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How To Retire Early


Retiring early can seem like a dream come true.  You would have all the time you wanted to pursue your passions, enjoy your hobbies, spend time with friends and family and never have to work again.  But, before we get too excited let’s explore what it really takes to retire early, and some of the tradeoffs and risks associated with early retirement.

The formula for retiring early isn’t complicated.  It’s far from easy, but it’s not complicated.

  1. Spend a lot less than you make
  2. Save and invest the excess
  3. Retire when your investments can support you forever

Let’s look at a simplistic example.  We must make a few assumptions:

  • You can withdraw 4% of your portfolio per year
  • 5% inflation adjusted annual rate of return
  • Your starting portfolio is $0, and no other assets (including pensions and social security)
  • You invest any percentage of your income, and spend what you don’t save

Given these assumptions:

  • If you save 10% of your income and spend the other 90% it will take you about 50 years to reach retirement
  • If you save 25% of your income and spend the other 75% it will take you about 32 years to reach retirement
  • If you save 50% of your income and spend the other 50% it will take you about 17 years to reach retirement
  • If you save 75% of your income and spend the other 25% it will take you about 7-8 years to reach retirement 

This extremely simplistic example ignores a lot of important variables such as taxes, life events, (marriage, children, buying a house, changing jobs, ect.) investment volatility and many others.  But it can be a simple way to look at the math.

The 10% investment per year simulates a normal retirement age.  Assuming you start investing early in your career, you would build up enough of a nest egg, along with social security and pensions to retire in your mid 60’s.

However, if you are retiring early, you may not have access to social security, pensions, or most other forms of guaranteed income for most of our retirement.  This means you will have to cover most your retirement expense from our investments.

In our simplistic example, if you were to make $80,000 per year, after taxes, and invest half per year in investments averaging 5% return, you would reach $1,000,000 in around 17 years.  If you started investing at 20, you could be retired by 37!


Let’s think about some of the tradeoffs and risks that come with early retirement:

  • Spend less - The most obvious tradeoff is you must spend significantly less than you otherwise could. This could mean less travel, a cheaper home, less eating out, less expensive cars and other sacrifices.  In addition, when you do retire, you still must live within your means.
  • Investment Risk - To get a 5% after inflating rate of return, you will be taking some investment risk. There will be up years and down years.  It is important to have a plan on how to deal with the down years as well as the up years.
  • Health Insurance -When you are no longer employed you still need health insurance, and it can get prohibitively expensive without a subsidy.
  • Boredom - If you are not working, you still need do something with your time. Sometimes these retirement hobbies can get expensive.  Some people find enjoyment and fulfillment in work, if you retire early, it is important to find something to replace that feeling.  And once you have been out of the workforce for years, it can be hard to jump back in.

All of that said, while there are many potential drawbacks to early retirement, the only major tradeoff that occurs before you actually retire early, is spending less.  If you aren’t excessively crimping your lifestyle and enjoyment now, planning for early retirement can give you a strong head start.  If your goal is to save 50% of your income, but you only save 35%, is that really a failure?

If retiring early is something you want to learn more about, give us a call at 336-547-9999.  We are a team of CERTIFIED FINANCIAL PLANNERTM that specialize in retirement and retirement income planning. In my opinion, financial independence is a good goal to have, regardless of your planned retirement date.  Work is better when you don’t need the money.