MONEY early retirement

The Most Important Move to Make If You Want to Retire Early

Small birdhouse
Michael Blann—Getty Images

Housing is the most dangerous expense for those seeking financial freedom. Here's what you can do to control those costs.

Looking to achieve financial independence and retire sooner? A top priority should be to control expenses—especially your major living expenses like housing, food, transportation, health care, and recreation. We’ll focus on the rest of these spending categories in future columns, but for now let’s take a look at housing—the single largest expense for many, and one that can all too easily sabotage your journey to financial freedom.

Housing-related decisions will impact your financial independence by years, if not decades. Homes are a downright dangerous expense variable, because price tags are high, leverage (borrowing) is usually required, and various financial “experts” with their own agendas are usually involved. And houses expose our vanities, tempting us to spend for the approval of others, instead of in our own best interests. Losses of tens of thousands of dollars are routine in real estate, and can completely derail your savings plan.

Even when you don’t suffer an outright loss, changing homes is expensive. I moved around in my 20’s, had few possessions, and rented, so the cost of relocating was minimal. Then I married, we bought our first house, and had a child. Our next move was punishing: We were forced to sell our house at a steep loss, and, because of all our new stuff, we had to hire professional movers for the first time. When we finally bought a house again, we stayed put for nearly 17 years. In retrospect, that long time in one place was an enormous help in growing our assets and retiring early.

How much does it cost to change homes? By the time you add up the costs of selling, relocating, buying again, and settling in, you can easily spend $20,000, or more. According to Zillow, closing costs to a home buyer run from 2% to 5% of the purchase price. The seller doesn’t have mortgage-related costs but is likely paying a realtor commission as high as 6% or 7%. Then there are moving costs, and the inevitable shakedown costs with any new home: painting, carpets and curtains, repairs, supplies and furnishings, and basic improvements to suit your lifestyle.

In short, changing homes is frightfully expensive, and will probably eat up most of the average family’s potential savings for several years running.

Of course there are scenarios like career moves, where you don’t have the luxury of staying in place. But anytime the choice to move is yours, stop and consider the expenses. The worst possible choice would be an optional move into a larger house that you don’t really need. You are taking on a big one-time expense, plus a bigger ongoing mortgage and maintenance obligation. If more space is truly necessary, consider instead modifying your current home: When our son reached the later teen years, we renovated a larger downstairs room so he could have more space.

Once you’re in your home, be smart about home improvement projects, especially those you can’t do cheaply yourself. Trying to create the “perfect” home is an uphill battle, at best. Borrowing to improve your home is an especially bad idea, in my opinion. You can spend vast sums of money without measurably improving your quality of life. And old assumptions about getting that money back when you sell are outdated. For 2014, Remodeling Magazine reports that the average cost-value ratio for 35 representative home improvement projects stood at just about 66%. In other words, you don’t make money when you sell: rather, you only get about two-thirds of your money back! Financially speaking, that’s a lousy investment.

Lastly, while there are situations where it makes sense, on paper, to hold a mortgage, for those truly dedicated to financial independence, the disadvantages of debt often outweigh the benefits. In general, pay off your mortgage as soon as possible. Using extra income to pay down a mortgage loan can be a solid investment in today’s low-return environment. We paid off our mortgage years before retiring, and the peace of mind was invaluable. Now, in retirement, we rent instead of own. It’s a flexible, economical, and low-hassle lifestyle.

In short, maintaining a home will be one of your largest life expenses. Pay careful attention to your housing decisions if you’re serious about financial freedom!

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

More from Darrow Kirkpatrick:

The Single Most Important Thing You Can Do to Achieve Financial Success

The One Retirement Question You Must Get Right

How to Figure Out Your Real Cost of Living in Retirement

Read next: 3 Little Mistakes That Can Sink Your Retirement

MONEY retirement planning

The One Retirement Question You Must Get Right

Man slamming his head into chalkboard of theorems in frustration
Getty Images

Figuring out how big a nest egg you need is a huge financial planning challenge. Here are some helpful tips from an expert who retired at 50.

How much money do you need to retire? This is one of the most difficult questions in all of financial planning. Countless words are written, endless fees are charged, and plenty of sleep is lost, just trying to answer it!

But I’ll tell you a secret—a truth that none in financial services and few in the financial media will admit. We don’t know how much you need to retire! Beyond some broad ranges that have worked in the past, it’s practically impossible to calculate the precise amount of money needed to carry you through a retirement lasting decades or more into the future.

Why? Because, in addition to predicting a host of smaller factors, computing how much you need to retire requires pinning down two huge and essentially unknowable variables: the length of your life, and the real return on your investments. (That’s the actual return, after inflation.)

If you misjudge your life expectancy by even a few years, you could potentially die broke, or with tens of thousands of unspent dollars on the table. If you misgauge your real rate of return by just 1% (and the pros miss it by more than that, all the time), the error in a half-million dollar portfolio over a 30-year retirement will be about $175,000—one-third of the starting value, and a lot of money to go missing!

So there can be no precise answer to this question. And, yet, you must answer it, in some fashion, if you don’t want to go on working forever. So where do you begin?

As I’ve written before, knowing your expenses is an essential first step to retirement planning. You simply must know what it costs you to live each month, in order to get any sense for what you must save to retire.

From that monthly expense number you can subtract any guaranteed, inflation-adjusted income that you are certain to receive in retirement: Social Security for many of us, pensions for a fortunate few, and annuities for those who buy them.

Your remaining expenses must be funded from your investment portfolio. The traditional approach has been the 4% Rule, which states that you can withdraw 4% of your portfolio in the first year, then adjust that withdrawal amount for inflation each year, without fear of running out over the course of a 30-year retirement. However, some experts say this rule is too optimistic for the current difficult economic times, with low interest rates and high market valuations. On the other hand, if you retire in better economic times, or if you choose to annuitize your assets, the rule might be too conservative. (You can find online tools that will let you see the impact of using different economic assumptions—I mention three of the best retirement calculators in this article.)

Boiling down all the research papers, case studies, and opinions that I have read on this topic—and I read about it nearly every day—I can tell you this: The safe withdrawal rates from your retirement savings probably range from about 5% on the optimistic side to about 3% on the conservative side.

That means, for example, if your living expenses not covered by guaranteed inflation-adjusted income were $3,000 a month in retirement, then you would need between $720,000 in savings on the optimistic side, to $1.2 million on the conservative side, to provide for your lifestyle over a several-decade retirement.

Thus if your savings were in that range you could consider retiring. But there is more to it than that, especially for an early retiree. You would also need to factor in the risk that you would run low, and your ability to do something about it. That risk would be a function of the economic environment you retire into, and the longevity factors in your family. The ability to do something about it would be a function of your age and health at retirement, your professional skills, and your lifestyle flexibility.

In the end, there is no simple answer to the question “Do I have enough to retire?” But, there is a range of possibilities, based on historical data and your own risks and capabilities. And, even after you’ve made the retirement decision, you still need to assess and drive your retirement, especially in the early years. So, once you’ve started on the retirement journey, don’t fall asleep at the wheel!

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

MONEY early retirement

How to Figure Out Your Real Cost of Living in Retirement

Your retirement savings “number” gets a lot of press. But your expense number is even more important, especially if you retire early.

Many financial advisors say you’ll need some fixed percent of your previous income in retirement—often 80% is considered “reasonable.” But that’s nonsense. What it costs you to live in retirement, or before, is not a function of how much you make! There are millionaires who live like college students, and college students who live like millionaires—for a while anyway, on credit.

Where are you on the lifestyle spectrum? To get serious about retirement planning, you’ve got to have an accurate picture of your monthly living expenses. You need to know your bare minimum or fixed expenses, your average or normal expenses, and your ideal expenses—allowing for some luxuries.

Spending is a personal area, so everyone’s pattern will be different. But on average the first phase of retirement is when you’re likely to spend the most, since you’re finally free to travel, dine out and enjoy other leisure activities. Among older Americans, average annual expenditures peaked at about $61,000 for those in the 45-54 year age range, according to the latest data from the Consumer Expenditures Survey. By ages 55-64, spending dipped to $56,000, and down again to $46,000 between ages 65 to 74. At 75 years and older, average spending was only $34,000, though health care expenses may spike up for many.

We are in our mid-50’s and live a modest but comfortable lifestyle, which currently costs us about $4,500 a month, in addition to housing. We rent a smaller, two-bedroom house (about $1,500 monthly), and share a single gas-efficient car ($370 a month, including gas, insurance and repairs). But we eat well, own some nice things, and have plenty of fun—mostly free or cheap outdoor activities. And our living expenses run about 25% above the national average for our age.

This past year we moved to our ideal retirement location. So we’ve had to spend a bit more than usual due to the relocation. But these have generally been one-time home or personal expenses—not recurring expenses that would inflate our lifestyle forever more.

Health care costs remain a concern, since we are too young for Medicare. Fortunately, I was able to get coverage through my wife’s retirement health plan, thanks to her former career as a public school teacher; we pay $1,100 a month on average for premiums, co-pays, deductibles and the like. That’s one of our larger expenses, but it is manageable, for now. (For more on our spending in early retirement, see my blog here.)

If you’re willing to live in a cheaper area, buy used, and eat simpler, you can probably live on much less than we do. On the other hand, if manicured retirement communities, luxury vehicles, and international travel are your idea of retirement living, you could need quite a bit more. In most surveys of consumer expenses, the biggest items are housing and transportation. So, if you want to optimize your retirement lifestyle, start with your home and vehicle.

Without a complete understanding of how much it costs you to live, your retirement planning can’t get off the ground. The best way to determine your expenses is to actually keep track of them for at least a year, as you approach retirement. You can record expenses using dedicated tools like Quicken on the desktop or Mint on the web, or you can use an electronic spreadsheet or paper journal.

As an engineer, tracking expenses was second nature to me. But what if you aren’t the detail-oriented type? You could estimate your expenses based on those government averages above, but in the long run you’ll need more accuracy to be confident about your own situation.

One approach is to sit down with your checking and credit card statements, and use them to estimate a monthly or annual amount for each important budget category. You can start with this short list: housing, transportation, food, health care, entertainment, and personal expenses. Just don’t forget those less-frequent items such as home and auto repairs, vacations, and property taxes!

Your retirement savings “number” gets a lot of press. But even more important than that is your expense number. Understanding your expenses is a critical stepping stone to building wealth and retiring comfortably. If you still don’t know where your money goes, why not get started today?

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

MONEY early retirement

4 Secrets of Financial Freedom

140701_HO_FinancialIndependence_1
Feng Yu—Alamy

You can shorten the path to early retirement if you start with the right strategies.

Ever since I retired at age 50, I’m often asked how I managed to reach financial security. Looking back, I see that the key factors fall into four categories—family support, career choice, money management, and personal habits and attitudes. Here’s how you can use these building blocks to reach your goals.

Start from a Strong Foundation
Some of us were fortunate to start out in families that instilled integrity, prudence, and hard work. If that’s your experience, you can be grateful. But, if not, then it’s still within your power to cultivate those qualities now. Not only will that create the conditions for your own financial success, but it will benefit everyone around you as well.

Throughout you will need patience. Typically the personal and financial decisions that will pay off in the long run require sacrificing a little today. Patience helps you live with the reality that true rewards usually require some short-term discomfort.

Choose a Career Wisely
Your choice of career is one of the most important decisions you’ll ever make. You need to love your work if you want to be great and prosper from it. So pay attention not only to your gifts, but to what makes you enthusiastic about getting up in the morning. Then, find a career path that plays to those strengths.

If you’re just starting out, and it suits you, a high-paying career in a technical or professional field will clearly advance your cause. Competence in math or technology can be a first-class ticket to building wealth. But, if that’s not possible, at least be aware of the financial implications of your college education and early career choices. A graduate in an esoteric major with five digits of student debt starts out life doubly handicapped. You can pursue your passions, integrate them with a professional track, and stay out of significant debt—but only if you make informed choices.

If you’re already in a career, look for mentors and other professional relationships that complement your skills and personality. Having been on both sides of the equation now, I can tell you that older, more experienced people generally enjoy counseling a talented and enthusiastic newcomer. It’s a relationship that pays dividends on both sides. So be open to wisdom when it’s offered. You don’t have to take every piece of advice, but it can be your starting point.

Learn to Manage Money
You might start out with a great family foundation. You might have a high-paying career that you love. But unless you live on less than you make, it won’t put you any closer to financial freedom. In fact, if you develop expensive tastes in houses and cars, and need to look as affluent as your neighbor, you could wind up worse off financially—no matter how much you make. You can start heading in the right direction by simply tracking your expenses, as well as learning about saving and budgeting. Identify the few areas where money spent truly pays off in better quality of life for your core interests. Spend there, and cut back everywhere else.

Next, find a mentor to help you become a confident investor. You need to master any fear of stocks, so you can profit from them in the long run. Offset the risk of stocks by allocating into other asset classes as well. Start small and carefully, but do start. Learn and abide by a few bedrock investing principles: diversification, patience, simplicity, low expenses. Track your net worth and your overall portfolio return each year, so you know what direction you’re going, and why.

Related: Find the right mix of stocks and bonds

Once your career and finances are on track, you can explore more entrepreneurial paths for wealth building—perhaps by owning a small business or real estate. These can leverage your time and money, getting you to financial independence years earlier. They can be fun and rewarding too!

Keep Your Perspective
Even with all these potent ingredients for success, be sure to take life one day at a time. Again, cultivate patience. You’ll need it for the long stretches.

Remember the goal—financial independence —but don’t obsess on it. Don’t sacrifice the present for the future; it won’t turn out as planned anyway. Make time for your loved ones and meaningful activities, even if you must work longer in the end. As great as it is to achieve financial freedom and retire early, you don’t want to arrive there having missed out on life along the way.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

MONEY early retirement

I Retired At 50—Here’s How

It is possible to retire early—if you live below your means and stick to a detailed budget. You can even splurge once in a while on things that really matter to you.

What does it take to retire early, or to retire at all? How much do you need to save before you can make the leap? And once you’re retired, how will you manage your investments for reliable income?

Almost everybody faces these questions eventually. If you’re thinking about them sooner than later, then you’re ahead of the game. Those with successful careers and a taste for simple living have the best options. That was my situation: Instead of climbing further up the corporate ladder, or inflating my lifestyle, I retired at age 50.

How did I do it? I was fortunate to grow up in a military family where I learned integrity, economy, and the value of hard work. In college I earned an engineering degree, discovered personal computers, and taught myself to program. Eventually I started my own small software company, which I merged with another, and helped grow into a larger company.

But I’m not a dot-com millionaire. I didn’t become financially independent from selling a business or flipping real estate or trading hot stocks. I did it the traditional way: hard work, frugality, prudent investing, and patience. Financial independence was a slow process: I began serious saving and investing in my mid-30′s—maxing out my retirement contributions, invested raises and bonuses—and ultimately it paid off in early retirement.

Along the way, I had the help of some wise financial mentors, and my wife Caroline, who, like me, has always been happy living below our means. We ignore what other people are buying, and splurge in the few areas that matter to us. I track our expenses and keep a detailed budget. We can number on one hand the times we didn’t pay off credit card balances in the same month, and it’s been decades since we had a car loan. We paid off our house early too. Even when it might make economic “sense” to borrow, we don’t, favoring the simplicity and security of living debt-free.

In my investment portfolio, I also focus on simplicity and accountability. After some early detours, I’ve resisted the urge to pick stocks or chase the latest hot idea. The bulk of our portfolio now consists of just 10 holdings (all low-cost mutual funds or ETFs) in just two accounts. I’ve tracked our net worth for many years, and calculated our overall portfolio return each year, so I would understand if we were going in the right direction, and why or why not.

At heart, I’m still an engineer. When it comes to managing money, my top priorities are simplicity, reliability, and safety. Now my mission is to help others get on track to financial freedom, through my blog and other writing about personal finance. Whatever your starting point—whether you’re just leaving school, working to get out of debt, or building your retirement savings—you can reach financial independence sooner by using the principles I’ll discuss here.

In the months ahead I’ll be drawing on my experience plus some of the latest research to explore strategies for saving, investing, and retiring earlier. My favorite topics include saving big, cheap travel, passive index investing, retirement calculators, and early retirement lifestyles. You’ll get my best tips and lessons learned—first-hand knowledge for becoming financially independent and retiring sooner in the real-world. So stay tuned!

__________________________________________

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. Now he writes regularly about saving, investing, and retiring on his blog CanIRetireYet.com. This column will appear monthly.

More from Darrow Kirkpatrick:

The One Retirement Question You Must Get Right

How to Figure Out Your Real Cost of Living in Retirement

4 Secrets of Financial Freedom

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser