How to master your early retirement lifestyle: Part 1

Published September 29, 2015   Posted in How to Retire Middle Feature

Welcome to the “How to master your early retirement lifestyle” article series.  This series takes you on a relaxing walk through the key concepts of early retirement and how they relate to the way that you live your life.  These articles are meant to be easy to read, yet informative, without the more complex technical ins and outs of our economy.  Other blogs do an exceptional job at getting more into the weeds of our economy, the stock market and investments.  My goal with this blog series is to explain the essentials of early retirement.

I am a simple person.  I like to remove the bullshit that tends to accumulate atop life’s many different issues, choices and dilemmas and instead distill things down to their more basic elements, and the business of giving corporate America the middle finger in my mid-freaking-30s is certainly no exception.  Let’s not make retiring early more complex than it needs to be.

We’ll kick this article off the right way by diving into why anyone would want to retire early – but not just early, super early.  Think 30s or 40s.

For me, I want to retire young because I want the freedom to choose my own life.  No more alarm clock, eight different bosses droning on about mission statements (Office Space reference), the ability to wake up in the morning and decide exactly what I want to do that day.  Basically, if you haven’t seen Office Space, watch it – I want to escape that movie.  That’s what this one is all about.

In other words: No.  More.  Job.

For others, retiring early might be a way to spend more time with friends and family.  Or to travel and explore our world.  And let’s face it, exploration is just easier when you’re younger.  Go hunting.  Go fishing.  Work on your tennis game.  Whatever it is, when a job drains 40 hours of your life from your exhausted organic hodge podge of a human skeleton, we simply don’t have nearly as much time or energy as we’d like for things such as…I don’t know, living?

The reason to retire early is simple.  We want to have fun, not do work.

But how do we retire early?  Ah, this may not be so simple, but allow me the opportunity to get at the heart of what makes early retirement possible.

Ultimately, the ability to retire early comes down to two very simple principles:

  1. Reduce your expenses, and
  2. Maximize your savings

But to what point?  The goal: have enough money in your savings accounts that, combined with capital gains (or losses) in the market, your savings and investments will continue to grow even after you begin tapping your investments to provide for your living expenses.

Wait, withdrawing our own money to live?  Yes.  Remember, after retirement, we no longer have a nice little paycheck.  Instead, we live off of what we’ve saved.  We pay ourselves with the money that we saved over the course of our working years.

What are your expenses? Everything that you spend money on throughout the year.  This includes mortgage/rent, cars, computers, cell phones, televisions (and their associated service plans), pets, health care.  Basically, any time a dollar leaves your bank account, this is an expense.

What are your savings? For most early retirees, savings refers to their investment portfolio.  It could also include bank accounts, CDs, savings bonds, etc.

To retire early in life, the idea is to build enough wealth to sustain us for 50 or more years without earning another dollar of income.  But how do early retirees do this?

How sustainable investments are built

While it’s true that some of us simply “strike it rich” with some brilliant new business idea, or inherit millions of dollars, or were in the right place at the right time, the majority of early retirees – including my wife and I – employ a rather simple strategy to build our investments to a point where, even after we retire and stop actively contributing to our stash of cash, our savings will never run out.

The key is to save oodles of money while working with a simple thought in mind: every dollar that I save today will turn into two, or three, or four dollars that I will live off of later.

Our working years are key to success in early retirement because this is the period where wealth is truly built.  This is the magical period of growth ahead of our longer-term enjoyment of that growth without the added burden of holding a full time job.

Most [soon-to-be] early retirees believe in a few basic principles:

  1. Save considerably more than money spent
  2. Keep expenses to sensible (not minimal!) levels
  3. Stock market will provide needed growth to enable long term retirement

The essential part of growing sustainable investments is saving money.  Every dollar saved helps build a solid foundation on which growth can (and usually will) occur.  Certainly, the stock market cannot build something out of nothing – meaning, if your investment portfolio is blank, there will be no foundation to support growth.

Pro tip: It is also a good idea to build enough buffer in your savings to withstand stock market fluctuations (meaning, those periods when the market might be stagnant, or go down).  Also, while income earned through odd jobs after retirement is possible, most early retirees consider that the exception rather than the rule.  Most of us would rather not work after they retire.

How much money do we need to save?

Ultimately, this is the most important question.  How much money do we need available in our investment portfolio at the time of retirement to sustain us for the rest of our lives?

Well, answer this question: How expensive is your lifestyle?

Incoming!  Here is where the “Trinity Study” comes into the picture.  Three professors of finance at Trinity University conducted a study to determine how much money can be withdrawn (i.e.: spent) from savings during retirement without depleting the savings.  The goal was to determine a reasonable rate of withdrawal that can withstand most economic conditions.

In other words, through the ups and downs of our economy, how much money can we spend and still remain reasonably certain that our money will still be there in 30 or 40 (or more) years – adjusted for inflation?  They conducted this study by giving a hypothetical retired person (living 100% off of their investments) a set amount to spend every year and proceeded to analyze economic data in 30-year increments beginning in 1925.  This person held 50% of their money in stocks (more risky, but more reward) and the other 50% in bonds (less risky, less reward).

This study revealed that the answer is around 4%.  This means that according to this study, 4% of your investment portfolio can be withdrawn and spent every year with a high likelihood of never running out of cash – even if you’re retiring at 35 and only have a couple hundred thousand to your name, and a recession hits.  This is called your safe withdrawal rate.

A few quick points to consider about the Trinity study:

  • The study assumes no changes to lifestyle and expenditures over the course of retirement
  • The study also assumes the retiree will never earn a dime of additional income in retirement, including Social Security and/or pensions
  • Lastly, the study does not account for natural decreases in spending rates as retirees age

Luckily for us, these assumptions mean that the 4% withdrawal rate stands a better chance at supporting us through retirement because we, as human beings, make adjustments all the time.  When recessions hit, we cut back.

For example, the study found several 30-year periods where 4% did not support the retiree throughout retirement because the stock market performed poorly.  However, the study assumed that the retiree stubbornly kept spending the exact same amount of money every year and refused to cut back on anything during that period and never earned a dime of additional income through any means.

Additionally, the study ignores the decrease in spending phenomenon as we age, which indicates that we tend to spend less in retirement than we anticipate, especially as we get older.  In fact, retirees often do find that their spending post-retirement is quite a bit less than when they worked.

Nevertheless, the Study still tells us a couple of important things: If less than 4% of your investments are withdrawn each year after retirement without a single spending adjustment, historically your chances of never running out of money for the rest of your life have been pretty darn close to 100%.  If more than 4% is withdrawn, the chances of keeping your stash decreases with each additional percent withdrawn each year – again, assuming no changes to spending habits.

Again, let’s simplify.  Stock market investing is engineered to provide a return on your money over the longer term.  Put $10,000 into the market today and it might grow to $10,600 by the end of the year (6% growth).  In 10 years, however, that $10,000 might turn into $15,000 or $16,000.  Or more.

In general, the longer that money is left in the market, the greater its potential for growth.

For example, over the past 10 years my investment portfolio has enjoyed an 8.2% growth rate.  That means on average, all the money that I have in stock has grown by 8.2% every year.  Your investment company will keep these growth calculations on-hand for you.  I use Vanguard and their online tools make finding these numbers exceptionally easy.

Let’s get back to the question at hand.  How much money do I need to save?  To answer this, let’s ask this question a different way: how much money can I safely spend?

To make our math simple, assume that I have $800,000 in total investments.  Historically, my investments grow at a rate of 8.2% every year.  Thus, I probably want to withdraw something less than 8.2% so my investments continue to grow throughout retirement, but I still want enough income to support my desired lifestyle.  So, let’s settle on 6% as my safe withdrawal rate.  How much money will I get to spend every year if I withdraw 6% from my $800,000 investment portfolio?

Do the math: 800000*.06 = $48,000.  This means that I have $48,000 to spend every year and still, on average, grow my investments by an additional 2.2% every year if my growth averages remain the same.  At this rate, and assuming no significant economic instability, I could easily retire with $800,000 in investments and spend no more than $48,000 per year and enjoy reasonably good chances of never running out of money.

Keep in mind: the safe withdrawal rate does not necessarily mean that you’ll always make money, year after year.  During the Great Recession of 2008, for example, some stocks shed 30 to 40% of their value.  It happens.  But over time, your rate of withdrawal should be designed to maintain reasonable certainty that your stash will always be there to support you.  In general, the closer to 4% you are, the greater the likelihood of long term success.

If this is beginning to sound a little more complex, let’s simplify: It all comes down to your lifestyle, and we will talk more about that in our next post.

In the next part of this article series, we will discuss a couple different ways to think about early retirement and decide exactly how large of an investment portfolio you will need.  This is where the rubber meets the road.  This is the fun part!

We track our net worth using Personal Capital


40 responses to “How to master your early retirement lifestyle: Part 1”

  1. So you’re telling me if I spend less, make more, and invest the difference instead of buying things or putting it under my mattress, that I can retire? It seems so easy! Oh wait… it is. 🙂 Great introductory to FI.

  2. You’re not really even “giving it up” if you don’t miss it. I’m actually much happier as I get older with having less things to maintain and worry out. Own you stuff, don’t let your stuff own you.

    Good write up as usual, I prefer to use as conservative numbers as possible.

  3. Mrs SSC says:

    Great summary! I am amazed at how much happier I feel (and I think Mr. SSC would agree) now that we have shed our more consumeristic lifestyle. I mean, we still spend a bit of money – but we have simplified, and it really helped us realize what is important in life, and what makes us happy. Deciding to work towards financial independence is one of the best decisions we have ever made!

    Sometimes I still have trouble thinking about shedding some comfy high paying jobs because the last 35 or so years I always thought the goal of life was “make more money!” But, after two years of working toward FI, I know myself and my personal goals even better than before!

    • Steve says:

      I’m right there with you Mrs. SSC – I’ve always thought of the high paying job as what I should be striving for. And in my ways I have achieved that goal for all intents and purposes, but I quickly learned that the money very often isn’t worth the stress and unhappiness. I guess it is another example of the pitfalls that are associated with the whole “Be careful what you wish for because you just might get it” phrase.

      It’s true!

  4. Tawcan says:

    Man the idea of reaching early retirement seems so simple that everyone should be able to achieve. It comes down to living below your means and invest. Time is something that we cannot buy with money, so being able to free yourself from a regular 9-5 job means you will have more time to pursuit in something else. That’s power right there.

    • Steve says:

      Hey Tawcan – it’s true, it really is simple. It does take time, which is the most “difficult” part for most people to accept. But hard? Nah, not really. 🙂

      Thanks for reading!

  5. The things that are “easy to do” are also “easy not to do.” The sad truth is that most people choose the “easy not to do” road.

    Great post!

    • Steve says:

      It’s ironic, isn’t it? It seems so much easier to just keep doing what you’ve always done…but the problem is if you keep doing what you’ve always done, you’ll keep getting what you’ve always gotten! 🙂

  6. Gira says:

    Thank you for the FI 101! I am on board!
    Coincidentally, you made a comment about not missing the stuff you have given up, and I feel the same way about not only material things/shopping/eating in restaurants, but I also feel the same way about vegetarianism. People often ask me if I miss eating bacon (and then they proceed to tell me all the ways they enjoy bacon) but I do not miss it! And I enjoy all the wonderful healthy veggie foods that I eat and the health benefits that come with this lifestyle.

    • Steve says:

      Hi Gira – I went through a very similar vegetarian transformation. I’m not a hard-and-fast vegetarian, but I do choose the vegetarian option many times, and I can’t think of a single instance where I actually missed eating meat. I used to be a pretty big meat eater, too, but not any more.

      Thanks for reading!

  7. […] the first post in this series, we discussed the essential elements of mastering your finances.  We briefly discussed the […]

  8. John says:

    Have you read Dr Pfau’s research where he indicates that US was a special case and even developed countries like Holland would not support 4% over the same time period?

  9. Jason says:

    You are absolutely right with the formula, but a couple of other things I think are important. first, you need to clear all consumer debt at the very least. That way you can truly calculate your spending rate on “normal” lifestyle things. Second, I think that if you can, just to be safe, keep your housing costs really low or have a mortgage/place to live paid off. Both will allow you to reach FI quicker. Based upon my calculations I still have a bit for FI, but get closer everyday.

    • Steve says:

      Good call, Jason – it’s true that debt is very much a part of this whole process. Debts will significantly push out all financial independence and early retirement plans, no doubt about it. Gotta take care of that first and foremost.

      Thanks for the note!

  10. […] How to master your early retirement lifestyle (Think Save Retire) […]

  11. Roger H says:

    Assuming you stick with the plan, Firecalc gives
    a 50 chance that u go broke in less than 30 years.
    a 62 % chance that you go broke in less than 40 years.
    a 68 % chance that you go broke in less than 50 years.

    That is living on 48,000 pretax dollars and paying for the added post work expense of health insurance.

    Not odds I would feel comfortable with.

  12. This is a great series idea! Though I always think about the Trinity Test Site when people talk about the Trinity Study (it was about how atomic bombs affect retirement, right?!). 🙂 Speaking of which, our feared atomic bomb would be rising health care costs — that’s the big x factor for us, as we get older, since they are rising so astronomically quickly that even healthy people can end up paying obscene sums for routine tests. We’ll keep ourselves well insured, but no way of telling what the future holds on that front… so, another reason to pad the accounts a little!

    • Steve says:

      Hey ONL – yup, nothing wrong with padding the ol’ retirement account, that’s for sure. I agree that health care is a bit of a mystery at the moment. My wife and I will probably utilize services in Mexico any time that we can, which offers all the same services as in the U.S., but at a fraction of the cost. Believe it or not, full time RVers do this a LOT, and it works out well (especially for Dentistry). Of course, we’ll still need health insurance in the U.S., unfortunately.

  13. Simple and (of course) supported by the maths to prove it works! Excellent introduction.

  14. […] How to master your early retirement lifestyle […]

  15. Ravi Tandukar says:

    Very simplistic and ‘dreamy’ view with no regards to life’s hidden wonders – emergencies, disasters, mishaps and so forth.

    • Steve says:

      Thanks for your thoughts, Ravi. I think they are “hidden wonders” for a reason. Unfortunately, I cannot control emergencies or natural disasters. The only thing that I can do is remain flexible through it all. 🙂

  16. One of the most amazing things after I left corporate america in 2012 was Sunday evening. To NOT have to set that alarm clock (b/c I had to get in by 7am every day) was magical. It’s worth it folks!

    • Steve says:

      It’s funny that you say that because one of the things that I’m really, really looking forward to is…Sunday evening and knowing that Monday is just another day. Maybe I’ll go to a coffee shop and mooch off of their wi-fi. Then again, maybe I’ll hike. Or…nothing! It’s all my choice. 🙂

  17. Brian says:

    Hey great post, very sensible advice. One additional thing to note about the Trinity Study is that it assumes your investment costs are $0. What I *think* this really means is, your actual (non-zero) investment expenses reduce your SWR. Or looked at another way, if you assume from the Trinity Study that you can take out 4% every year, and your mutual fund expenses are on average 0.5%, you really have only 3.5% to live off of each year. You lose .5% to expenses even though they do not show up as cash flow throughout the year. I think this is an under-appreciated point that really demonstrates why mutual fund expenses are so important. If I’m right about this, then using a 4% WR means that a 1% investment expense ratio reduces your potential retirement income by 25% (1/4th of your potential retirement income goes to Wall Street every year).

    Another thing to note is that although a typical retiree spends less as they age, this rule may not apply to an early retiree until they reach 70+. An early retiree should probably assume they will spend more out-of-pocket on health care as they get closer to 65, (even with insurance — there are copays and deductibles not to mention higher premiums), than they do when they are still in their mid-30s. For purposes of calculating my “number” for ER, I assume that my wife and I will spend the same as the average American every year in out-of-pocket expenses, which is currently much higher than I spend now. You could really go nuts and assume that you will spend the out-of-pocket maximum for your plan every year, but that’s probably overkill.

    • Steve says:

      Hey Brian – there’s no question that investment costs are incredibly important if you’re living entirely off of those investments. My wife and I are planning on 3.5% to start and will adjust as appropriate to the investment climate throughout the years. Minimize costs (all costs) and you’ll stand a better shot at making it all the way through. 🙂

  18. […] How to Master Your Early Retirement Lifestyle […]

  19. […] is the category designed for financial badasses, where money is so immaterial relative to your lifestyle that you don’t give it a lot of thought. Do note, however, the “relative to your […]

  20. […] I would do it again, but only because of the techniques that I have developed to keep this business from killing me. One can make a great deal of money in information technology – money that can be used to fund an early retirement lifestyle. […]

  21. Hi Steve,

    Just read about your decision to retire by 36 years of age. Is everything going on as per the plan ?

    I personally want to retire by 32 and I do have my own plan. Let’s see if I get any success with it.

  22. Jeff says:

    8 years ago the market was at 14000 and then crashed to 7000. We are looking at a 2.5% return for 8 years, NOT 8.2%. In 08′ there was a 47% haircut to the Dow. This is the same baseless thinking that is causing the coming pension collapse. The markets are not any risk free guarantee for retirement. The boomer generation got lucky that they happend to be able to make some good gains by sheer luck of being born during the growth phase of the US economy. As the system collapses there will be no “traditional” investing models to use. The markets will shake investors out and confuse even the so called experts, because what they will fail to understand is that money is always look for a home, even if it is the least worst place to park it.

    • Steve says:

      Hi Jeff – yup, nothing is a guarantee, and stocks will go down from time to time. But, that only makes them cheaper to buy, increasing our passive income earnings potential. Even though the market’s “crash”, still seeing a return over 2% ain’t bad!

Leave a Reply