once a year. Update your retirement spending (especially as you get more current living expenses) so the estimate of your needed retirement income becomes more and more refined.
Eventually, you’ll reach the point where your retirement income is higher than your expenses. At that point, you can retire from full-time work as detailed below.
Running the Numbers
To see how the steps above can play out, here is an illustration to consider.
Let’s begin with the following assumptions:
- You make $50,000 a year at your current job
- You need $40,000 in retirement to cover living expenses.
Here’s how to work the above situation to retire asap:
Begin by initially saving $20k per year and investing it immediately. That’s a 40% savings rate and is certainly healthy, but is just average among extreme early retirees. It’s completely do-able (and I speak from experience). Keep your standard of living low so you can invest more as you earn more.
And before someone says “it can’t be done in [insert name of city they currently live in]” let me say that you may need to move to make early retirement happen because where you live has a major cost impact on your budget.
Work at your job to get top raises. Follow the steps noted above and you should be able to earn 5% raises rather easily (this is on average — some years will only be 3% but some could be 10%). We’ll be conservative and say you earn 5% average raises and save all the increases.
So now you’ve set up a system where you are saving $20k every year plus every amount of income you receive over $50k.
Assuming your investments earn 8%, taking these steps alone will yield you almost $450k after ten years.
Add In Your Side Hustle
Here’s where you’ll see a great benefit from your side business. Let’s say you get that side hustle up and running in year one. In the first years, you’ll probably not earn much and anything you do earn will be plowed back into the business to help it grow.
Let’s say that by year three you are able to earn $4,000 a year (less than $100 a week) and after that add a couple thousand dollars a year to it. We’ll say you save all of this income too.
If you add the side hustle into the mix, after 10 years you’ll have over $550k saved/invested and a side business churning off $18k per year.
You are now ready to retire from full-time work. Here’s how:
- Using the 4% rule, you can withdraw $22k from your savings each year (4% of $550k).
- Add in the $18k from your business and you’re now able to generate $40k per year — you’ve covered your retirement spending needs.
BTW, if you don’t want to or can’t develop a side hustle, you could down-shift to a part-time job that earns you $18k per year. That shouldn’t be too hard for someone with the career skills you’ve developed over the past decade.
It Can Be Even Better!
I used the numbers and results above because they represent a reasonable set of assumptions that could apply for many people. But these numbers can be improved significantly with just one or two extra pushes.
Consider the numbers above with the following changes:
1. You could earn $60k per year instead of $50k. Or maybe $70k or even higher.
2. You could save 50% of your income instead of 40%. Or maybe 60% or even higher.
3. It’s difficult to say you could earn a higher rate of return than 8% (especially given today’s market valuations), but what if you could earn 9% or even 10%?
4. Your side business could easily earn more than $18k per year. Even if you just earn $100 a week, that gets you to $5,200 as a start, well ahead of the $4,000 we suggested. And it’s likely it won’t take you three years to get to this level.
We assumed you have zero savings currently. If you have some, you already have a head start on your retirement nest egg.
These numbers are especially attainable for a couple who both work. As such, they could be looking at retirement well within a decade.
Of course, your exact circumstances will vary, but you can use the principles above to run your own personalized numbers.
Maybe you can earn more and save less. Or perhaps you’re better at saving than earning. Or maybe your side hustle can become a $30k per year business.
Simply run the numbers with your particular likes and dislikes, see where that puts you on the road to retirement, and adjust as needed. We all take different paths, so don’t stress if you don’t do “as well” as others. It’s not a competition.
Now the retirement police may say “well you’re not really retired if you’re working part-time or on a side hustle.” First of all, who cares what others say?
Second, if you want to be completely retired simply put more effort into the steps noted and save/invest more. Or take the steps as they are and add a bit more time. The plan can be as flexible as you want it to be.
And if it takes longer than ten years to retire, who cares? You’re still retiring in 15 to 20 years, well before most people.
What is your ideal age of being retired? How much would you need in retirement using the calculations above?
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