How to Retire in Your Late 30's

Now that title got your attention, didn't it? ;-)

Here's a brief piece from Kiplinger's about a couple who retired in their late thirties. Their story:

Eighteen years ago, when Billy and Akaisha Kaderli were in their late thirties, they decided they were working more and enjoying it less. So Billy, a stockbroker, and Akaisha, a restaurant owner-turned-office manager, vowed to save enough money to retire in two years. And they did. "Every time I looked at a latte or a new pair of shoes, I decided I didn't need them," says Akaisha. "I'd say to myself: I could either buy this or be days closer to our goal." By 1991, Billy and Akaisha had accumulated about $500,000, including a $100,000 profit from the sale of their home. They put their belongings in storage and set out to see the world.

What was they key for them (both getting to retirement and living through it?) Spending less than they earn. In fact, they spent waaaaaaay less than they earned to get to retirement in the first place, and they spend a very small amount even now -- 16 years later. Specifically:

Billy and Akaisha limit their expenses to about $24,000 a year. They eat well and enjoy themselves but don't buy a lot of stuff. "We base our lives on gathering experiences rather than collecting things," says Billy.

In addition to spending less than they earn, they also get high marks from me for how they invest:

The couple invests mainly in low-cost index funds, withdrawing about 3% of the balance each year.

;-)

So let's get this straight, here are the keys to retiring early:

1. While you're working, spend dramatically less than you earn in order to rapidly fund your nest egg.
2. Once you reach the amount you need, invest it wisely so it grows at a good rate.
3. Live frugally in retirement so you're only spending a fraction of the nest egg.

This is in contrast to how people are supposed to save for a "conventional" retirement (at 65):

1. While you're working, spend less than you earn in order to fund your nest egg.
2. As you save, invest your money wisely so it grows at a good rate and starts compounding.
3. Live on 70%-100% of your pre-retirement salary in retirement -- still only spending a fraction of the nest egg.

I'll fall somewhere between the two of these -- hopefully retiring at 55 or so with fully-funded retirement savings.

Now, contrast these options with how most people are saving for retirement:

1. While you're working, spend a bit less than you earn in order to put something away.
2. Work past 65 because you can't afford to retire.
3. Eventually retire because your body gives out and live on the meager amount you've saved, Social Security, and off your kids.

Which option are you working towards?

Comments

[Richard]

I read the article and found their site. According to their FAQ's they don't have kids. Obviously this aided to their early retirement and carefree lifestyle.

How realistic is this advice for those with children? IMO, not very. Mortgage, food, and activities including children's will keep most adults working well into their golden years.

[Patrick]

I also noticed they do not have children. This does make it much easier for them to save more and spend less.

This is a good article and this couple prove to people that retirement is a matter of investing and living within your means. This obviously will not work for everyone, but for some people it can. Kudos to the Kaderli's!

[broknowrchlatr]

This can work for some but probably not for me. For one thing, they don't seem to have much of a cushon. Taking 3% annually seems to cover just minimal expenses. If the stock market took a big hit, they couldn't really cut back on spending. If a big medical expense came up down the road, how would they handle it?

I am looking at retiring around age 55 also. I suppose I could (maybe) retire at 39 but it would take a lot.
1) Continuing to save $25k - $30k each year.
2) The market returning 10.5% or more each year (and I doubt it will).
3) Being able to live on about $24k a year (in 2007 dollars) indefinately.

The advantage of time is very apparent here. If I worled 6 more years (to age 45), I could just as easily have $20k more per year to spend. Waiting to age 50 would give another $25k in annual income.

I imagine that the earliest I could possibly feel comfortable retiring is age 50. That would be when my last child finishes college. But, I think I would need a ton of co-oeration from the market to have any chance at that.

[Ciji]

While I don't disagree that their lack of children has helped them spend less, I don't think those of you with children should be so dismissive of their example. They would probably find a way to still live below their means even if they had kids. It is possible for everyone to retire early and well, IF (and that's a big IF) you are willing to bite the bullet.

Personally, I'm 32 and retiring at 40. How? In addition to spending less than I earn and investing aggressively and wisely, I'm earning more money each month and NOT spending it. I think that when most people earn more, the temptation is to spend more, too.

[FamilyFinanceBlog]

I really hope to be able to partially retire by my early to mid 40s. But how is a normal person supposed to save $400,000 in two years like they did??? It will take us quite a bit longer to save that much money. But some work I did (and posted on my blog) showed that in about 10 years I can go to part time work and still be able to afford "life." So I can be at home at all the time my kids are home from school. That sounds good to me!

[Jim Bigham]

Am I the only one thinking it's ironic that Billy's income (and retirement assets) came from being a stockbroker, where the index fund is no friend of the commissioned broker? Of course there were very few assets parked in index products back in 1991, but they did exist. Still sound advice though. Paraphrasing... Spend less than you earn and gather experiences not stuff. Brilliant idea really. Cheers!

[A Tentative Personal Finance Blog]

I'm with you buddy. I'm planning on retiring at 55 or younger. I do not want to work all of my life and I don't want to burden my children with having to take care of me.

[Lazy Man and Money]

Yep, they've got a lot of things in their favor...

1) No kids - this has been mentioned.
2) They had $400K in savings in two years - that's 100K per person, per year. That's more than twice what the average person makes in a year. This also assumes that they paid no money in expenses. Realistically they had to start out with something before the two years, but what was that number?
3) They have a website that reaches 50,000 people a day?!?! That's two and half times my traffic... in a whole month. If that kind of traffic is monetized at all (and it looks like it is) it should bring in about $35K-40K a year by my rough estimates.

Looking at all these factors, it seems just as likely to plan to be a successful major league pitcher. I don't think this (or the MLB pitcher) is a realistic blueprint for retiring early. It may help as a stretch goal or motivation for some, but I think many people would feel disillusioned by the lack of success after two years leading to two unfortunate results... 1) retiring early and not being able to afford it 2) spending all the savings in a binge to make up for two years lost of scrimping and saving and not reaching the target.

[Ciji]

A Tentative: I hear you, man. I'm having to take care of my parents financially, which I am happy to do, however, I've had to put my financial goals on hold to do so.

[My New Choice]

We fall into a similar category as many here as I am on plan to reach "retirement" at an age of 52-54 depending on how luxorious we care to be. Right now we are doing a good job of stashing money away in index funds and doing our best to live frugally while still taking some time to enjoy life now.

We don't do expensive annual vacations and don't drive flashy vehicles, although I have splurged a few years back with the purchase of a Harley but that was all paid for at the time of purchase. Our only debt is our mortgage and that allows us to save aggressively while still allowing the kids to pursue their extra-curricular interests and take a modest family trip every other year or so.

[Minimum Wage]

Yes, those of you with children should not be so dismissive of their example.

But those earning minimum wage are free to be so dismissive!

[Minimum Wage]

Also I find it amusing that so many people who extol the virtues of hard work are eager to encourage people to quit working early if they can!

[S. B.]

Without being "dismissive", I would point out that the expenses associated with children (or any other incremental expenses, for that matter) may affect one's savings more dramatically than you might think at first blush.

Suppose a couple are good savers and save 30% of their income. That means they spend 70% of it. If they have two kids and their family size doubles, many of their expenses will nearly double -- e.g. food, clothing, medical insurance, perhaps housing, even things like water consumption, etc. Plus there will be entirely new expenses -- e.g. diapers, school supplies, etc. If they are lucky, maybe they can keep the overall rise to 1.5x the original. This means they now spend basically all of their income (105%!), as income doesn't rise just because you have children -- but let's also say they save 5% of gross on taxes so it brings it down to 100% of income. So savings goes from 30% down to zero.

There is a leverage effect with savings relative to incremental expenses, both positive and negative. If you are saving 30% of your income (i.e. spending 70% of it), then a 10% rise in expenses results in almost a 25% reduction in savings. (Spending goes from 70% to 77% of income; savings goes from 30% of income down to 23%.) A 20% rise in expenses cuts savings almost in half. And the less you were saving to begin with, the higher the leverage.

So if you were only saving 10% to begin with, and your expenses rise 10%? Well, you get the idea...

[Dave]

They are still earning revenues from the sale of their book.

I agree with folks who have trouble saving because of children and/or taking care of elderly parents,

[Akaisha Kaderli]

Richard:
How realistic is this advice for those with children?

Richard, we know lots of couples who have retired with children. They simply teach them the values of Living Below Their Means, and fiscal responsibility. The ticket is to get the whole family on board.

broknowrchlatr
If the stock market took a big hit, they couldn't really cut back on spending. If a big medical expense came up down the road, how would they handle it?

We retired in 1991 at the age of 38. We survived the 2nd worst bear market our country has ever been through (2000-2002) and continued our lifestyle.

FamilyFinanceBlog
But how is a normal person supposed to save $400,000 in two years like they did???

We didn't save $400,000 in two years. We saved and invested as a lifestyle for 13 years.

Jim Bigham
Am I the only one thinking it's ironic that Billy's income (and retirement assets) came from being a stockbroker, where the index fund is no friend of the commissioned broker?

This is one of the reasons Billy quit being a stockbroker, as he felt he couldn't do his clients justice. No load mutual funds were just coming out at the time. We had 2 businesses running also. Billy was not the only wage earner!

LazyMan&Money
I don't think this (or the MLB pitcher) is a realistic blueprint for retiring early.

We are in no way MLB pitchers. We did not come from wealth, did not hit it big. Everything we have we took the hard way to earn. Many hours of work, lots of saving.

MinimumWage
Also I find it amusing that so many people who extol the virtues of hard work are eager to encourage people to quit working early if they can!

We never considered work to be a 4 letter word. We still log in many hours of volunteer time. We have no investment in whether or not anyone retires early. It's entirely up to you. We simply want to let people know it can be done!
Be well,
Akaisha Kaderli