Early Retirement: Is It the Solution?

Alrighty then, let’s get back down to some brass tacks, shall we? I originally started this website in a heartfelt effort to get folks thinking about their finances. And what was the bait? It was our story of a potential early retirement. So how is our plan coming along?

Lordy, Lordy, nothing gets people more riled than mentioning early retirement, especially regarding someone in their mid-30s. I think folks are generally okay with financial independence as a concept, but EARLY RETIREMENT IS SHORT-SIGHTED AND IRRESPONSIBLE. Some friends, family, and other less subtle internet enemies are quick to point out all that can go wrong.

Some issues are obvious: we will run out of money, we will be bored, or we won’t be contributing members of society.

Other issues arise with further reflection: we will be bankrupted by unforeseen healthcare expenses without an employer-sponsored plan, the market won’t provide as it has in the past, or…you can choose your own adventure and finish this sentence.

Fair points dear critic, and I’ll probably write a post for all of them at some point. In the meantime, I’ll say this: we’re not going to be guinea pigs of the early retirement laboratory test. The math and historical market patterns indicate that our plan of strict early retirement would be successful, but why test it in the purest form?

A Little Refresher on Early Retirement

Let’s back up.

For those of you new here, financial independence has multiple definitions and is mutually exclusive from early retirement. The most commonly held definition is the ability to create a liquid net worth of at least 25x one’s annual spending. These funds are mostly held in long-term appreciating equities (stocks).

This is not achieved through penny-pinching, executive-level salaries, or receiving massive windfalls of money. The premise is to simply save at least half of your income and invest those savings.

For more on our extremely simple and lazy investing strategy, I encourage you to check out part 1 and part 2.

Using the method described above, let’s assume your family spends $40,000 per year and can generate a net worth of $1,000,000 through low-cost and broad-based index funds. The compounding effects of capital growth will provide, as they say, a perpetual money machine, allowing you to live off your investments for the remainder of your days if you so choose.

And you can get there much faster than you think.

In essence, so long as you withdraw 4% or less of your total savings per year, you will likely never run out of money. The 4% Rule is considered by most to be a safe strategy for a 30-year retirement horizon.

However, for a retirement horizon greater than 30 years, you will want a safe withdrawal rate of likely 3.5% or lower. Or a way to make a small sum of money. Or both.

The 4% Rule is potentially risky for retirement horizons of 60 years.

Pulling the Early Retirement Trigger Too Soon

Yes, I do believe that a subset of folks in this movement are rushing to early retirement, framing their finances around an unsustainable level of frugality. Perhaps they are retiring on a frugal lifestyle appropriate for now, but might regret self-imposed spending limitations later in life.

For example, renting seemed more than adequate at age 28, but I love owning a home now at age 34. Is there space in your plan if your tastes change?

We are building our finances to account for now, with some cushion for if/when we get all soft and weak and want to spend more money.

But honestly, is it really a big deal if folks are cutting it a little close?

Anyone living a life in pursuit of financial independence is changing the narrative on financial well-being. At a minimum, these people are amassing decades of living expenses. Contrast that with the American spending habits of almost any time in the past, and I’d say this movement is on the right track.

I’d much rather hear about someone retiring aggressively in their 30’s and figuring life out as they go, as opposed to another story of a family riddled with debt and still shopping.

Are folks in pursuit of early retirement really any worse off than those who stay in their jobs and save virtually nothing or dig deeper into debt?

We Probably Won’t “Retire Early”

My goal is to live my best life. And as I’ve mentioned before, I want to continue doing good and challenging work, which I believe is a core element of happiness. Yes I do.

Does that mean I want to keep working in the tail of the corporate ox indefinitely, driven by the ever-persistent whip of maximizing quarterly shareholder value? Nope.

I want to be the head of the chicken.

But if we’re financially independent, the only threshold of success in a new work venture is not losing money. It’s a beautiful thing.

Alright, alright, I’ll get on with some of our statistics.

Hurry Up and Give Me the Numbers

So, there’s a few way to cut this. The first important item to mention is that we own a home with a low remaining mortgage, so our spending now does not equal our near-future spending.

Current Spending & Current Savings

With our current spending and net worth profile as of July 15th, we are 81% of the way to financial independence. If we were to retire today, our current safe withdrawal rate would be about 5% (see chart below). And that does not include the equity (value minus mortgage balance) we’ve built in our home, worth about $400,000 at this point. If you include home equity, we’re financially independent! Yay! But we don’t, so we’re not.

Our Future (Post-Mortgage) Spending

We plan to have our mortgage paid off by spring of 2020, which will lower our total spending by about 30%. If our mortgage was gone today, we’re essentially financially independent, with a safe withdrawal rate of 3.6%. But it’s not, so we’re not.

Creating Space: Our Plan for Financial Independence

By the time we either sell our home or pay down the mortgage in early 2020, we conservatively project a safe withdrawal rate of 3.25%. This feels like a very comfortable position to lay claim on the next phase of our lives and worry very little about money.

We’ve also created a budget that allows for spending flexibility, allowing a 40% cut if necessary in lean times without significantly impacting quality of life (minimum spending model in the chart below).

This “bare-bones” budget is not rice, beans, and coupon catalogues, but instead calls for a reduction in big-ticket travel spending and other luxuries. This concept is explained in our post on five ways to recession-proof your life.

We think it’s really important to have a bare-bones budget that doesn’t require moving to a sweaty jungle outpost in Southeast Asia. But that’s an option too.

What’s Our Next Plan? Early Retirement?

It’s a good question. We could sell our home today in the expensive city and move to almost anywhere else with a lower cost of living. We would pay 100% cash for a new home, lock in the differential equity on our current home, and we would be financially independent. So why don’t we just throw in the towel on our jobs and do the damn thing?

The short answer is that we want to be really solid. We’re planners to the max, and we are constantly evaluating every option. And sometimes life in the expensive city, seated at my desk in the ox ass, is pretty good. Do recall, I’m a “grass is always greener on the other side” kind of guy.

However, as I write this, our number one interest involves an out-of-state relocation. We want to de-clutter and unwind from a decade of urban living, and get back to the land of open skies, starry nights, and a hell of a lot less people.

But we need to make sure the details are lined out first. What are the plans for location-independent supplemental income, healthcare, tax structures, housing markets, and buttery sick rock climbing (not necessarily in that order)?

Until Next Time

Moving from financial ambivalence to financial mastery is technically easy, but can require a wholesale shift in mentality.

But once you make that shift, it’s a feeling of deep satisfaction. I cordially invite you to feel that tickling feeling. Financial security is Gold Bond powder for the mind.

For those of you already on the path, do you include home equity in your net worth calculations? Would you put in a notice with these safe withdrawal rates?

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Remember, the best laid plans mean nothing if you can’t take action today. Have questions? Need some feedback? Hit us up on the Contact page.

Thanks guys, see you next week.