How To Retire in your 30s
Retire at 30? That doesn’t even seem reasonable, right?
More and more people are doing it today, thanks to the FIRE movement (Financially Independent, Retire Early), but that’s not the only way. It all comes down to starting early and knowing what you want.
We’ll show you how it’s possible to retire 30 years or more earlier than the traditional retirement age.
If there’s one thing every person that wants to retire early will have in common, it’s the need to start early.
You must commit to the concept as early as you can (in your 20s) so you proceed appropriately.
With that commitment, you’ll then feel motivated enough to create the assets needed to live off of for the rest of your life. Remember, you’ll need enough to live off of for the next 40 – 50 years rather than 20 to 30 years – that’s almost double.
You have to commit to living a frugal life – thinking of the future every time you spend. Constantly asking yourself ‘will this make me richer in the future?’ really helps put things into perspective. Suddenly those impulse buys, or even regular expenses don’t seem as necessary because they won’t allow you to retire early.
It takes an intentional focus – you can’t just passively spend. You have to actively think about every dollar or even every penny that leaves your bank account. Is it worth it? Will it provide value?
It also comes down to tax efficiency. Are the choices you’re making today minimizing your tax liability and leaving more money for you to invest in your future?
If not, it’s time to make changes.
Starting as early as you can, you must think like a wealthy person, so you too can become one.
It comes down to not succumbing to the lifestyle creep.
Think about it. You start off in college driving a beater. Then you graduate, probably with debt and you buy yourself a starter home.
As your career advances, you make more money. So it’s natural to grow into it. You buy a more expensive car and the bigger house. You buy fancy furniture and take the exotic trips – after all, you deserve it, right?
If you start now, living a ‘basic’ life and not inflating your lifestyle, you put yourself on track to retire early.
Learning to Save
If you want to retire early, it goes well beyond saving an emergency fund with 6 months of expenses in it. You need 40 to 50 years of money to live off of – that’s a tremendous difference.
Savings in this sense of the word isn’t you need to save a few dollars a month, it’s you need to save thousands of dollars a month and have more than a million dollars set aside.
Unless you’re winning the lottery, this takes a lot of self-discipline.
We’ve already discussed the need to avoid the lifestyle creep. But there are those little expenses too. It’s all about living a minimalist lifestyle.
Things people regularly do that don’t increase their future worth at all like:
- Dining out at expensive restaurants
- Paying for the most expensive cellphone packages
- Taking exotic trips
- Wearing high-end clothing
Think of all the ways you may spend that isn’t necessary and if you cut out, could easily become a part of your savings.
Don’t be afraid to downsize if you’ve already bought the bigger house. Don’t be afraid to drive used cars and for a long time rather than wasting money on a car that depreciates the minute, you drive it off the lot.
It comes down to living within your means – don’t keep up with the Joneses – keep up with yourself and your own desires, don’t look around you.
When we talk savings here, though, we aren’t talking putting the money in your savings account – you aren’t going to earn nearly enough. Savings in this sense means saving on your expenses. What you’ll actually do with the money is invest it.
Now the fun begins.
Investing for your Future
Investing is scary, especially when you’re quitting your job and are going to live off the money you’ve saved.
The key is to diversify. Yes, have your retirement funds, whether 401K, IRA, or both, but you’ll also diversify in other ways.
As many of these investments that you can have, the better off your chances of retiring early become.
- Roth IRA
- Taxable investment account
- Invest in a business or businesses
- Invest in real estate
It’s not just all stocks and bonds. Yes, a portion of your portfolio should be in stocks (you’ll get aggressive growth) and bonds (your conservative investments) but not all of it. You need your money to GROW fast.
Investing in ETFs and mutual funds help diversify your cash investments and combining taxable and tax-advantaged accounts helps minimize your tax liabilities.
But step outside the box – invest in a business, real estate, or both. You can actively invest in a business, meaning you help run it, or passively, meaning you supply the money but don’t run the business. Same with real estate. You can be a landlord or invest in fix and flips or you can invest in real estate passively through REITs and crowdfunding.
The key is to diversify your investments – put your money in all areas of the economy so when one does bad, you don’t lose it all.
The Magic of Compound Interest
This is why you must invest early – compound interest.
Let’s look at a simple example.
You invest $100,000 to start and you contribute $2,000 a month after that. You invest in the stock market which has an average return of around 13% over the last 10 years. In 10 years’ time you’d have $781,000.
If you didn’t contribute that $2,000 a month, you’d have a measly $339,000 and if you only contributed $1,000 a month, you’d have $560,493, so you can see the power of compound interest and why you must start early.
Figuring out Your Number
Here’s the real problem. How do you know how much you need? Retiring early means living off your money for a lot longer as you hopefully have many more years ahead of you.
Ask yourself these questions:
- How much do you need to spend each year?
Be realistic with yourself. What sort of lifestyle will you live? What did you picture doing while you retired? There’s a big difference between sitting at home and relaxing and traveling the world. Will you work, own a business, or completely retire?
Ideally, you shouldn’t spend more than 3% of what you have saved for retirement each year. So if you have a few hundred thousand saved, you’re allowance will be a lot lower than if you had a few million saved.
- How much money do you have saved?
Here’s a simple rule to figure out how much you need to save.
Take the amount you wanted to spend (say $25,000 a year) and multiply it by 33. That gives you the number you need invested/saved. In this case, you’d need $825,000 invested.
Compare that to how much you have saved/invested so you see where you stand. Are you close or do you have a lot of work to do before you can retire?
- How much money do you make?
This is the million dollar question (no pun intended). If you make $40,000 a year and don’t save any of it – you aren’t going to be able to retire anytime soon.
So ask yourself, how much do you make and how much can you save? If you don’t come anywhere near the number you need, it’s time to think outside the box. How can you bring in more money?
Mistakes to Avoid
Even the best-laid plans can fail if you aren’t careful. Retiring early leaves room for plenty of mistakes, though, so avoid any of the following:
- Spending too much too soon
Don’t let the excitement of retirement get to you. Keep your wits about you. Go ahead and budget a celebration, but beyond that live a frugal lifestyle. It’s not about instant gratification, but rather, enjoying the rest of your life.
- Take Social Security too early
It makes sense to take Social Security as soon as you’re eligible, right? Not so fast. If you budgeted correctly, you shouldn’t need Social Security to live off of, so don’t draw it too early. Let your earnings grow and play around with the Social Security calculator to see how you can maximize your earnings.
- Have a plan
Retiring without a plan is like driving without a map. What’s the first thing you’ll do when you get bored? Spend money! Think about what you want out of retirement. What will you do? If you don’t have a plan, you leave yourself at the mercy of boredom and that usually ends up bad financially.
- Underestimating your expenses
It’s easy to do. You don’t know what life will be like in 10 or 20 years. What if you fall ill? What if your investments take a nosedive? What if you need more money to live because you need help? Not estimating your expenses properly can leave you without enough money to last the rest of your life.
Enjoying your Retirement
In the end, the goal is to enjoy your retirement. With so many conditions, equations, and ‘what ifs’ it seems impossible.
Here’s where your math skills really come into play. First, have a solid plan. Know what you’ll do in retirement. This isn’t set in stone – you can change at any time, but having a plan going into it sets the foundation.
Set the basics – where you will live, if you will work, what hobbies you’ll have, and what type of lifestyle you’ll live. Then calculate the funds you need accordingly remembering the 3% rule. If you find yourself withdrawing more than 3% per year, it’s time to change something.
- Do you need to change your lifestyle? Are you living beyond your means?
- Do you need to bring in more money? Working a side job or even running your own business isn’t against the rules. You retired from the rat race but that doesn’t mean you can’t do what you want now.
- Do you need to invest more aggressively? Maybe you took it easy so you didn’t have any major losses, but if you need more money than you anticipated, it may be time to get a little braver.
- Do you need help? It’s okay to ask for help. A financial advisor can help you minimize your tax liabilities, know how to strategically withdraw your retirement funds, and how to make more money if you’re running short.
Anyone can retire at 30 years old no matter how much they make if they use the right steps. Is it right for everyone?
You have to be in the right mindset and that’s a mindset of growing money, not spending it. If you’re a spender, retiring early probably isn’t beneficial. You’ll quickly outspend your investments and end up financially distraught rather than enjoying your golden years.
If you’ve gotten yourself in the frugal mindset and have done so since you first left your college dorm, you’re well on your way to a healthy retirement. Enjoy the years you’ve opened up for yourself doing what you love.
Let those years be years of investment, growth, and even making money the way you want rather than having someone tell you what you’re going to do. It’s a whole different world out there once you retire, but if you can pull it off – enjoy every second of your newfound freedom.