1. I had a paradigm shift
It was the early 80s and I was in my early 20s. I was working an entry level job and living paycheck to paycheck. It was difficult to find jobs at the time and I was always living in fear of What ifÖ? What if I lost my job? What if my car breaks down? What if I get sick and canít work for a while? Etc, etc, etcÖ.
Then I ran across the following article in issue #4 of The Mother Earth News magazine. How to Retire 6 Months Every Year. The basic point of the article was by lowering your expenses to half of your income you could retire 6 months of the year.
What? What a minute, you mean there is another way to live? I donít have to work a 40 hour job for the rest of my life, constantly worrying about the future? This was a revelation to me. I had never considered retiring early or not working week-in and week-out until I was old. I didnít make enough to live on half my income and wasnít willing to go to the extremes the article suggested for cutting expenses. I also didnít want to quit work every 6 months and hope to find another one in the future. But the thought of lowering my expenses to where I could save enough and not have to work any longer by the time I was 40 was extremely appealing. So my goal was defined.
2. Create a financial foundation.
The first thing I decided to do was make myself more secure. I was tired of being afraid of a financial mishap. I had about $1000 in credit card debt and no savings. I started working all the overtime hours I could get and having garage sales and eventually paid off the debt. It took about 7 months. I also got a bonus of $500 around then and saved all of it for the start of my emergency fund. I gradually built my emergency fund up to $1000 which made me feel more secure. $1000 was 3 or 4 months living expenses at the time. It took a long time to actually get the $1000 to remain stable. It seemed like as soon as I got to $1000 I had to spend part of it on car repairs or replacement of some item. However, I eventually added a $100 monthly savings to my budget to cover unexpected expenses which helped stabilize my budget and made me feel much more secure.
3. Make a plan
I had defined my goal - retiring by age 40. Now I needed a plan on how to get there. Based on my living expenses at the time and adding a 10% cushion I decided I needed $10,000 a year to live on assuming my house was paid off. At the time you could make 13 - 14% on CDs, so I decided I needed to save $100,000 by the time I was 40 with a projected interest of 10%. I gave no thought to inflation at the time. I divided $100,000 by 15 years and came up with $550 a month. Well of course I couldnít afford to save that much, but I messed with the calculations and added in the interest I expected to earn during the 15 years and calculated projected raises and eventually got to a number I thought I could save each month. I donít remember what it was now, but it was a hefty amount by my living standards then. I determined to save a percentage of my salary each pay period. I think it was 5% to start and increase it by 1% each time I got a raise. The plan didnít work out exactly as I expected but at least I started and was saving and investing money.
4. Learn about investing
I started reading whatever books and magazines I could about investing to educate myself. I took advantage of the company stock plan and 401K offerings. I started prepaying my mortgage with any extra money that came my way.
5. Make adjustments to the plan.
At first the plan was too stringent and I rarely made my goals, but I was saving more than I would have without a plan. Eventually I started exceeding my savings goals. When I was 37 my job was outsourced and I was laid off. However, because I had built my foundation and had several months living expenses saved, plus my investments and low expenses I viewed it as an opportunity instead of a disaster. I knew my field was dwindling and jobs in the sector were not plentiful so I decided to take my severance pay, unemployment insurance, government grants and savings and go back to school to retrain in a new field.
I took every class I could cram in during the next year and got my 2 year degree in 1 year in Computers. I went thru all my liquid savings and had about $1000 left when I got a new job in my new field; for less money than I was making in my old field. I quickly advanced in the new field and was making more than I had in my previous field within a year. However I had lost quite a bit of momentum towards my goal of retiring at 40. By this time I was very interested in my new field and didnít want to retire at 40, I enjoyed my new job. My living expenses had increased during that time also. So I revised my goal to retire at 50 with $24,000 a year income. I determined I needed to have my house paid off and $600,000 in savings earning 5% a year.
6. Persevere during down times
There have been many downturns in the stock market during the last 25 years but I kept my money in regardless and continued to invest during good times and bad. When I started investing in stocks the DOW was 400 something. I went thru the 1987 Black Friday plunge. The early 90s downsizing craze. The 2000 tech market bust and now this years downturn, plus many other recessions in between. I didnít panic and sell when times got bad and then buy back when times were booming. I diversified and continued to invest during it all.
7. Know myself
I had to know what was important to me for this to work over all the years. Retiring early was the most important goal and many things were sacrificed for that, but I needed/wanted other things too. Everyone has certain levels of comfort where if they canít have enough of some things life is miserable and you canít continue with the plan. I analyzed what was important to me and directed my money to those things and scrimped on other items that I didnít care about.
Living alone was important to me. Having a nice, safe and comfortable house. It didnít have to be fancy, but it had to meet those criteria.
Having books to read. I like owning books so a pretty big chunk of my money was spent on books. Now Iíve mostly satisfied that need and am much more content with borrowing books verses owning. I still like to own some, but itís tapered off during the years.
Good, reliable transportation. It doesnít have to be expensive or fancy, but it has to be reliable.
Eating out. I enjoy eating out both for the food and the social aspect, so I budget for that at least twice a week.
Most everything else was lower on the list and could be put aside for other priorities. Vacations, clothes, gadgets etc.
8. Getting the most for my money
Savings always came first in my budget. To afford more for savings I had to make the rest of the budget stretch as much as possible so I didnít feel deprived. I started learning how to get the most for my money. Couponing, bargain hunting, using less, recycling etc all helped to make those dollars stretch farther and allow me to get the maximum amount for the money spent.
I read virtually every money saving book or article I could get my hands on to help with this. The best resource of course was the Tightwad Gazette. But I was constantly finding new ways to save money.
9. Revise the plan again.
After 11 years in my new job, the situation changed. It was no longer as interesting and the environment was much more stressful. I hated going to work and was under a lot of stress. I had been living on budgets and lowering my expenses for years so knew what I needed to live on. I reran the numbers on what I needed to retire and determined that if I was careful and adjusted as needed I could retire now. My new numbers were $18,000 to $21,000 a year income. I determined I needed my house paid off and $525,000 in savings. My house will be paid off this month. And I had more than the necessary savings. I also had a cache of money put aside to cover big expenses for the next 12 years until I am 60; when I can withdrawal money from my Roth IRA and not pay taxes on the withdrawals.
10. The courage to quit
I had determined that I could retire on paper. But we are in a downturn in the stock market and itís a scary time to retire. I think most anytime is scary. Even though you have planned and revised and thought and thought about every possible scenario and response, you still hesitate and wonder if youíve thought of everything and if your plan will really work. At the end of the day you have to just take the plunge and have the courage to follow the plan. So I retired at 47. Iíve been retired for less than 2 weeks now so it remains to be seen if it will work out long term. But I have faith that I can adjust for whatever comes my way and I will make this work.
10 things that helped me to Retire Early
1. I had a paradigm shift