The Simple Secret to Retiring Early – And What’s Stopping You from Doing It

Do you dream of retiring early? If you can make just a few small changes in your day-to-day life, you can.

Are you concerned that you won’t have enough money saved to retire at all, or that you won’t be able to enjoy the kind of retirement you would like? If you can make just a few small changes in your day-to-day life, you can.

So, what’s the secret to retiring early? It’s simple: save more.

I can already hear you saying, “Well, duh…” But if it’s this simple, why aren’t you (and most people) doing it?

As it turns out, saving more for retirement isn’t simple for most people at all. In fact, it’s so difficult for many people that the average 50-year-old in the United States has saved only $43,797 for retirement, and 36% of Americans have saved nothing for retirement at all.

The thing that makes saving so hard is that it means you have to spend less.

Again, “Well, duh…” Most of us would rather spend more than spend less. Most of us respond better to immediate gratification than to delayed gratification. We live in a society that encourages and celebrates consumption. We lead stressful lives, and that comforting thing we spend a few bucks on now seems to help – at least for a few minutes.

Let’s look at how you can identify a few ways to save more. Further down, I will share several things you will need to consider if “early” for you means before the age of 65, 62, or 59½. After all, “early” is a subjective and relative term. If you’re thinking that you won’t be able to retire until you turn 70, retiring at 65 will seem early.

Even if you’re not seriously thinking about retiring early, here’s something else to consider. It is commonplace for people to retire, on average, three years before they planned to. This may be caused by a layoff, a health condition, dissatisfaction with your career, or the need to care for a family member. It’s a great idea to pad your retirement savings just to prepare for the possibility that retirement may come sooner that you think, and not necessarily at the time of your choice.

First, Understand Your Current Spending Habits

The first step you have to take in order to spend less and save more is the hardest. You have to gain clarity on what you’re spending now.

This means that you are going to have to keep track of every penny you spend for the next three months. If you don’t think you can do this for three months, at least try one month.

If you’re like most people, this will be tedious and unpleasant. I get that. Most of us don’t really get excited about creating and filling Excel spreadsheets and poring over bank and credit card statements. But can you do this for three months if it means you’ll be able to retire two to five years earlier?

The fact is, most of us don’t really know where all of our money goes. It’s easy enough to know how much you’re paying each month for your mortgage or rent, your car payment, or your utility bills. But it’s very hard to know how much slips away in smaller amounts every day when we walk out the door (or get on the internet).

Let’s look at a few examples.

When you’re at work, how often do you go to the vending machine or cafeteria for a soda or a snack? There goes one or two dollars.

Do you go out to eat at lunch? Even if you go to a fast food outlet or the nearby sandwich shop, that’s usually $8-10.

How often do you stop at Starbucks? There goes another $5.

Do you smoke? Do you stop by the bar for happy hour? How often do you eat out in the evening or on weekends? I think you get the picture.

It All Adds Up! 

Coins in bottleYou may not appreciate how much this all adds up. What if you could trim $50 a week off of your nickel-and-dime spending? That’s just over $7 a day, on average. For example, if you decide to bring frozen lunches to work instead of going out, you could save $8 a day ($2 vs. $10), five days a week. If you brought snacks to work with you (or cut them out!) instead of buying them from the vending machine, you might save another $2 a day, five days a week. That adds up to $50 a week.

Let’s see how this can make a big difference. $50 a week times 50 weeks equals $2,500 a year. That’s right – $2,500 is flying out of your wallet every year for just these two things!

If you invest that $2,500 into your IRA or 401(K) or other investments, and you earn an average 6% rate of return (which is not hard to do with stocks, when averaged over many years), then over 30 years, you would accumulate $197,645.47. That’s almost $200,000! If you estimate that you would require $5,000 per month to live after you retire, this additional savings would allow you to retire over three years earlier!

Are you willing to forego going out for lunch and buying sodas and snacks from vending machines in order to leave work and gain your freedom three years sooner?

Of course, what you choose to forego may be different, but the principle is the same. Are you willing to exchange going to movies in theatres for renting them on Netflix? Are there premium cable channels (that you probably don’t watch much anyway) that you can do without? Can you scale back your cell phone plan?

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Let’s Get Started!

It’s easy to get started! Just open up Excel (or whatever software you prefer to use) and set up some rows and columns. Set up a column for each month, and set up rows for spending categories. For example, your categories might include many of these:

  • Mortgage or rent
  • Utilities
  • Groceries
  • Household supplies and repairs
  • Children
  • Pets
  • Transportation (gas, mass transit, parking, auto maintenance)
  • Clothing
  • Restaurants
  • Snacks (coffee, sodas, munchies, etc.)
  • Alcohol
  • Tobacco
  • Entertainment
  • Memberships
  • Donations/tithes
  • Insurance
  • Taxes
  • Medical/dental
  • Vacation/travel

Maybe there are other categories that apply to you. Some categories may be single line items, but most will require multiple lines. You can always insert more lines as needed.

Set up the spreadsheet to calculate subtotals for each category and a grand total for each month.

Now, the rigorous part. If you pay for most things with a credit or debit card, your monthly statements will provide many of these values. For cash spending, either keep receipts for your purchases or jot down all expenditures on a piece of paper until you can transfer them into the spreadsheet.

I find that some of my purchases at the grocery store or other multi-purpose stores such as Costco and Target may cross multiple categories. For example, I may buy food items, household supplies and alcohol at the same time. In these cases, I keep the receipts and separate the amounts into their respective categories.

After tracking your spending for about three months, you might be surprised at what you discover. You should be able to identify several areas where you can cut back without noticeably impacting your everyday quality of life.

But Wait, There’s More!

Here’s another reason to go through this exercise: it will allow you to better determine how much money you will need to live on each month after you retire. Some of these expenses will shrink or go away when you stop working (for example, commuting costs and business clothing), while others may increase (such as medical and travel).

Here’s yet another bonus. Most of us, being creatures of habit, will expect to continue with the same lifestyle in retirement that we became accustomed to during all those years we worked. For example, if you have been in the habit of eating most of your meals in restaurants during your working years, you will probably want to eat most of your meals in restaurants after you retire. You might think that you’ll suddenly start living differently and become more frugal when you retire, but chances are, you won’t.

If you become accustomed to living with less discretionary spending during your working years, you will have a lower monthly expense target to reach when you retire.

Or, if you want to withdraw a higher monthly income to support the lifestyle you wish to enjoy after you retire, this additional money can make that happen!

This leads us nicely into the topic of determining how much you’ll need to live on each month. This is a complex, multi-faceted topic that I have written about elsewhere, but there are a few specific things to consider if you want to retire early.

Retiring Before Age 65

Sixty-five is the age at which you become eligible for Medicare. Even with Medicare, there will be a portion of your health care costs that you’ll need to cover. But if you retire before 65, you will need to pay for all of your medical care. If you qualify for retirement benefits with your last employer, their retirement plan may include some health benefits.

Retiring Before Age 62

Sixty-two is the earliest age at which you can start collecting Social Security. (You can start collecting Social Security any time between the ages of 62 and 70.)

Most experts recommend that you do not start receiving payments at 62, because your payment will be 8% higher for each year that you wait. (Or to look at the other side of the same coin, your payment will be 8% lower for each year that you collect Social Security early.) So, it’s a choice between receiving smaller payments sooner or larger payments later.

Considering that the average cost of living increase for the past 20 years has been 2.5%, you will reach the break-even point at around age 79. Coincidentally, 79 is the current average life expectancy in the U.S.

While none of us can predict when we will die, you can consider your family’s longevity history and the state of your health to decide upon the best time for you to begin receiving Social Security. Of course, consult with your financial advisor.

Retiring Before Age 59½

Fifty-nine years and six months is the earliest that you can begin to withdraw money from your tax-deferred retirement plans (your 401(K) and IRA), without incurring a substantial penalty. So if you are hoping to retire before 59½, you are going to need to have enough money in other non-tax-deferred investments to live on until you reach 59½.

Also consider that every year that you retire early gives you one less year of salary (and probably your highest salary), a portion of which would have gone into your retirement savings.

Is It Worth It?

For me, it has absolutely been worth it. My freedom and my day-to-day happiness are worth it.

Ultimately, it’s up to you to decide how much you value having the latest and greatest smart phone, eating out in nice restaurants, driving upscale cars, etc., when the price tag will be working several years longer and enjoying fewer years of retirement. What is your freedom worth to you?

Please feel welcome to comment below.

© 2014 by Dave Hughes. All rights reserved.

Photo credits:
Bird Taking Flight: Dave Townsend. Some rights reserved.
Coins in Bottle: MIKI Yoshihito. Some rights reserved.

2 Responses

  1. David Stobberingh says:

    Great article! One area I think people overlook is housing expense, particularly if single. Although admittedly it’s not always practical or feasible, yet if one can share/subsidize housing expenses, e.g. take on or be a housemate/roommate, the bang for those bucks could be significant.

    • Dave Hughes says:

      Hi David,

      Thanks for your comment!

      You’re entirely correct. Housing expense is one of the largest line items in our monthly expenditures. Your suggestion of finding a roommate is a good one; I did that a couple times while I was single and it was a big help. It wasn’t nearly as much of a crimp on my lifestyle as I thought it might be.

      In the U.S., the prevailing wisdom for many years when people are in the market to buy a house has been to buy as much house as you can afford – the rationale being that your pay raises and property appreciation will make this less of a burden in the years to come. I now see that this isn’t the best advice. If you buy a house that is much more within your means, you’ll have more to save for retirement.

      Thanks again for your comment and your kind words!


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