Editor’s note: This story originally appeared on NewRetirement.
Most people struggle and worry about being able to retire in their mid- to late 60s. At that point, you are expected to have hundreds of thousands (maybe even millions) of dollars in your retirement accounts, get additional money from Social Security, and also get some government assistance with health insurance. Even then, retiring securely can feel impossibly hard. What you really want is total financial independence — forever.
Maybe you are already retired and have a dreadful feeling that you simply don’t have enough.
Many people have been there, done that, and retired. Some even have a passion to teach others how they did it via their writings in books, blogs, and online courses.
I read through hundreds of articles from dozens of financial independence blogs to discover 15 of the top lessons from regular people who have achieved total financial independence.
1. Spend Less on Highest Cost Items
If you save 50% on an item, that sounds pretty impressive. But if that item was a bottle of $1 shampoo, you really only kept 50 cents in your pocket.
J.D. Roth from Get Rich Slowly explains that if you want to retire early, you’ve got to focus on your high-cost items. Namely, your:
The average person will spend over $2,000 a month on these categories alone. If you want to retire or retire early, the solution is simple: Spend less. And, you can do it easily by focusing all your efforts on reducing the big dogs — home, car, and food expenses.
2. Know Your Target Savings Rate
There is no formula that is going to work for everyone.
However, if you want a simple formula, here it is. So, when do you want to retire? In five, 15, 25 years? The math behind how much you need to save to achieve these targets is shockingly simple according to the financial independence blog, Mr. Money Mustache (MMM). MMM is an engineer who retired when he was only 30.
Even though the math is supposedly simple, MMM made it even simpler by putting together a target savings rate table.
If you currently have zero and want to retire in:
- Five years, you’ll need to save 80% of your income
- 15 years, save 55% of your income
- 25 years, put away 35% of your income
Most of you have already been working for a few decades, so these numbers might not mean as much as they do for those that are just starting out (especially if you haven’t been putting 80% of your income away all your life). So, what numbers are relevant for you?
If you have consistently put away:
- 10% of your income, you’ll likely have to work for 51 years before you retire
- 15% of your income, your time in the workforce is 43 years
- 20% of your income, you’ll probably have enough money to retire after 37 years in the workforce
Want to retire sooner? And, want a simple answer for how to do that? Just up your savings rate!
3. Don’t Rule Out Part-Time Work in Retirement
When most people retire, they assume they’ll never work another day in their lives, and, if they have to, they consider themselves a failure in retirement.
Jonathan Clements, from the financial independence blog the HumbleDollar, disagrees.
According to Jonathan, “Working a few days each week could greatly ease any financial strain, while adding richness to your retirement.”
So if you have to (or want to) work in retirement, don’t sweat it. There are countless others that do the same.
4. Start With Simple Retirement Models
Before putting together a complex assortment of facts and figures, Darrow Kirkpatrick (retired at 50 years old) champions the idea of keeping things simple.
“The best way to get a useful model going is to input a small number of initial assumptions, then calculate and check the results carefully, year by year. Once you are certain those initial numbers are behaving as expected, you can begin adding more data, more financial events, and refining your model.”
He compares retirement planning to constructing a puzzle. You don’t try to put all the pieces together at once. You start with a corner, add a piece, add another, and then slowly put together the entire puzzle one piece at a time. The same should be true with your retirement planning.
Instead of putting all your numbers into a complex tool right off the bat, put in only a few, confirm the number, and then go back and model in other likely scenarios. In the end, you’ll be much more confident in your number and you’ll understand it completely.
This approach is fully supported by the NewRetirement Retirement Planner. Users start by inputting a relatively simple set of data — estimates are okay. You can view results and start building a more complete plan. Or, simply run different scenarios and keep your information updated over time, making adjustments as necessary.
5. Map Out Your Spending Today to Better Understand Tomorrow
There are tons of people today that have absolutely no idea how much they spend from month to month. And, not only do they not know the amount that they’re spending, they probably couldn’t even tell you where half of it is going.
If you have absolutely no idea where your money is going today, you have little chance of grasping where it will go 10 to 30 years from now.
In Darrow Kirkpatrick’s book, “Retiring Sooner,” he discusses several ways to assess your living expenses quickly and easily. So if you’re one of the people who doesn’t know where your money is going, take some notes from DK and get a handle on your spending today so that you can have a blissful, easy retirement.
6. No Regrets
When you think of regrets in retirement, you might only consider the regret of retiring too early and running out of money, but that’s not the only outcome you should fear.
Physician on FIRE (retired at age 39) warns us also of retiring too late.
If you run all the scenarios in all of the models and you’re safe in every one, then you waited far too long to retire. You’re not going to:
- Get cancer
- Have Alzheimer’s disease
- Get into a car accident
- Experience three stock market crashes
- Lose your pension, or
- Get sued
If all of those things happened to you, it honestly doesn’t matter if you can cover all the expenses. Your life is going to be difficult regardless.
The point of modeling is to protect yourself against the likely fears, not every one. Wait too long to retire, and you’re going to regret it for the rest of your life. Sure, your kids might enjoy the millions that you’ll never be able to spend, but I bet they’d much rather have your time instead.
7. Get Out of Debt Already
The Wealthy Accountant, who calls himself Keith “Taxguy,” is certainly a guy you want to listen to. He’s worth over $12 million and hasn’t held a conventional job since he was 22 years old …
He says it plain and simple:
“When you are in debt the clock works against you. Every morning when you wake — weekends, holidays, sick days, birthdays and work days — you are already behind. The mortgage, credit card, car loan, et cetera, all tacked on interest the second after midnight. Long before you rolled out of bed and poured your first cup of coffee, you need to work to pay the interest before you have money for food, clothing, shelter or entertainment.”
The takeaway is that debt is just adding to your expenses. Pay your debt off as fast as possible and invest heavily once it’s gone. It’s easy to do once you don’t have a payment in the world.
8. Never Take on a Mortgage That’s More Than Three Times Your Income
Most people go to the bank and ask the question, “How much will you lend me?” The bank tells them the maximum that they’d be comfortable forking over, then the borrowers go out and find the best house for that amount of money.
Without realizing it, these folks just became house poor. Hopefully, they really love the house, because they won’t have enough money to do anything outside of those four walls for many years to come.
Passive Income MD gives us a great rule of thumb when it comes to getting a mortgage — never exceed three times your annual income.
If you are currently in over your head, downsize. You won’t regret minimizing your debt down the road.
9. Max Out Your 401(k)
You hear this all the time, but are you actually doing it? Are you putting the maximum amount allowed into your 401(k) plan each year? Joe Udo, from the financial independence blog Retire by 40, admits that he didn’t max his out every year, but he only missed his first couple of opportunities.
By maxing out his retirement nearly every year, he was able to build up a $640,000 nest egg before his 40th birthday. Not too shabby.
If you still haven’t started to max out your contributions, it’s better late than never. Do nothing, and you’ll have way more regrets than if you get started today.
If you’re over age 50, be sure to use catch-up contributions (whether or not your employer offers a program or not).
10. Pay as Little to Uncle Sam as Possible
In 2012, Justin, from Root of Good, earned $140,000 and paid just $600 in taxes. In 2013, he did even better. He earned $150,000 and paid $150.
“We didn’t go anything sneaky or illegal,” Justin explained. He and his wife simply invested in all the tax-advantaged accounts:
- Traditional IRAs
- Health savings accounts
- 457 retirement plans
- 529 College Savings Account
That, and they paid for child care with a flexible spending account through his wife’s work.
His motto is to keep things simple, but also to keep the government’s hands off his money. If you can do this just half as well as Justin, you’ll be well on your way to total financial independence.
Planning ahead for taxes in retirement — especially when it comes to your required minimum distributions (RMDs) — is critically important if you want to preserve your wealth.
11. The Miracle of Compound Interest
“Saving a high percentage of income is only half the battle. You can’t just put fat stacks of cash under your mattress and expect to get rich.” — Go Curry Cracker
If you can earn 10% a year on your savings, it takes approximately seven years for your money to double. In another seven years, it would double again. Wait another seven, and it doubles again.
So if you start with $100,000, you’ve actually got $800,000. ($100,000 becomes $200,000 which doubles to $400,000, and then doubles one more time to make $800,000). If you could hold off another seven years, you could have yourself a cool $1.6 million. Not too shabby when you consider that you only had $100,000 28 years before. That’s the power of compounding.
Put that money under your mattress, and you’d have just $100,000. That is, unless you had a house fire.
As Bill Bernstein said in his NewRetirement podcast interview:
“I’m going to sound kind of insensitive and cruel, I suppose, but when someone tells you that [that they are not invested and are holding cash], what they’re effectively telling you is that they’re extremely undisciplined. And they can’t execute a strategy and that’s the kind of person who probably does need an advisor. If you sold out in 2007 or 2008 and you’ve been in cash ever since, you’ve got a very seriously flawed process and you’re probably managing your own money.”
You have got to be invested in order to get ahead.
12. Your Retirement Won’t Go As Planned
If you retire at age 60, you could easily have 30 years or more of retirement life ahead of you. When you were 30, could you have predicted you’d be where you are at age 60?
Of course not.
The same is true for your retirement years, “And that’s okay!” explains Steve from Think, Save, Retire (retired at age 35). You can do all the planning and forecasting your want, but you’ll never be able to predict what will happen to you personally, professionally, relationship-wise, or financially over the next 30 or more years.
In early retirement, Steve thought he was going to:
- Exercise more
- Blog more
- And read more
He doesn’t, and for good reasons. All reasons he hadn’t thought of when he handed in his two weeks’ notice.
Be ready to be flexible and able to make updates to your overall financial plan.
13. Keep It Simple
Sam at the popular financial independence blog Financial Samurai is a smart guy. After all, he worked as an investment banker for Goldman Sachs for 13 years. Very few have those credentials on their resume.
After all that experience and knowledge of the markets, his advice to achieve early retirement is not a stock tip and not even a sector analysis. His advice:
Keep it simple.
Spend less, earn more, and invest all you can. That’s it. There’s power in that message, especially considering the source.
14. Invest for Growth, Then Income
ESI Money retired in his early 50s and has practiced exactly what he’s preaching today. His message:
“Invest for growth and then income.”
What does that mean? He goes on to explain and outlines the following:
- Max out your 401(k) and invest in index funds (growth)
- Invest in rental properties (a combination of growth and income)
- Consider person to person (P2P) investing (income)
Also, option three could include annuities — another tool that helps build up a consistent income for your retirement years.
Why growth, then income? Simple. You first want to get your nest egg going and grow your investments quickly out of the gate so you can capitalize on compound interest. Then, in order to retire early, it’s best if you invest in multiple income sources that can float you until you hit the magic age of 59 ½, when you can start withdrawing from your retirement accounts without penalty.
15. Breaking Up With Your Career Is Hard to Do
Even if you hate your job and have a “countdown to retirement” clock on your desk at work, you’ll still likely have difficulty when you finally give them the old heave-ho.
Jacob, from Early Retirement Extreme, likens it to a long-term marriage. A break-up from your long-time spouse is sure to be difficult. You think the escape will be nothing but sunshine and rainbows, but it’s not always that easy.
The same is true of your job. Expect it.
Better yet, set up a future for yourself in other areas – self-employment, volunteering, or starting that part-time gig we mentioned above. When you’ve already moved on to the next thing mentally, letting go of the old boat anchor becomes that much easier to do.
Important Lessons on Financial Independence — Takeaways
As with almost anything, you dive into something expecting to find the hidden secret or the magical takeaway, and the results are quite obvious and underwhelming.
This analysis was no different.
If you want to retire well and retire early, you should simply live modestly, get rid of all your debts, earn a solid income, forecast what you need (but be flexible), and invest heavily. That’s really all there is to it. Dig any deeper, and you’re just wasting your time.
The most valuable information here were the items that hardly anyone talks about:
- Be willing to work after retirement.
- Have an understanding that even the best-laid plans are futile – you’re never going to predict exactly what will happen over a 30-year span. It’s impossible.
- Retirement is not all unicorns and angelic choirs. It’s just the next challenge in life worth conquering.
Go in with the right mindset, understand what happiness truly means for you, and never stop working toward the goals that will take you there.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.