There have been some major changes announced for military retirement, and we want you to be prepared. This is a significant change and many military members have a big decision to make. We are going to do a series of posts focused on preparing for retirement as a young service man/woman. Today we’ll take a look at how to retire well before the traditionally expected age.
How can I retire early? Is this crazy for someone in their mid-twenties to think? No! We’re not advocating for stopping your careers in your 30’s if you love what you do, but many people don’t consider that given the right attitude and understanding of their finances they could be a lot closer than they realize to living without a NEED for income. It can be very complicated to come up with a specific number for any one person or family, but there are some surprisingly simple guidelines that might help you at least guesstimate what you should be saving or what your target number might be. If you feel overwhelmed by the idea of throwing money into the empty hole of a retirement account with no idea what you’re doing, maybe these simple guidelines will encourage you – or invite you to consider retiring early!
Guideline #1 – The rule of 25.
One basic way to approach a retirement goal is the idea of 25 times the annual salary you would like to have in retirement. This is a fairly common guideline used by financial planners and bloggers as it accounts for a conservative annual return (7%) as well as includes inflation costs of 3% per year. Here’s how it works:
If you have $1,000,000 in your nest egg the 7% return will be $70,000. However inflation accounts for about 3% each year. If you want to account for this inflation you need to plan on only getting 4% of the return each year, leaving you with $40,000 in annual income during retirement.
This is simple math. You’d like to have the equivalent of a $70,000 salary in retirement? You’ll need to accumulate $1,750,000 ($70,000 x 25). In that scenario you’re conservatively estimating only 7% returns and accounting for inflation so you’re making a pretty safe bet. Sometimes it’s easier to reach our goals when we understand our target. This rule of 25 can help us pick a number, even if we need to make adjustments to it as you inch closer to retirement.
Guideline # 2 – Reduce your income needs by 20-25%.
While it may be tempting to assume you’ll want a higher annual salary in retirement than you have in your working life, consider what costs you’ll be cutting when you retire. A good rule is that you’ll only need 75-80% of your pre-retirement income during retirement.
The more you can focus on cutting your current living costs, the sooner you can retire. The double edged sword of saving and eliminating future costs could cut years off of your working life (or the years you still need to exchange your time for money).
A financial blogger we recommend Mr Money Mustache created a wonderful chart and article on the relationship between working years and savings rate as they relate to your ability to retire early. He advocates for keeping your costs as low as possible as the secret to early retirement. He believes that you have more control over your spending rather than your income, and we would tend to agree.
Guideline # 3 – Consider passive income.
If early retirement is your goal and you’ve established a target retirement income, maybe you could consider developing a side income that takes minimal work to maintain. If you’re in a situation where you own a rental property or a website that pays out monthly advertisement fees you can you leverage this to your advantage and subsidize some of that 75-80%. This isn’t really a guideline so much as a suggestion. If we box ourselves into just the ‘nest egg,’ or the capital we have saved as our means of retirement, we’ll probably fall into the normal expected retirement age. There’s nothing wrong with being average but hopefully we’re all able to see the potential a set amount of passive income could bring to our retirement. If not needed for living expenses perhaps it could be a source of money for generosity or extra fun money for experiences? Essentially any passive income you can develop will dramatically shorten the necessary lifespan of your working career.
It’s all up to you
When all is said and done you may not be interested in focusing so much on retirement because you want to focus on the present. That’s fine! We’re not here to make you feel that early retirement is the elite way of living. We do want you to understand that your ability to chose when you retire is in your hands. Be proactive, understand what it will take to retire, determine your nest egg goal and your own retirement age.
What age sounds ideal for your retirement? What do you plan to do when you no longer need to exchange your time for money? (Even if you still want a career).