Congratulations! You just graduated from college and you have started your first job. You are living the dream and you wake up each morning, refreshed and ready to go to work. You hop in the car and head to Starbucks to grab some caffeine on the way to the office (or for those commuting via bus, train, or other, you grabbed your Starbucks at the nearest corner) and you can't wait to get to work. And you look forward to it each and every day.
Wait.
What?
Yes, that's right, each and every day (well, weekdays at least). If you are just starting out in the work force and are in your mid 20s, you can estimate that you will have a similar routine for the next 35 - 40 years. And you read that correct – you have two times as long to go before retirement than you have already spent on earth. The average retirement age in the United States is currently just shy of age 60, though the most common age is 62.
Now that's a lot to take in. So, what if that didn't need to be the case? Even if you absolutely love your job and you know that work is about more than money, what if there was a way to retire early and take advantage of those golden years when they are not yet quite so golden (and could be better than golden)?
The science in determining your path to early retirement is actually shockingly simple, or dreadfully uncomplicated, depending on the way you look at it. You just need to have two key bits of information:
- How much take-home pay you have each year – this is not your gross earnings. For this calculation, you need to understand your net pay after your taxes have been paid and benefits have been deducted.
- How much money you need to live – pretty self-explanatory, but this is what you need for food, shelter, clothing, etc.
Quite frankly, your ability to retire early is all tied to your savings rate as a percentage of your net income. If you are living paycheck to paycheck and spending 100% (or more) of your net income, you will not be able to retire early. But, if you are budgeting well and abiding by the 50/20/30 method (50% is applied towards essential costs such as your mortgage, car(s), utilities, and groceries, 20% is then allocated towards your financial goals such as your emergency savings, retirement, and future goals, and the remaining 30% is put towards lifestyle expenses such as eating out, going to concerts and the movies, and taking vacations), you may be taking the right steps to retiring well before age 62 (the minimum age to collect Social Security benefits in the United States).
Now, if you are doing better than the 50/20/30 method and you are spending 0% of your income and can maintain this until retirement, you can likely retire right now. But the likelihood is that mom and dad won't want you living in their basement and stealing food out of their fridge at midnight forever, so the reality is that your more probable retirement age will be somewhere in the middle.
Money you invest begins to acrue money on its own. Over time, those savings just faster and faster. So, if you can increase that 20% from the afore-mentioned rule to 30% or 40% and lower the expenses on the other sides of the equation, you'll get there even faster. As soon as your income from this early-retirement account is substantial enough that it will cover your day to day living expenses (keep in mind inflation in the years to come), you'll be ready to retire.
In order to make this work, you'll need to exercise extreme discipline. Cutting your spending can be far more impactful than increasing your income because whenever you lower your expenses, you increase the amount of money that you have each month to put into savings. And if you are careful, you can permanently decrease the funds you'll need each month to live.
Let's look at an example to better illustrate how fast the money can add up. Remember that caffeine boost at Starbucks each morning? Let's assume that your Grande Latte costs $4.25, and you go to Starbucks 22 times per month (the average number of working days per month). We'll even subtract 20 days from the year to account for vacation, but then let's just add them back in because who says you won't want Starbucks on vacation? So, at 22 times per month, that Starbucks Grande Latte costs you an estimated $1,122 per year. Yes, you read that right (we did the math, twice). If you were to invest in a Keurig coffee maker for say, $80, and then you make yourself a cup of K-cup coffee each day (each K-cup averages $0.75), then you will still save $844 per year. And if you want to retire at age 45 and you are 25 now, just in 20 years, not including interest, you'll have saved almost $16,880! And that is just for changing your coffee habit.
Consider the savings if you worked from home and didn't need to bus or drive your car to work. Or, consider starting a vegetable garden to grow your own produce (not only will it save you money, it'll be better for your health too). There are so many ways to cut down on extraneous expenses.
If you want the magic formula, change that 50/20/30 method to 30/50/20 or 30/60/10 and see what happens. You'll be retiring before you know it! But a word (or paragraph) of caution here. Make sure that even if you are changing your savings method, that you still leverage some sort of credit. Things can change in life and even the best-laid plans can be unexpectedly compromised. By maintaining a strong credit rating (mid-700s or above) you'll ensure you have additional flexibility in the event you need it.
