How to Retire Early

When it rains, it pours. Just when I find one article on "retiring early", I find a couple more. But since it's a topic I like, I'm going to run with it for now.

This first piece tells the story of two couples who retired early (one of which I covered in an earlier story. But the key part of this piece is the list of five steps for early retirement. Here is their list:

• Set spending and investment priorities now for the future
• Stay 100 percent out of debt, except for a mortgage
• Invest in stocks through index and mutual funds
• Use the compounding effect of time by investing early
• Seek a partner with the same financial values

Can I say how much I love this list? If you've been a reader for any amount of time, you know these are principles I believe in. Here are some posts I've written on each of these topics (in order) that explains my related thoughts:

• Best of Free Money Finance: My Best Financial Advice

• Paying Off a Mortgage Versus Investing

• Why I Like Index Funds, Part 3

• I Love Compounding

• MND: You Need a Frugal Spouse

Really, all of these can be summarized by the following: How to Get Rich in Three Easy Steps.

The second story lists some personal "extreme" early retirement experiences. There are some very interesting stories in this article on how people retired early. Seems like there are lots of ways to do it (and many reasons for doing so too.)

In my net worth post wrap up for the year (I'll post it sometime in mid-January), I'll talk about our plans for retirement. If all goes well, we should be able to retire in several years with a solid income to boot. Stay tuned.

Comments

[Dave]

I generally agree with your 5 steps, except I think there are more exceptions to rule #2 than mortgage debt. During the time I was in law school, interest rates were at record lows. Since graduating, I've paid off the private loans I borrowed for my tuition and cost of living, but I consolidated and still hold onto about $68,000 in partially subsidized federal Stafford loans. (Yes, law school was expensive, but for me has had a great ROI.) Those loans have a 30 year amortization at a fixed rate of 2.88%! I've been a practicing attorney for a few years now, and have enough saved to pay off my law school debt, but have absolutely no interest in doing so. Rather, I can keep $68,000 in a zero-risk online savings account, earn more than 5% interest, pay taxes on the interest earned, make my monthly law school loan payments, and still have money leftover to invest in an IRA or taxable investment account. In fact, that's exactly what I'm doing. The moral of the story is, if you are a careful and disciplined investor, there are ways beyond your mortgage to manage "good" debt.

[Edmund]

Having all debt usually applies to debt that is charging you more than the risk-free rate.

If by whatever reason you are borrowing below the risk-free rate, then keeping it could be a good idea.

[GeckoGirl]

I agree with the list but I think #5 may very well be the most important. I have many coworkers who are very knowledgeable about money and TRY to do #1-4 but are derailed by a spendthrift spouse.

[Rev]

@Dave

Have you don't the actual math on that account? If the taxes eat more than 1.22% then you aren't coming out ahead. If you are getting taxed less than 1.22% on that interest then you are ahead. Not saying for sure that you aren't just wondering if you have done the math instead of thinking 5 is bigger than 2.88.

[Dave]

Rev,

Could you explain where you are getting that 1.22% figure from? I think what you might mean is 2.22, since 2.22 + 2.88 = 5?

To be specific, I currently have an Indymacbank account which I think gives about a 5.35% interest, as well as a 12 month Countrywide CD which also provides about 5.35%. Since the indymacbank rate can change at any time, let's just assume that the total rate of interest I'm earning is about 5.25%. Given my tax bracket, about 36% of that would be eaten up in taxes, leaving a rate of 3.36%. By my calculation, since the post-tax interest rate is higher than 2.88, I'm coming out ahead. At the end of the day we're not talking about that much savings in the grand scheme of things (a few hundred dollars a year?) but every little bit helps.

[Dan]

While there are some good ideas in these articles, there's also a lot of hype.
First, the Kaderlis' call themselves retired but their website is buried in advertising and is clearly a source of income as well as a part-time job.
Second, they started with half a million dollars which, even with frugal living, is beyond most Americans' ability.

I agree with the basic premise: take control of your spending and make choices about comfort (current and future) level to reduce the amount of work in your life.