Saving With a Purpose: Early Retirement

This is the third post in a series called Saving With Purpose: Living a More Intentional Financial Life. In this series, I plan to highlight a number of specific savings goals my family has identified we would like to achieve over the next few decades.

Any post about saving for early retirement should first define the author’s meaning of “early” and “retirement.” Combined, these words are typically understood to mean walking away from paid employment earlier than the traditional retirement age. I guess I agree with that broad definition, but I’d like to take the definition a little further before getting into the actual numbers.

What Does Early Retirement Mean To Me?

The older I get, the more my definition of retirement changes. When I was young, I envisioned retirement as a time of leisure, where older people traveled to exotic locations, took cruises, and when they weren’t traveling, played golf, went fishing, and generally enjoyed a life of leisure.

Of course, now that I’m older, I recognize this is not how the average retiree’s years are spent. Unfortunately, thanks to the Great Recession of 2008, many soon-to-be retirees saw half of their retirement saving disappear. This has lead many retirees to hang on to their jobs, or return to other types of jobs (often times lower paying) than the careers they had for most of their adult lives. This is a sad reality for many, and a cautionary tale for the rest of us.

For me, early retirement is all about options. Living without the worry of needing to work a traditional 8-5 job frees up many opportunities for more worthwhile ways to spend time. For us, that means doing some travel and doing more things with our time to make a difference in the lives of others, particularly young people. We married young, had kids young, and skipped over the period in our lives where we would be able to do these types of things, so we’d like to recapture a bit of that after the corporate grind is completed.

Saving For Each Phase of Retirement

Uncle Sam has dictated retirement for many people to mean age 59 1/2 (the age you can tap most retirement accounts without penalty), or 62 (if you plan on receiving early benefits from social security). Personally, I use neither of these age milestones as a guide, and plan to save in such a manner that I can experience freedom from paid, full-time employment long before reaching 59 1/2.

To identify the types of savings we’ll need to have in place to meet our own milestones, it’s best to work backwards from the next upcoming event. In this case, let’s start with early retirement at 47 years-old, some 15 years away.

Phase I: Early Retirement on Taxable (and Tax Free) Savings

Over the next 15 years my wife and I plan to maximize both our Roth IRA accounts, and my 401(k) through my employer. Using the current maximum contribution levels for Roth IRAs, this would provide $150,000 in contributions. Remember, Roth IRA contributions may be withdrawn at any time, without tax or penalty. Assuming we plan to live on about $50,000 a year, this would only last 3 years, barely getting us to 50 years-old.

A better plan would be to use taxable savings to bridge the 12-year gap between 47 and 59 1/2 (the age we can begin to withdraw from retirement accounts).  We’d only need about $600,000 in savings outside of retirement accounts to pull this off. Only. I laughed at myself after writing that.

Pretty tough to carve out $600k in savings in the next 15 years (even earning a modest 6.5%) while maxing out retirement accounts, funding college savings, and meeting our previously mentioned short-to-medium range savings goals. Not like we have an extra $25,000 a year sitting around to invest.

So the numbers appear unattainable, but the exercise was still worthwhile. It provides us with some real feedback for the variables we set, and we can now tweak those inputs to determine the impact. For instance, if we delayed early retirement just three years to age 50, we’d have another $30,000 in Roth IRA contributions. Our taxable nest egg required to fund the gap from 50 to 59 1/2 would drop to $500,000, and since we’d have a little longer to save, we would only have to divert $1,200 a month to taxable savings. The $1,200 a month figure sounds eerily similar to an average mortgage payment, doesn’t it?

When you break the numbers down this way, two things become apparent. First, early retirement is not just a pipe dream, if you are a disciplined saver and avoid debt. Second, I sure wish I had started this plan 10 years ago!

Up next – Retirement Savings Phase II: Drawing from the Nest Egg

Comments

  1. Thanks for sharing. As always a wealth of beneficial information. This is the same stuff that my grandma taught me. Right now she is 85 years old. She is not wealthy, but she still financially supports her grown “children” and some grandchildren. I was one of the few who took her wise advice on saving and investing. I dont think I will retire though. I really enjoy what I do.

  2. First, early retirement is not just a pipe dream, if you are a disciplined saver and avoid debt.

    I often say that the conventional saving and investing “experts” have failed us. This is one of the reasons why. If we think this through for just a minute, we can see that the idea that early retirement is a pipe dream for most is absurd.

    The idea of retiring at age 65 became popular in the 1930s, with the enactment of Social Security. The United States has enjoyed many decades of huge productivity gains in the time since. Workers obtain a share of those gains in the form of increased earning power. That means that retirement far before age 65 MUST be a realistic possibility for most of us.

    The tricky part is that early retirement is not automatic. We must CHOOSE it. We all have a choice to retire early or to enjoy more of the benefits of goods and services than our parents and grandparents enjoyed. There’s nothing wrong with choosing goods and services (spending) over early retirement (saving). The point here is that this is a CHOICE. We DECIDE when we will achieve financial freedom when we write out budgets (I prefer to call them Life Plans).

    Early retirement is available to just about every middle-class worker today. I have known people making minimum way who pulled it off. It’s not required. All of the benefits supplied through the goods and services available in this Consumer Wonderland of ours also offer a great deal of appeal. The point is just that we should stop thinking that early retirement is for the rich or for those with amazing willpower or something. It is for everyone who CHOOSES it. We all have lots of extra productivity to spend and we just need to decide how to make use of it.

    Rob

  3. I often hear from people who “retire early” and when I congratulate them, many tell me with a worried tone that it’s not by choice.

    I think everyone should plan on it even if you think you’ll work to 65 or later. Illness, layoffs, caring for a family member can all be reasons to retire early. No one plans on them but they happen to alot of people.

  4. Thanks for the great post, it’s always inspiring to hear from others planning early retirement!

    At 25, we’re hoping to retire between 45 or 50. I’ve always known that Roth contributions can be withdrawn at any time, but this post clarifies just HOW MUCH we’ll need to contribute between now and then. A bit eye-opening!

    Lookining forward to your Phase II post. Do you plan to utilize a Traditional IRA at some point? My plan was to hold the Traditional IRA until 59 1/2, and then start withdrawing up to the “tax free” amount every year. For example, in 2009 every couple gets about $11,000 in deductions and $7,000 for two personal exemptions. That’s $18,000 we can pull from the Trad. IRA without paying taxes – and it’s tax deductable now.

  5. FD,
    Just one note. Your goals assume that you will earn no income at all after you take your “Early retirement”.
    Is that realistic? This blog, for instance, or it’s future reincarnation (whatever it may be) is certain to provide some income. Either through it’s continued operation with outsourced writing or through it’s sale. It creates income, therefore, it has value.

  6. The goal of sustainable retirement is to generating enough yearly income to: 1) meet all living expenses 2) continue investing enough to at least match inflation and 3) allow for giving (a personal goal).
    I could live as I am now with $50K. I see two ways you could achieve your goal in the time frame you originally suggested. The first way is cut out all payments in your life (including the dreaded mortgage). To me a house is a place I keep my stuff. I like to be out of the house and in the world. By the time my kids are out of high school, my house will be paid off and I’m thinking seriously about downsizing and using the remainder of the sale proceeds to invest in more income property (I already own several). This decreases my yearly expenses by about $12K, I could probably live on $38K. And in ‘retirement’ I’m pretty sure my wife and I can share a single car easily. Less maintenance, less insurance, less gasoline on the commute every day. So maybe I only need about $35K. The only major expense I see that we don’t have now that we would have then is higher medical insurance premiums. This can be partially offset by living a healthy lifestyle, and there are options for HSAs with higher deductibles to make healthcare more manageable. This is one area I haven’t completely workout out yet, so any suggestions are appreciated.
    The second way is to move to a lower cost area of living either in the States or abroad. Check out http://www.retirelearlylifestyle.com to learn more about how a couple retired in their late 30s. Granted they have no kids and he was a successful restaurateur and stockbroker for awhile, so they could pile up the cash quickly. Still, they live a life of wonderful experiences on a modest bankroll.
    There’s no way to predict how all of the future will turn out, but your goals are not unreasonable at all. Keeping tinkering with them and you may surprise yourself at how early you can exit the corporate grind.

  7. @Tyler: You make a good point. My estimates were sort of “worst case” all the way around. I don’t plan to ever completely stop looking for ways to generate an income. And yes, I’d certainly hope Frugal Dad is still around in one form or another.

    @Sid: I’m equally unsure about health insurance options, but I’m eager to learn more. I’ll try to cover that topic in a follow-up post after doing a bit of homework.

    @Stacey: Interesting strategy with the Traditional IRA. I had not planned to use them, but you have picqued my curiosity about how they may fit in our overall plan. I like the idea of getting a tax deduction now and an exemption on a portion of that money down the line.

  8. My husband and I are 26 and 27 respectively and plan to retire at 52. That’s the earliest my husband can receive his full pension…hence it being our target date.

    We cannot afford to max out my 401k, but we do contribute the maximum that will be matched (6%) and have a Roth IRA we max out every year. We are planning to open another Roth IRA this year with the money we’ve been funneling into graduate school. That gives us about 25 more years to build up a pension, a 401k, and two Roth IRA’s for retirement.

    Our Scottrade account and savings accounts will need to be large enough to bridge the gap between 52 and “normal” retirement age.

    Early retirement is our main reason for saving. We may still work part-time jobs, but we want the financial freedom to be able to choose. Knowing that you have to go to work in order to fund your life is very different than choosing to go to work simply because you enjoy it.

    Great post!

  9. Thanks for the reply FD.
    I understand your worst case scenario idea. I agree that early retirement isn’t about actually “retiring” but just about freedom. Given that as your goal… you could still earn money and be “free” provided that your income doesn’t depend on you trading hours for dollars at a specific workplace.

  10. Hm, I’ve always thought of traditional retirement as t
    what you described in the first paragraph — traveling, fishing, relaxing — because those are the kinds of things the people I know who are retired actually do. So I found the first part if this post surprising.

    It’s also a good reminder to clearly define retirement goals and what “retirement” means for us as individuals. For me I hope it will mean freedom to travel while working/volunteering/puttering — since those are the things I enjoy.

    Funding it is another matter. My biggest concern by far is health insurance.

    I think you might be able to reach your goal easier than you think based on the numbers you mentioned. Also, won’t your expenses likely be less in retirement?

  11. Jackie’s comment made me think of my uncle. He was a blend of her and frugal dad’s retirement vision.

    He did fish ALOT for pleasure, but also ate them. Being an immigrant, most of his leisure activities also involved some practical purpose as well. (Wild Berry picking, mushrooming, canning, gardening, hunting, fishing, driving around looking for dead wood, etc..)

    I think everyone should think about what hobby they can start now that they can kick into high gear when they retire.

    You know what they say about old dogs and new tricks. I doubt that if one doesn’t carve out some time in their life now, it won’t happen in retirement either. Anything that is a priority can and is scheduled in. If you think you’ll start volunteering when you stop working but have never done it in the 65 years before, then I doubt it will happen.

    My friends’ retired lives aren’t that much different than their working lives. A slob still won’t have emough time to clean their house.

    I guess after all that writing I realize that retirement isn’t a date or specific bank balance but a journey. It’s the person we are evolving to be.

  12. My view of early retirement has changed for two reasons. I have gotten older / wiser and the financial crisis. My savings is not what it used to be. However, we need to make the best of what we have and seize the opportunities. I feel that Roth IRA conversion may work even for those closer to retirement. It may make sense. Keep our heads high and stick to a plan.

  13. A few years back I came across the idea of working once and then getting paid for the rest of my life.

    Now I enjoy the lifelong income that keeps growing.

  14. I retired a three years ago and my husband retired three years ago at the grand age of 47 and 50 respectively.
    We are amazed at the number the retired with us that have went back to work at lower paying jobs because they are “bored.” I do believe we make it because our house is paid off and we have no big payments. Although we don’t go on cruises (we never did)-we live more of a simple life and always have. Oh we love babysitting our grandchild and fishing, and gardening. Things we might not have time for otherwise.

  15. I’m just starting to feel myself getting a hold on things and if I can just increase my income a little this year then early retirement will definitely be something I start aiming towards. Thanks for the, as always, informative article.

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