This month we highlight three key paths to financial independence and early retirement.

Financial Friday: How to Retire Early

18 min read

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This month’s Financial Fridays episode is sponsored by Golden Gate Chiropractic Center in San Francisco, CA. $90 off your first visit for mentioning the podcast. Sponsor copy in footnotes at the bottom of the article.

Today we’re going to talk about how you can retire early — and by early I mean as early as in your 30s or 40s, if you wanted to. We’re not going to go into the reasons why you might want to do this; if you want that type of context, check out episode 2 of the podcast where we introduce the concept of financial independence and provide some reasons as to why someone might consider pursuing early retirement or financial independence. For today we’re just going to talk about several different ways you can retire early.

For the sake of simplicity we will refer to this process as FIRE, which stands for Financial Independence / Retirement Early. We’ll refer to early retirement — or financially having the option — in these terms for this episode.

There are fundamentally a few ways to give yourself the option of early retirement. These are standard FIRE through expense reduction, lean FIRE, and fat FIRE. An important thing to understand before we jump into each of these is that absolutely anyone can design their life to accommodate early retirement. Of course certain scenarios like major emergency medical expenses or having 15 kids will have a substantial impact, but I think in the developed world, if you are able to earn a steady income, you can make this a reality. I also want to clarify that for this episode, “retirement” will refer to having the option to quit full-time 9-5 work. Having the option doesn’t mean a person should or will want to, and it could also just mean reallocating the time so rather than being retired, maybe you just work a part-time job you love for a wage that might have otherwise been difficult to live off of. One last clarification here is that if you have existing debt in the 5-6 figure range, for example from student loans, you will likely need to calculate that into your own monthly or annual expenses, or factor in how many years it would take you to tackle the debt based on your earning power, and add that to your early retirement calculation.

standard/typical FIRE: disciplined and aggressive budgeting on moderate to high earnings
Onto the ways to retire early! The easiest way to retire early for most people is to earn a moderate to high wage and reduce your expenses. For clarity, let’s refer to moderate to high wage as $70,000 – $300,000 total household income, so that could be one or two earners typically. If you fall in this category or can in the near future, early retirement is simply a matter of expense reduction. For an easy-math example, let’s look at a household bringing in $100,000 in post-tax annual earnings. By keeping expenses low and living within their means — renting inexpensively or owning a home with a very modest mortgage, driving inexpensive cars, minimizing luxury entertainment and shopping etc. — let’s say this household is able to live on $50,000. That means they are able to save and invest $50,000 a year. Let’s also assume they never inflate their lifestyle and never get a raise — both of which are likely to happen, in this case let’s say these factors remain totally static. In this scenario, with a 50% savings rate, they will both be in a position to retire within 16.6 years. Networthify has a great simple calculator for this, which assumes a 5% return on investment. I believe most people will be able to see a higher return than that most years (and as a side note, if you don’t know how to do that, check out Episode 29 of the podcast or blog). I’m happy with the 5% calculation though as I do believe this calculator ignores inflation, so 5% is a conservative happy medium there. So in any case what this means for our hypothetical couple is that they are both earning under 6 figures pre-tax, but by keeping their expenses realistic and saving and investing consistently, they can quit their jobs and live off of the returns from their nest egg after about 16-17 years. Even if we assume they begin this process at 30 years old, they will have the option to retire before their 47th birthdays.

lean FIRE: extremely strict budgeting, minimalist living, usually modest earning
The next way to retire early is what often gets called lean FIRE. In lean FIRE, the idea is that extremely minimalist living would not necessitate ever being a high income earner. If you’re the type of person who can live very happily without many luxuries or material possessions, and you are also the type of person who maybe just doesn’t have any particular drive to earn a high income, lean FIRE might be a path for you. A lean FIRE example would be someone who, let’s say, earns $25,000 a year post-tax, making him or her in the range of minimum wage earnings. In a household of two such earners, a $50,000 post-tax income can be spent, let’s say, $25,000 a year on expenses. This is certainly not impossible, and many people pursue lean FIRE much more aggressively than this, but I’m using this example because I think it’s generally doable. This would basically amount to a $1,000 a month total rent or mortgage, $500 total monthly car and transportation expenses, $500 a month on food, and $100 a month on spending and entertainment. That’s $25,000 a year. Unfortunately for folks in high cost-of-living areas, a $1,000 a month living expense may be unrealistic, but for most of the United States this would actually be more than enough to live in very comfortable, safe housing. A bit of tough love here for anyone listening who wants to live in San Francisco, wants to retire early, and has no plans or aspirations to increase earnings: you’re not going to make that goal. For a point of reference, a friend of mine is a photographer who has had many great experiences in various countries in Africa and he can see himself living there. The cost of living in most areas he’s considering is so low that he in order to retire early might need to save and invest only 5-10% of the nest egg required by someone in a reasonably priced metropolitan area in the United States. Point being, there are many ways to achieve this. Oh by the way, in our previous example of the $25,000 a year savings and $25,000 a year earnings, that person also retires in 16.6 years. If you’re curious about savings rate math, check out Episode 2 of the podcast which dives deep into that. For today I want to shine the spotlight more on methods to FIRE rather than too much math and theory behind it.

fat FIRE: upper-middle-class-to-luxury lifestyle, high or outlier earning to enable moderate to high spending and equally astronomical saving
The last common way to retire early is basically the opposite of lean FIRE, and is often called fat FIRE just to show its contrast with the previous method. Fat FIRE is for someone who wants to live a lavish or even luxury lifestyle, but also achieve financial independence or retirement at a younger-than-traditional age. Another piece of tough love here: if you think this sounds really nice, but you aren’t willing to work very deliberately on sky-high earning potential, you need to pick a different strategy. Fat FIRE is for someone who has a gameplan to make and invest millions of dollars at a young age. Of course, this is much easier said than done, but it’s certainly quite possible and I see examples of it very often here in the Silicon Valley, so let’s explore a few typical cases here. The CEO of a company I used to work at was in his mid-30s when the company sold for over $500 million; as such, selling all of his stock would leave him with a liquid net worth in the $20-50 million range. If we assume he had $35 million well-invested, a 4% safe withdrawal rate leaves him with $1,400,000 income earned passively every year without having to draw down his $35 million nest egg. As you can imagine, a person can live quite well on $1,400,000 spending money each year, so in this example that individual would have the option available of never working another day in his life. He could have four $20,000-a-month mansions, two Lamborghinis and two Rolls Royces costing $4,000 each per month, and still have nearly $300,000 a year to spend on whatever else he pleases such as travel, food, and entertainment.

Obviously this is a very extreme example of fat FIRE, but it is still definitely a form of FIRE! A more attainable example would be someone who sold a company and made a few million, became an executive and had a small equity stake, stayed at a company that grew over time and led to significant stock option holdings, or earned a lot through sales and reached $600,000+ a year type earnings. Note that everyone’s idea of what qualifies as fat FIRE might be different. For people in very low cost-of-living areas, fat FIRE might be seen as or achievable with a $250,000 a year pre-tax income where it’s not too hard to save 80% of that income annually until a retirement with 6-figure passive incomes. For others, like those of you listening from the San Francisco Bay Area or New York, you recognize that the same earnings do not go very far in the way of creating a lavish lifestyle.

I’m sure there are other means of getting to early retirement — and no, I don’t really count a huge inheritance as one — but those are your best ways. At the end of the day it all comes down to savings rate; you can do this with a small, moderate, or high income, and you can do this over the course of two decades or all at once with a big buyout or other windfall. Hope this was a helpful look into early retirement and again, if you want to better understand the math behind it, or whether it’s even right for you to pursue, check out Episode 2 of the podcast or blog.

All right everyone, thank you for tuning in, as always please share your thoughts, your praise, your criticism, it all serves to make the show better. Follow us in instagram @thewealthyhealthy

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