I’m going to be 46 this year. Yikes! While I still have my health and a decent level of fitness I have noticed some changes in how long I recover from injuries as well as my energy levels that have reminded me life is not forever. Given a limited amount of time left that I can do all the things I love [bike, surf, kiteboard, camp, ride motos and travel] my thoughts have turned to the end game aka retirement.
I’m very aware that if I wait too long I’ll not be able to do the same stuff as I would right now. On the other hand I need to fund my life so it’s not as easy as saying “I’m done working. Let’s party!”
What I do know is that if I don’t come up with a plan and follow it I’ll be bumbling along for another couple decades without much hope of stopping. So I’ve been reading about retirement and personal finance online to see what other folks are doing. Based on what I’ve read and my own situation I’ve come up with a plan. I thought I’d share it since I can’t be the only person who’s been thinking they’d like to ride more and work less as they get older. 😉
- Reduce my costs.
- Save aggressively.
- Invest wisely.
- Move to part-time work.
- Allow investments to grow.
- Reduce work load to zero.
- Stay flexible.
If I was 25 I’d just save aggressively and invest while working full-time until I had enough to live off of and then quit working. However, if you are starting this process at my age and want to stop working full-time before the conventional retirement age [60-71] you have to save a ton of money in a short time to reach financial independence. If you are making a shit load of money and can reduce your costs savagely this may still be a good plan, but for most people [me included] it’s not workable.
By shooting for part-time work you can give yourself the gift of more and more time off without needing anywhere near the same amount saved before you start.
Kill your debts!
If you have any debt other than a mortgage treat it like an emergency. Do not buy anything non-essential – which includes beer, new clothes, movie tickets, eating out, etc.. If that sounds grim than see if you can get rid of debt – for example sell the car and ride your bike/take the bus. You literally can’t get anywhere if you have consumer debt.
I was lucky despite living on my own since I was 15 yrs old [and never receiving support from my parents/relatives once I left home] I didn’t have any student loans or spend more than I earned.
You don’t need all the stuff you want.
It’s very easy to let your spending grow with your salary. That means you’ll always chew through your money and never get anywhere.
When I started looking at retirement I came up with a budget I figured I could live on. I kept reviewing it and reducing it. I now realize that I can actually live an awesome life on 50% less than my initial estimate and I can be just fine on 50% less than that…this includes paying a mortgage.
Being honest at this stage is critical. If you need $50K/yr to live that’s a lot harder to fund than if you need $20K/yr to live.
I’d love a fancy new mountain bike every couple years, but I don’t want to work full-time to pay for it so I am going to get a less fancy mountain bike every 5-6 years which means I can work part-time.
$25 saved and invested = $1/yr for life!
If I had realized the above was true when I was 25 I would have been retired at 35 and never looked at money the same again. Fancy new tires for your bike cost $100. If you just look at it from the perspective of how much $100 is compared to your salary it’s easy to spend that money. If you ask yourself “would I rather have the new tires or have to earn $4 less per year forever?” it becomes a lot clearer that you want to keep riding the old tires on your bike until they are truly worn out.
Make your money work for you!
There are a number of ways to invest your money so it gets a reasonable return. You can buy a rental property, invest in the stock market, buy a business, etc… The key is to not let it sit in a savings account being eaten away by inflation. Personally I’m investing in stocks because I am too lazy to do the rental property thing while working full-time. I’m running a consulting business which is great for deductions, but it’s not scalable the way a manufacturing business would be. I’m too lazy to start a second business.
Wealth is spending investment income.
Once you’ve invested your money never take out the principal. If you have $10K in investments earning 10%/yr after inflation think of that as $1K/yr of income. Never spend more than the $1K. Ideally never spend more than part of that $1K. That way your investments will always grow.
If you make $120K/yr at a job and spend it all each year you aren’t wealthy. You are a highly successful wage slave.
If you make $30K/yr off your investments and live happily off $20K/yr you are wealthy.
Part-time work is still a ton of awesome!
It’s nice to dream about giving your job the big Fuck You! and never working another day of your life, but if you can’t do that working part-time is still a pretty awesome option. If you are right now working Monday to Friday with 4 weeks off per year including stat holidays and you start going part-time here is what it means:
- Taking Fridays off = 38% more time off per year
- Taking Friday and Monday off = 77% more time off per year
- Working 2.5 days per week = 96% more time off per year
So you can nearly double your free time in a year while still earning 50% of what you do now.
If you earn $40K/yr now and a can live off $20K/yr you can save $20K/yr until you get enough investments then switch to part-time and ride that bike a lot more.
If you save $1 working full-time then invest it at 7.5% after inflation and switch to part-time work you will have $2 after 10 years and $4.25 after 20 years. So you can save hard and then start enjoying your life while your money grows to whatever amount you need.
- $40K/yr salary after tax
- Cost of living $20K/yr
- Save $20K/yr for 7 years
- Invest at 10% after inflation
- Work part-time earning $20K/yr for 10 years
- Stop working and earn $20K/yr from investments for the rest of your life
That’s 7 years of full-time work and 10 years of relaxing part-time work with a lot of travelling and bike riding. Then no working at all if you want.
When to stop?
So you have saved a bunch of money and invested it then started working part-time when should you quit working entirely?
Once your investments are making more [adjusted for inflation] than you need to live in a year you don’t have to work. Since the stock market changes returns over time you need to decide on a safe withdrawal rate which a lot of people will tell you is 4% of your principal. That’s where the save/invest $25 = $1/yr for life comes from. You can decide to go with 3% or with 5% depending on your view of the risks.
My own view is don’t fixate on a number. If you have a few years when you make a lot of investment income maybe that’s the time to replace your roof and paint the house? When you have a couple bad years maybe that’s the time to skip buying any bike bling? If you let your spending vary with your investment performance you need a lot less money to buffer the bad years.
Now once you don’t have to work that doesn’t mean you shouldn’t work. It just means you shouldn’t do any work you don’t enjoy.
I’ve made it to stage 3 and I hope to get to stage 4/5 in the next few years. I think working part-time is going to be great. I can cover my cost of living and I can let my investments grow. At 10% returns adjusted for inflation $1 = $2 every 7.5 years. So if I don’t touch $1 from now until I am 65 it will grow to over $6 with today’s buying power. That’s awesome and makes saving enough to live off of far more achievable.
I’m not even sure I will ever stop working entirely between now and 71. I don’t love what I do enough to work forever at 40hrs/week, but once I’m down to say 20hrs/week and 148hrs not working each week I may well enjoy it enough to keep going for a couple more decades at a slower pace.
No matter where you are at it’s not too late too start.
- Kill your debt.
- Spend less and/or earn more.
- Work out a plan based on your own reality.
If you are like me the key is to never forget that $25 saved and invested today is $1/yr forever.
Here are some sites I’ve found were useful to me if you are interested in learning more:
- Mr. Money Mustach [Living fancy on $25K/yr for a family of 3]
- Early Retirement Extreme [Living well on $7K/yr]
- Couch Potato Investing [Index investing for Canadians who are clueless about investing]
- cFIRE Simulator [How realistic are your plans? Find out!]