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How To Retire In Your 30s ?
Work in a cubicle from nine to five during the best years of your life with only 14 days of vacation a year ?
When you are 67 you can retire and finally start living life maybe even play golf every day ?
Sounds like terrible idea sometimes you have a question societal norm that we just take for granted. That is what this article is all about we all want to have more freedom and more flexibility in our lives. Now not 40 years down the road, so as a result I think the idea of traditional retirement where you work for several decades to save and you enjoy all your money at the end. This whole notion is becoming less and less relevant these days. In fact, according to census data, 66% of Millennials have nothing saved for retirement. Even if you have plenty of money left to save as millennial after you make all those student loan payments and all that, I do not think anyone gets excited by the word ‘Retirement’. I preach all day about investing but even I am not excited about retirement. I do not want to wait till I am 67, I do not want to play golf all day and I want to travel and pursue my passions now not later.
Enter the F.I.R.E Movement, FIRE which stands for Financial Independence Retire Early is a growing movement of people who are going against the norms to aggressively save money and retire decades earlier than most other people. When I first started reading about FIRE, it really resonated because deep down I always knew I wanted to achieve financial independence well before the age of 67. But I did not really know that this was a thing, and that other people were doing it. The idea of FIRE was very exciting to me. However, for the last six years all I could think about was just paying off my student loans, I was not even thinking about retirement let alone early retirement. Now I am happy to say I literally just finished paying off the last of my student loans earlier this year. So now that I am finally debt free, I have been thinking a lot about what big financial goals I want to pursue. Next retiring early is one of them, so this article I want to explain step by step how to run the number for retiring early. I want to talk about some hacks to get there faster and of course share with you my plan to retire in my 30s.
Part 1: Running the Numbers for Early Retirement
There are 3 steps process in running the number for early retirement.
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Step 1 - Define your number
What is the amount of money you need to have invested such that you can live off your investments for the rest of your life without running out of moneys?
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Step 2 - Give yourself a timeframe
Decide how many years are you going to give yourself to hit that number. Since this is about retiring early, it is probably to be a short timeline like you are giving yourself 10 years or maybe even 5 years.
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Step 3 - Reverse engineer
How much you need to contribute every month to hit your number within that time frame. Let us walk through an actual example of how to do this financial independence means that you have enough money invested to cover your annual living expenses. in other words, the income from the investment whether it comes from dividend income or capital gains income. All that is enough to cover your annual expenses.
To define your big number, it all starts with first knowing what your living expenses are. That is where it all starts once you know what you need to live on every year say 40 thousand dollars you can then apply what is called the 4% rule. The 4% rule says that if you have a retirement nest egg of x amount, the safe amount it withdrawn from every year is 4 %. If you withdraw more than 4% every year, there is a chance that your nest egg will run out of money during your retirement. If you withdraw less than that, your money is pretty much guaranteed to last forever and you will even be able to pass it on to your children. The 4% safe withdrawal rate is based on an extensive study called the Trinity Study which was done by professors at Trinity University in 1995. In the study, they did a bunch of fancy advanced financial modelling on historical stock and bond market returns since 1926. They did this to figure out what is the optimal withdrawal rate in retirement, what is that rate such that the growth of the stock market and your portfolio is going to be enough to sustain the withdrawals in such a way that you don’t have too much money left but you don’t have any like zero money left and that optimal rate they found was 4%.
To be more specific, the studies discovered that on a portfolio of 50% stocks and 50% bonds, withdrawing only 4% a year while also adjusting that amount for inflation each year. This would give you a 95% chance of your money lasting at least 30 years. It would also give you a 100% chance of your money lasting at least 25 years. To say it another way if you want your nest egg to be guaranteed to last at least 25 years, plan on only withdrawing 4% from it every year in retirement. For example, if your living expenses are 40 thousand dollars a year then according to the 4% rule you would need 1 million dollars to retire. Why? Because if you withdraw 4% on a 1 million dollars nest egg every year, that will give you a 40 thousand dollar a year annual retirement income. If you are not good with calculating percentages or it is not very intuitive to you a quick hack is to just multiply your annual living expenses by 25. That will also give you 1 million dollars and that is just another way to calculate what your number needs to be.
The 4% rule is super simple but very powerful and a lot of successful FIRE people follow it. However, it does come with one caveat which assumes a 30-year retirement. If you retire early your retirement is going to last more like 40, 50 or even 60 years. If you really want to be bulletproof and certain, go for a 3-withdrawal rate. As for me, a 4-withdrawal rate is already conservative according to the study. I am cool with 4% but if you really want to be sure you can also consider adjusting that down. Assuming you are going with a 4% withdrawal rate 1 million dollars is your number based on 40 thousand dollars a year in living expenses.
The next step is to decide how many years you are giving yourself to hit that number. Let say you are giving yourself 10 years which is obviously extremely aggressive. Now this will be a function of how soon you want to retire but also what is actually achievable and realistic for you then on Step 3 and of course you may have to go back to Step 2 and just kind of fine tune its both of them are a moving target. But Step 3 is to figure out how much you need to invest every month of the year to get your big number in the timeframe that you have given yourself. In this example, how much do you need to invest every month to reach one million dollars in ten years. There is a lot of good online calculators for this which is the one on bankrate.com (https://www.calculator.net/investment). If you want to try it out for yourself, your first thing to write is your investment goal which is 1 million dollars and the years of accumulate is 10 years. Let’s say you have nothing invested yet, you are starting off with zero then I would put 7% in the rate of return which has been the average after tax total return of the 500 over the 90 years. Or let us say you contribute 5 thousand dollars a month, well according to this calculator in 10 years, you will have 855,259 dollars which is a little bit short of your 1 million dollars goal. So, then you must go back to Step 2 to adjust the timeframe or go back to Step 1 to adjust the monthly contributions and play around with this calculator until you come up with something that you can follow. Let’s say you increase your monthly contributions to 6 thousand dollars a month, that would get you to your goal a little over 1 million dollars in 10 years, so 6 thousand dollars a month is a lot. Obviously, the only way to put away that much money every month is to first have a very high income and then also to be very frugal. Your kind must do both, there is no way around it if you want to have a high savings rate, you need to be frugal and make a lot of income. If early retirement were easy, everyone would be doing it.
Part 2: Hacks for Early Retirement
There are some hacks to make it more doable for you. One way to retire early faster is by doing something called geoarbitrage. Geoarbitrage is a concept popularized by Timothy Ferriss in his book – The 4-Hour Workweek and it is where you relocate to another city or country with a lower cost of living while maintaining the same income. You are arbitraging the geography where you make a high income in the higher cost of living country, but your expenses are in a lower cost of living country. For example, if you retire in a foreign country where the dollar stretches a lot farther instead of needing 40 thousand dollars a year to retire, you mighty only need 20 thousand dollars a year. The place like Vietnam, Colombia and Bali, the currency there is a lot weaker so you could live quite comfortably on 20 thousand dollars a year and there is a lot of large expat retiree communities doing.
My first experienced the power of geoarbitrage when I went on a backpacking trip around the world at 18 years old, I was travelling with savings from waiting tables in high school. It is not like I was flush with cash during this trip. However, in Kenya I could rent a sweet house right on the beach for 30 dollars a night and I could do things like have fresh ceviche every day in Peru for just a dollar fifty a bowl. So geoarbitrage is powerful if all of you need is 20 thousand dollars a year to live on while not a compromising on your quality of life. Then your number goes down by half instead of needing a million to retire, all you need is half a million dollars which means instead of having to save 6 thousand dollars a month, you can just save 3 thousand dollars a month and then you can still retire in 10 years or you can contribute more every month and retire in a shorter amount of time. So, the possibilities are endless. Geoarbitrage means you can just not make a lot of money, but you can also still live well no compromises. Furthermore, you do not have to straight up move to another country because if you are able to work remotely, you could even just live abroad somewhere cheaper or even just live somewhere in the same country but to a cheaper city and that way you can save up a bunch of money to help you reach FIRE faster.
In addition to geoarbitrage, something else you can do to speed up early retirement is to go for a part-time retirement. This is also known as Barista FIRE where you work part-time to supplement the income from your investments. You could work a couple days a week as a Starbucks barista which is kind of the original concept and that is where the term came from. But you can also just make money in retirement doing something else like side gigs or consulting work. This way you can possibly get health insurance through you job and of course have extra money coming in. Believe it or not, there are a lot of companies that provide health insurance to part-time employees such as Starbucks, Verizon, Costco, and there is a lot more. If all you need is 20 thousand dollars from your investments in retirement and the remaining 20 thousand that you need you can earn from part-time job, then early retirement suddenly becomes a lot more doable. Sure, I know this is not like a real retirement since you would actually still be working but then again I do not think anyone actually wants to just sit around and do nothing when they are retired. Working part-time in retirement could be nice because it creates structure in your life. It gives you a reason to be out with other people all while making some money. Another hack for speeding it up is by earning more.
Now I know this is a real hack it is just obvious but if you want to reach early retirement faster, you must think of ways to increase your income by a lot and I really like focusing on this. Of course, saving money and being as frugal as possible is important as well. If you can make some drastic lifestyle changes like moving to a smaller home or giving up your car or even like living out of a van, you can do all those things but still there is always a rock bottom to how low your expenses can go. No matter how frugal you are, we all need a roof over our head and put some food on the table. So, I like focusing on ways to increase your income because there is no ceiling on how high your income can go. A lot of the FIRE bloggers and youtubers that I stalk on Instagram or YouTube that have retired early successfully. When I look their stories, I see that they have all made pretty high incomes from their primary job and or from their side hustles and that is how they retired early a lot of them either made high salaries from their jobs, they did Airbnb, online business or something else that brought in money. If your main job is not going to get you there and if it is, you are very lucky. But for now, here are some rapid-FIRE idea to get you started and you will see that the possibilities are endless you can fix things on TaskRabbit. You can make deliveries for UberEats, Postmates, or Instacart, you can charge scooters for Bird or Lime, you can trade options. Or you can resell clothing through online platform. These are all things that either I have made money in or I personally know people who are making money on the side doing these things. You have skills that you can monetize so dig deep and find a way to increase your income. If retiring early for you means you need to save 6 thousand dollars a month instead of feeling discourages because that is a lot of money and you have no idea how you can afford that start asking yourself how can I afford that. Ask yourself productive questions so you can get productive answers.
Step 3: My Plan
My crazy goal is to get 1 million dollars within 6 years, it feels crazy to say that out load. But I want you to hold me accountable using the 4% rule, 1 million dollars would mean for me 40 thousand dollars a year in retirement. I would of course supplement that income with part-time work because 40 thousand dollars a year is bare bone. Mostly because I would just go crazy sitting around doing nothing. I really do enjoy working, being productive using my skills and providing value to society so that is why I am going for a part-time retirement. In addition to YouTube, I have some online courses which I do consulting and options trading so if all goes as planes, I should be able to put away the 10 thousand dollars in a month that I need to save in order to retire in 6 years. Especially since I do not have to pay student loans anymore, those were so annoying. After crunching the numbers and doing a lot of thinking, this idea of a hybrid retirement is really starting to make me very excited. I really think this is going to be the new way people do not want to retire, they just want to buy their time back and have some breathing room in their lives and spend their days in a way that they enjoy. With a hybrid retirement or Barista FIRE, you can all get there much sooner than you think even though this whole article was about money and retiring early. We all know it is not actually about money, it is about buying back your time. So that you can do all the things you want to do with your life. I would love to learn French, build my own burring man art car, live by the beach, and learn classic piano, so these all is just daydreaming for now, but daydreaming is a lot of fun.