When I tell people that I plan to retire by age 50, they ask me how this will be possible. First you must understand what my definition of retirement is.
Early Retirement is:
having the financial resources so that I don’t have to ever work again
The key is “that I don’t have to” and not that I will stop working. My idea of retirement is that I will be in control of whether I choose to work or not and not be reliant on work to provide monthly income. Here are my 5 key principles that will allow you to retire by age 50.
Believe early retirement is possible
First, you must believe that early retirement is possible and have a strong conviction that you are responsible for your financial future. You must believe that retirement is NOT something that happens at age 65 when the government is responsible for your personal finances and providing you monthly income. Without fully believing that you are in control of your future, you will not be in a position to retire early.
Save and invest a large portion of your income
Second, you must not spend more money than you earn. Yes, you heard it correctly, you must actually save and invest money every month. To retire early you must also save a very large part of what you earn. Typically you must save over 50% of your monthly income every month.
Make early retirement a priority
You must make early retirement a priority. An example of this is that you must live somewhat frugally so that you are able to save and invest. In order to afford to save a large part of your monthly income you must be able to significantly cut your monthly expenses. If you are fortunate enough to have a large annual salary this may be easier, but you still must commit to saving a large part of your monthly income to be able to continue your current lifestyle in your retirement years.
No credit card debt
You must not ever have credit card debt. It is critical that all of your excess income goes toward investments and not toward paying off credit card debt. Credit card debt indicates that you are not making early retirement a priority and are living beyond your current means.
Make a financial plan
Finally, you must be willing and able to plan your financial future. Coming up with a realistic plan of your expenses in your retirement years is critical. Only with a solid plan will you know how much money you need to save. Typically you should be able to take 4% out of your investments every year so that your investments will last a lifetime. For example if you have saved $1 million, you will be able to safely withdraw $40 thousand every year to live on. If you need more income, you will need to save and invest more. If you feel you can live on a smaller annual income, your total investment target will be lower. The amount you need to save and invest is a personal decision. What is most important is that you have a plan and adjust your plan as changes occur. There you have it, my 5 key principles for achieving an early retirement. I hope this post has provided some ideas on how you can also retire early.