In my experience, once someone is over age 50 it is a common desire to consider the possibility of an early retirement. I have gone through the math and mechanics with many people and it is rare for someone to have the financial capability retire early, in comfort, when including potential health care expenses.
Most people have little free time beyond their job, family, home maintenance, hobbies, and social events. Unfortunately, early retirement is only for those who carve out time and effort to go well beyond having an average income and setting aside 5-10% of their income in a retirement account.
Early retirement is at the end of 3 paths. You can choose any one of the three paths or combine them to make it happen even sooner. The three paths are:
- An extraordinarily high income.
- An extraordinarily high rate of savings.
- An extraordinarily high return on investments.
Let’s go through each of these. An extraordinarily high income would be either from a career with a high-income trajectory (3 or more times the average income) or a normal career with a side-income or business. By definition, not many people are on track for an extraordinarily high income. I won’t go over career planning in this post, but this path is usually a professional career with a lot of education or sales ability. However, what most anyone can do is start a part-time side income with some examples being tutoring, window washing, painting, or anything else that you can work around your schedule.
The second path is having an extraordinarily high rate of savings. This refers to how much money from your income do you set aside for retirement each month, is it 5%, 10%, 25%, or 50%? You can use any retirement calculator, and even when starting from zero, you can retire in 10 years if you are a hyper-saver setting aside +70% of your income. There are many websites for hyper-savers for ideas and support in reaching a very-fast retirement. Although hyper-saving isn’t appealing to most people, the math that it highlights is the same for every potential retiree; whether you are saving 3% or 30% for retirement.
The third path is an extraordinarily high investment return rate. This refers to the profitability of your retirement accounts, how hard they working for your retirement. The average mutual fund investor earns 4%, or less, over long periods of time (according to Vanguard research), and that is simply not high enough for an early retirement – based on an average income with an average rate of savings. Extraordinary returns normally come from being an active real estate investor, active stock trader, active direct business owner, or other active investing areas.
How many of these three paths to early retirement are you currently doing? Sooner or later, you may want to have the option of an early retirement when your career stalls, health issues arise, difficulty finding work, family issues, or other reasons. The sooner you actively move forward on these three paths, the sooner you’ll have more financial options in your future, including an early retirement.