Retire Early: Is it Possible?

The Evolution of Retirement

When the Social Security Act was passed in 1935, retirement officially began at 65. However, the life expectancy at that time was only 58, so retirement wasn’t something that everyone got to experience. Over the last century, as life expectancies have increased, retirement has become synonymous with the final chapter of a person’s life.

However, in the 90’s, the book “Your Money or Your Life” introduced a radical concept. The author, Vicki Robin, proposed that by living with extreme frugality for a few years, younger people could essentially become “retired” long before old age. She claimed to have achieved financial independence in her 20’s.

The FIRE Movement

Today, the phenomenon of retiring early at a young age is known as FIRE: Financial Independence, Retire Early. It has gained significant attention, being covered by publications such as the New York Times, Market Watch, and Forbes. This has led many millennials to wonder if they too can quit their day jobs.

However, it’s important to note that FIRE is not about dropping out of society or living in a cave. Instead, those who practice FIRE work extremely hard while living below their means for years to amass enough savings to leave the workforce. Many early retirees continue to work, but only on projects they are passionate about.

The Three Fundamental Concepts of FIRE

Peter Adeney, also known as “Mr. Money Mustache,” is considered the founding father of the modern FIRE movement. Adeney achieved financial independence in his early 30’s through three fundamental concepts: frugality, investing, and the “4% Rule” of withdrawals.

Frugality

To retire early, one must save up a substantial nest egg. The simplest way to do this is by slashing your lifestyle. While financial advisors suggest a 10-15% savings rate for a normal retirement age of 65, early retirees often adopt a 50-75% savings rate or even higher. They cut back on expenses such as dining out, buying expensive cars, and indulging in luxury vacations and hobbies.

Investing

Early retirees rely on the power of the markets to boost their savings rates. By investing in general stock-market index funds, they can expect an average return of 7-10% based on historical averages. Although year-to-year returns can swing wildly, the long-term average tends to be favorable.

The “4% Rule”

The “4% Rule” is a guideline that suggests withdrawing 4% of your total savings annually in retirement. A study by Trinity University found that this withdrawal rate should allow you to never outlive your money, even in a bad economy. By multiplying your annual spending needs by 25, you can determine the amount you need to become financially independent.

Running the Numbers

Now, let’s imagine you have a household income of $85,000 but only need $35,000 per year to be happy. According to the 4% Rule, you would need $875,000 in the bank to be financially independent. If you can save $50,000 per year, which is 59% of your annual income, and achieve an average return of 7% on your investments, you could reach your goal in just 12 years.

It’s important to remember that a high income is not a requirement for early retirement. Jillian Johnsrud, for example, started working towards financial independence at age 19 with an average household income of $60,000. By the time she was 32, she had saved enough to be completely financially independent. She achieved this while raising children and paying off a significant amount of debt.

Retiring Early: More Than Just Relaxing

Contrary to popular belief, early retirement is not about lounging around and avoiding work. It’s about replacing a job you dislike with work you love. Finances are often the biggest hurdle in achieving this goal. Early retirees have the freedom to pursue their passions and interests on their own terms.

However, even if you don’t aim for early retirement, adopting the mindset of reducing your lifestyle and prioritizing a fulfilling work-life balance is something everyone should strive for. Whether you sprint towards early retirement or not, the goal should be to live a simpler, more rewarding life.

So, if you were to retire today, what would you do with your newfound freedom? Share your thoughts in the comments below!