The 3 Steps to Early Retirement Everyone Should Know

“Time hurries on. And the leaves that are green turn to brown”  – Simon and Garfunkel

Life is short.  When can you relax and finally enjoy the fruits of your hard work? Most people achieve early retirement in their 50s (only 9 percent are retired by age 50), but you can’t start too soon to make sure you’ll be have the financial resources when you’re ready to retire.  The three important steps to early retirement are:  determining your spending level, a sound investment strategy, and deciding on your retirement age.


There are a few factors that determine when you can retire.  First, and foremost is your spending.   Your spending affects both how much you can save during your accumulation years and how much money you need to maintain your lifestyle during your retirement years.

Let’s look at some numbers.  Suppose you make $100,000 per year and save $30,000 (this example would work for any salary level for someone who saves 30% of his or her income).  After 30 years at a real return (meaning return after inflation) of 6%, you would have nearly $2.4 million saved for retirement.  If you want to continue to live on $70,000 (your $100,000 salary minus the $30,000 you save), the typical early retiree will need 30x that amount or $2.1 million in this case.  In other words, you’re set!

Now let’s look at someone who only saves $10,000 or 10% per year.  After 30 years the retirement account has only grown to $664,000.  Not only that, but because the retiree’s expenses to maintain this lifestyle after retirement are $90,000, he or she need $2.7 million in the retirement account.  This is what I mean when I say that having a lifestyle that is too extravagant affects both the amount you can save and the amount you need to retire.  While this is a simplified example that doesn’t take into account potential pay raises, spending going up or down in retirement, social security or tax rates, it gives you my general point.


The next important factor is how you invest your money.  Let’s start with portfolio mix.  The 6% real return I used above is based on the average return for a 60% stock/40% bond mix since 1970.   You could do even better than this by investing more aggressively in your earlier years and then ratcheting down risk as you get closer to retirement– the average return for a 90% stock/10% bond portfolio has been 7.2%.  But at the other extreme, is the person who doesn’t make the time or is afraid to invest his money.  A portfolio with 10% stock/90% money market has only returned 2.6%.   Let’s suppose you were a great saver and put away $30,000 per year but then invested it too cautiously.  At the end of the 30 years instead of $2.4 million in retirement savings you only have $1.3 million!  You’ve done everything right by living modestly all these years, but now you’ll likely need to work until full retirement age anyway!

The chart below illustrates the scenarios of 30% savings invested well, 30% savings invested poorly (too cautiously), and 10% savings invested well.

Beyond your portfolio mix, keeping your expenses down can have a big impact.  One pitfall is investing in high-fee funds.  Some actively managed funds may have annual fees from 0.5% to 1% vs. less than 0.1% for a passively managed index fund.  The claim is that the manager will outperform the index, but empirically most under-perform it.   Your favored money manager may have done better last year due to a focus on certain market sectors but as they say, past performance is not guarantee of the future.  If you want to invest with a managed fund, I suggest only using a portion of your money.  Remember the 3.3% better return of the 60% stock/40% bond fund vs. the 10% stock/90% money market?  If you’re not careful the extra fees from managed funds could wipe out a quarter of the 3.3% even though your money is invested correctly.

Retirement Age

The last factor is when you want to retire.  An often stated rule of thumb is that you can withdraw 4% of your starting portfolio each year of retirement, adjusting the amount you withdraw for inflation each year.  But this is based on a retirement age of 65.  If you plan to retire in your 50s your after tax spending will be about 3.5% See my blog on your Magic Number.

Do you dream of retiring now?  My blog isn’t aimed at people who plan to retire before 50, but there are many great blogs on what is called the “FIRE movement” (financial independence, retire early), which was recently profiled in the New York Times  FIRE movement . The gyst of it is:  1. Massive savings, e.g. 70% of of your income during your working years, 2. Retire to a low-cost city and keep your expenses low, and 3. A side-gig while retired to bring in some income.  The sustainable after-tax withdrawal rate at this age is probably less than 3% but some will decide to withdraw more– at that young age you can take some risk and in the worst case return to the workforce at some point.

In the end, the later you retire the more you will accumulate and the higher withdrawal rate you can take from your savings.  It’s really a matter of what lifestyle you’re willing to live, how much you can save, and how well you invest your money.

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