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Steps to Early Retirement

Written by Nickel - 12 Comments

The most recent issue of Money Magazine had an interesting article about early retirement. Included was a small sidebar with tips for getting out of the rat race well before traditional retirement age. While there wasn’t anything earth-shattering about these tips, they serve as a good reminder:

1. Live below your means. Keep an eye on both small and large expenditures, live in a low-cost area, send your kids to public instead of private schools, opt for less expensive vacations, etc.

2. Set lofty goals. Saving 10% of your income isn’t enough if you want to retire early. Instead, aim for 20-25%.

3. Be allergic to debt. Carrying debt is not the path to early retirement. Pay it off and then stay debt free (see Step #1).

Even if you don’t manage to retire early (or don’t want to), these are great steps for building wealth.

Published on January 24th, 2008
Modified on February 19th, 2008 - 12 Comments
Filed under: Debt Reduction, Frugality, Retirement, Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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12 Responses to “Steps to Early Retirement”

  1. 1
    Money Conversations Guy Says:

    The real question is, if you do as you say, pay off debt and save 20%, how early can you retire? Someone please make a spreadsheet!

    Here’s another idea that will make you change careers. Here are the steps:
    1. Become a firefighter or teacher or policeman or even a janitor
    2. Work 20 years
    3. Retire from public service at age 45, and then work in a private industry for another 10-20 years, while collecting a pension at the same time.

  2. 2
    mhg Says:

    Curious about your thoughts on the roth 401k… Love your site. Thanks!!

  3. 3
    Ken Mott Says:

    My whole thing with retiring early is this.

    My wife and I both put away 20% into our 401ks each. This gets us close to the max right now. Last year i put in like 14100. We also fund our IRA’s, thats 4k each last year and 5k to be funded this year.

    This puts us at about 25-27% each with company match for just our retirement savings.

    But heres the downside, I need to be old to take this money out. 59.5 years old for 401k and IRA. My problem is that I’m 24, so thats basically 35 years away.

    At our savings rate of about 20k individual/40k couple with our past few years of savings we will have 8 million in retirement funds if things have cagr of 8%. Which at 4% draw rate is 323k a year or 115k in today’s dollars if inflation is 3% cagr.

    But this means i have 35 years till i can pull that money. Which will be a good amount i hope as things should be paid off. Only debt now is college loans, no house yet.

    So what do i do if i want to retire early. I need to save more. If i want to retire at age 50 and my wife and i want 100k in income in todays dollars, (200k when we are actually 50). And for it to last 10 years till we can pull retirement money. We will need to save a little of 20K a year from now till 50 at 8% to be able to support that.

    So 20K (for early retirement) 40K (for old retirement) = 60K a year. And for us thats a little over 40% a year that we need to save to retire early.

    Money Conversation Guy, if you want me to build you a spread sheet showing this, email me at my first dot last name at gmail dot com

  4. 4
    Chris Says:

    Ken-

    The thing I look at in your situation is do you really need 100k+/year in retirement? I don’t know your exact financial situation, but I’ll go off of what you said.

    If 60k is roughly 40% of your combined income, you make in the neighborhood of $150k/year, with is pretty outstanding for a 24 year old. Currently, you are saving $40k/year. Without a house, I’m guessing you pay at least $25-30k in taxes, depending on your income and what additional payroll taxes you may have.

    So this means you are living on $80k/year and looking at putting away another 20k, or living on $60k/year. Without knowing where you live (cost of living), if you can live on $60k/year now and keep increasing your salary for 25 year until you are 50, you should have more than enough to retire with.

  5. 5
    Ken Mott Says:

    I don’t think requiring 100K a year is a high number to live off of.

    If i were to retire early i would need to cover my own health insurance. So we are talking about a lot of money right there for too people. The plan i am on now cost my wife company about 8k a year per person i think. So x2 we are talking about 16k.

    So 100-16 = 84k then taxes figure 25% or 21k. So that takes it down to 63k.

    So 63k to live and pay bills off of. Figure i will have a house, so thats like 3-6k per year in my area for taxes, who knows what type of house i will be in.

    So say i have 60k a year to have fun with and pay the normal things of life. I don’t think thats too much, but enough to do some fun things like trips and to not have to worry too much about money.

    And yes, salary increase over time will help make those numbers even better. But at the same time i will likely have kids to help through school, and once my wife gets pregnant this will change. I hope at that point i will be making roughly the same amount as we make total now.

    As for right now, we live north of seattle, higher costs than midwest or other places. But the monthly nut is around 2k to live plus whatever else we spend to have fun. So we only need around 25k to live with a room over our head and food to eat. Granted we rent a house with my wifes sister. She will be moving out in May, and we will likely find a smaller cheaper place to live, although after all things said and done it may cost us a little more than we are spending now, but not much more.

    My wife and I have set a goal of saving 3k a month for a house and should have no trouble doing that. Then we are also saving money for a new car for me, currently 11 years old. I hope to pay for it in cash, or depending on special financing like 0% i will just keep my money in the bank.

  6. 6
    nickel Says:

    Ken: That’s an excellent point, and one which I think about a lot. Stuffing money into tax advantaged accounts is a prudent thing to do, but it doesn’t necessarily help you to retire early. For that, you need access to funds well before you’re 59.5.

  7. 7
    Marc Says:

    Actually, you can withdraw funds from retirement accounts before 59 1/2. There is a loophole known as a “72(t) exception”. Under current tax law (Internal Revenue Service Code Section 72(t)(2)(a)(iv)) you can avoid the 10% penalty tax if you take “substantially equal periodic payments.”

    The obvious downside is that you can’t choose to take more or less in a given year with the “substantially equal payments” limit. However, it is possible.

    This is what I plan on doing so that I can retire early. I am currently 39 (my wife is 42) and in the next year or so, we will scale back to working 20 hours or less — only by choice and not driven by income requirements.

    We did it by saving over 1/3 of our gross income, almost 50% of our net income. We never made huge $ (max was maybe $130K), but lived well below our means and always tried to basically have 1/3 (+/- a few %) each for taxes, spending, investing. Ever since I was 18, my goal was to be “financially independent” by 45 and unless the stock market pulls a crash like in ‘29 I should be in that position.

  8. 8
    Ken Mott Says:

    I looks like with that rule you cannot even change your withdrawal after you hit 59 1/2.

  9. 9
    Early Retirement Extreme Says:

    With 20-25% one can probably look forward to retiring in one’s early 50s which would be considered early for a lot of people.

    Now with 75%, you can do it in 5 years, but that involves a lot of initial sacrifice(!)

  10. 10
    KC Says:

    I think I read somewhere that you need to save something like 40% of your income to retire at 50. One of the personal finance magazines recently ran an article on this – it was either Kiplinger’s, Money or Smart Money. So if you are really interested in this you might look at back issues online. It’s been within the past few months..

  11. 11
    Kent Irwin Says:

    I think retirement is becoming an outdated term. More meaningful is Financial Independence. Financial independence means, in my opinion, being able to live off of investments without having to work for a paycheck. There are many factors that go into calculating how much money someone will need to put aside now and how much their pile will need to be, such as spending, taxes, inflation, lifestyle, travel, health care needs, cost of living where you want to retire, investment return, life expectancy are the first ones that come to mind. However some successful business owners that I know are often able to work much less starting when they are younger and continue for quite some time, as they get older, earning a strong income from their business. Financial security of the future is complex, but has many options.

  12. 12
    Danielle Says:

    The last post makes a good point about owning a business providing income.

    Finding ways in which you can have income but not be working might be a solution for you. In addition to business owners, land, real estate and many other things I am sure I have never heard of can be used to provide you income once you stop working.

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