How to Make Early Retirement a Reality - By Neal Frankle

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early_retirement

Sometimes you might feel as though you are chained to a job for the next 20, 30 or 40 years and there's no way out. If that describes you, I have some great news. It's not necessarily true.

If you are willing to think outside the box and take decisive action, you can retire decades earlier than you otherwise might think.
Here's how to turn your retirement dream into reality.
1. The Dream
Your first task along the freedom trail is to define exactly when you want to retire, how much you are willing to give up now and what you want that retirement life to look like. Do you want to retire in five years, 10 years or 20? During retirement, are you willing to downsize or do you want to maintain your current lifestyle? What are you willing to give up now in order to pull that retirement date forward?
All these elements are important because they impact each other. For example, the sooner you retire, the fewer resources you'll have during your golden years because you'll have fewer years to save up. That means you may have to do with less. Also, the more you spend now means it may take longer to accumulate the assets you'll need in order to retire.
Everything has a trade-off and you need to be clear on what trade-offs you are willing to make in order to achieve your early retirement goal.
2. The Written Goal
Now that you've thought it through, it's time to make a rough draft declaration. It might look something like this; "I will retire in the year 20XX and have the resources to sustain a lifestyle I love at $XXXX per month. I will love this lifestyle because it will enable me to (describe what your retirement looks like)."
This sets forth the time frame and what your retirement life will be. It also forces you to determine how much you'll need to achieve your goal and create a plan to acquire those resources.
Don't share this declaration with anyone just yet. In a minute, we're going to work some numbers and see if this will fly. This is a starting point and while it may be just fine, we have to create a workable plan before we adopt it.
3. The Plan
The most important financial driver of any financial plan is spending. You need to know how much your retirement is going to cost in order to know how much money you'll need.
It is really hard to accurately predict what your future cost of living is going to be, but it's important to make some educated approximations. You can do that by taking what you spend on average now and inflating your number using any number of online calculators.
Simply do a search on "online financial calculator" and get to work. I did that and plugged in some numbers to get a sense of what retirement might look like for a hypothetical Jane Brown. I assumed she spends $42,000 a year now, wants to retire in 10 years, inflation is 2.5% and she can earn 6% each year on average over the next 10 years. Jane wants to determine what it will cost her to live when she retires and with inflation running at 2.5%, in 10 years she determines that she will need over $127,000 a year to maintain her current lifestyle. The calculator also determined that she would need to have approximately $1.3 million in order to achieve her goal.
Can she hit those numbers? It depends on her starting point and how much money she can save over the next decade. If Jane searches for "future value calculator" she can easily get a clearer picture of what lays ahead.
If she starts with $450,000 today and adds $35,000 each year, for example, she will get pretty close. But what if she doesn't have that kind of money to stash away?
That's where the tradeoffs kick in. She has already established how much money she needs to accumulate. At this stage, she can play with the calculator, entering the amount she currently has and the amount she is willing to save. Of course, she can also play with the interest rate she thinks she can earn, but she should probably remain conservative and realistic. This 6% refers to the return she projects that she'll be able to earn on her savings on average over many years. There is no guarantee, of course, but if she invests using a balanced approach for 10 years, an average return of 6% is not unreasonable.
If there is a divide between her dream and her current abilities it's time to compromise. Let's say you are "Jane" in this example.
If you can't hit your number, re-work your plan. For example, let's say you are starting with $150,000 and the most you can save is $10,000 a year but you are willing to work for another 15 years rather than 10. That suggests that you'll save up about $450,000. It's a lot less than $1.3 million. What does that mean?
If you do some simple math, you can see that $450k is roughly 35% of $1.3 million. That means you will have 35% of the income you want. Are you willing to live on a lot less during your retirement years? Are you willing to give up a lot more now so you can save and have a richer retirement? Are you willing to take a slice out of your future needs by working part-time after you quit your full-time gig? These are all personal questions that only you can answer, but at least now you know which questions to ask.
The numbers don't lie. Work on the balance that is right for you and get ready to put your plan in place.
4. Action
Now that you know what your financial life is going to look like, automate your success by putting your monthly savings on autopilot. In other words, instruct your financial adviser to have the investment custodian take that monthly savings amount directly out of your bank account each month and invest it for you into your investment account. This saves time and frankly, takes you out of the equation. You don't have to think about writing a check or transferring funds. It all gets taken care of for you. All you have to be concerned with is making sure the money is in the account and that you can live on what's left over for the remainder of the month.
5. Accountability
People who get this far are my kind of people. They have an ambitious goal, they work out a plan and they put it in place. That's what I'm talking about.
But the reality is that most of us encounter roadblocks along the way. We get tired and we lose enthusiasm. That's why it's crucial to have an accountability partner and provide that person with timely reports on your progress. This can be your spouse, a friend or your financial adviser. It doesn't matter who it is as long as that person is willing to hold your feet to the fire no matter what.

You can retire early if you are willing to do what it takes. Many people have a dream of leaving work while still in their 40s and 50s, yet they find it difficult to do because they don't have a realistic plan. You can take the steps I outlined above to calculate exactly how much money you'll need and build a plan to achieve your goal. If the bar is too high, you have the opportunity to amend the plan into something more doable.

Take the time now to map out your future. Figure out what you need to do to have the life you will love and ask a trusted friend to hold you accountable.

I've seen these tactics work for many people over the last 30 years. I know it can work for you, too.

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