This is something people that can’t afford to retire like to tell themselves to make them feel better about their situation.
There are some people that will never retire early even if they wanted. I truly believe that there are some people who are born into extremely bad situations. They will make good decisions with all the best intentions but may be dragged down by poor circumstances or plain bad luck. It takes all their strength just to keep their head above water. If that is you, then keep fighting the good fight but this article is probably not so much for you.
This advice is intended for everyone else that has the opportunities to become financially independent, but choose not to. By telling yourself that someone needs to win lotto to retire early makes you feel like it is outside your control doesn’t it?
The fact is, financial independence is within a lot of our control. It is our poor decisions and lifestyles that stop us from achieving financial freedom. There are countless examples of people making smart money decisions and retiring early. Guess what? They didn’t win lotto either.
How much do you need for retirement?
It is different for everyone, and it all comes down to how much you spend. A general rule of thumb tells us that we need 25 x our annual expenses. Definitely not a perfect rule, but can be used as a starting point.
Say you plan to spend $50,000 per year, you will need approximately $1.25 million. Spend $30,000 you would need just $750,000. As you can see, if your spending is less, not only can you save more quickly, but you will also need less to retire on.
By creating a large gap between our income and spending we can create a larger savings rate, which will get us to our financial independence number in no time.
Years to financial independence at different savings rates
If you can save just 30% of your income, you can retire in just 19 years if you can achieve 6% returns. This is starting from zero too, so your time to financial independence will be even less if you are starting from a positive net worth.
If you follow the much-advised path of buying a house, paying down the mortgage, buying a bigger house and paying down that mortgage, and then buying a bigger house and paying down that mortgage, and then finally saving, you have very little chance of retiring too early. That is why early retirement is such an unfathomable idea to many. We are a nation obsessed with buying houses and buying the most expensive house that our budget will allow. Saving for retirement tends to either come later or in small amounts due to our oversized commitment to paying back the mortgage.
The path of early retirees
Early retirees aren’t afraid to go against the mainstream by renting a house instead of owning. Or investing instead of paying down the mortgage. Or buying smaller houses. Or not feeling the need the upgrade constantly.
Early retirees understand the power of compound interest when starting investing early and letting time do the rest. If your focus is on paying down the house, then you won’t receive the same benefit on your savings.
Early retirees say no to rampant consumerism. Yes, they still buy nice things, but not too much. They understand that buying things do not make them happy, but it is experiences that make them happy. Freedom, leisure, relationships, travel, good health, community, physical activity and a purpose are what make us long term happy. A new I phone, car, and house can only provide short term happiness on a superficial level.
Early retirees have clear goals of what they want to achieve and when. The goals are achievable because they are well set. Because they are well set, there is no problem staying motivated to achieving them.
Early retirees aren’t afraid to invest their money in stocks. They tend not to gamble on individual or hand-picked stocks, instead relying on more reliable, low fee index funds. Small changes in fee percentage points have too big an impact on their savings.
Early retirees spend much less than they earn. Even when their incomes increase, they keep their spending at the same level. They know that keeping expenses stable after an increase in income will see an increase in their savings rate. They know how critical savings rate is to reaching financial independence.
Early retirees cut excess out of their budget, but still leave room for the most important things in their lives. Early retirees do not feel deprived from what they are missing out on. Because they have cut out all unnecessary spending, they still have everything they need in their lives. It is only the excess that has been cut.
Early retirees do not compete against other people. For a nicer house, nicer vacation, and nicer cars. They know this will dramatically decrease their savings rate and will only serve as a losing game of trying to keep up to others material lifestyles.
Early retirees do not have to have a triple figure income. As you can see on the savings table from earlier, it all comes down to savings rate. How much of your income you can save/invest.
Final Thoughts
It is through a series of calculated decisions that early retirees can achieve financial freedom. Deliberate decisions to decrease certain expenses, increase income, and invest wisely. A bunch of good small decisions, compounded over time to achieve truly tremendous results. So tremendous in fact, that people think you won lotto to get where you are.
You don’t need an extremely high income to achieve financial freedom. Yes it helps, but is not the deciding factor. I can guarantee that there are hundreds of thousands of kiwis on higher incomes than me but with a much further distance to financial independence because they are spending more. Realise that it is not outside your control and take back the control.
We just need to determine our most important values, set clear goals, and then design our lifestyle around our values and goals. Cut the excess and waste and you could be on your own path to financial freedom. You may think now that you would like to work at your current job until age 65 or 70, but things change. Personally, I value freedom over work. Wouldn’t you at least like the option to decide?
If you need help with your personal retirement planning, then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here
Comment below. Do you desire early retirement or financial freedom? How much money do you think you will need in retirement?