How to Retire Early
For many Americans, the idea of an early retirement is pure fantasy — many surveys suggest that a good portion of us are convinced we’ll never be able to retire at all. But what if retirement saving isn’t quite as insurmountable an obstacle as you think?
The idea that retirement — even early retirement — is within anyone’s grasp is a big part of the appeal of a popular personal-finance blog called “Mr. Money Mustache,” written by a 39-year-old man named Pete, who lives with his wife and 8-year-old son in Longmont, Colo. (The blog recently had 417,000 monthly unique visitors, and has had a total of 4 million unique visitors since it launched in April 2011.)
Pete, who prefers not to divulge his last name to protect his family’s privacy, retired when he was just 30. His wife retired with him, and for the past nine years they’ve been stay-at-home parents. Their investment income supports their lifestyle, but they also work when they want, on their own terms.
One secret to their success? They live on very little for a family of three: about $25,000 a year. They own a car, but mostly bike. Dining out is an occasional luxury. And shopping for stuff? That’s best avoided. But their philosophy goes beyond mere scrimping, says Mr. Money Mustache. It’s about enjoying life with less.
MarketWatch asked Mr. Money Mustache about his philosophy on spending, how he retired early, and his take on retirement planning. Our Q&A is below. And if you’re wondering about the name?
“Mr. Money Mustache is meant to be a bit of a character — a financial superhero,” Pete said. “He’s me, but a slightly bossier and more opinionated version of me. I find that people gladly obey the commandments of Mr. Money Mustache, even while they would scoff if plain old Pete, the former software engineer, stepped up and started giving them advice.”
How old were you when you decided to try to retire early, and how long did it take you to get to the point where you could retire?
It was a gradual process. I brought some frugal instincts along with me from childhood, so I always tended to save a bit of money rather than spending it all. My wife has been a pretty reasonable spender since the time we met, as well. So I graduated from college in 1997, we eventually moved in together, and, after several years of full-time work, some cash was starting to build up in our investment accounts, and we wondered if there was something useful we could do with it.
Sometime around 2002, we decided we wanted to be parents eventually, and that it would be great if we could retire from our relatively demanding careers in the tech industry before any babies came along. This really increased our motivation to spend less and invest more, and we cranked things up. At the end of 2005, our savings were sufficient to generate passive income that we could theoretically live off forever, so we quit the regular jobs and have been winging it ever since. And we now have an amazing 8-year-old-boy.
How did you decide how much money was enough to retire?
Based on a long-lasting hobby of reading books on stock investing, I realized that you can generally count on your nest egg to deliver a 4% return over most of a lifetime, with a good chance of it never running out. In other words, you need about 25 times your annual spending to retire. So we tracked our spending and our net worth, and when we hit the magic number we declared ourselves “retired.”
Did you have a written retirement plan in place early on, or more of a ballpark figure you were trying to save up?
We did most of the saving before we knew all that much about early retirement. But once the picture became a bit clearer, we had a clearer goal. For the last few years, the mantra was “$600,000 in investments, plus a paid-off house.” This is enough to generate $24,000 of spending money, which goes quite far if you have no rent or mortgage to pay.
How important is it for people to have a written retirement plan, in your opinion?
It doesn’t matter to me if it’s written, verbal or mental. But I do encourage people to open their minds to how real and possible an early retirement can be. It isn’t a vague, fluffy concept like, “someday,” “never” or “when I’m 65.” Retirement (or financial independence) simply means that you have your living expenses covered by nonwork income. In the worst case, this requires 25 to 30 times your annual spending, socked away into investments. If you’re eligible for a pension or Social Security, it’s even easier.
Do you work with a financial planner or manage your finances on your own?
I have always enjoyed managing my own finances. On the blog, I maintain a good-natured battle with the financial-planning industry in general, because they focus too much on retiring at a very old age with many millions in savings — just so you can continue to spend $100,000 a year until you die. It is much more efficient to get a handle on your materialism and spending so you can live more happily on a fraction of that amount, which can shave 20 years or more from the time you need to keep commuting in to that office.
How crucial is it, in your opinion, for people to have a monthly or annual spending plan or budget?
This really depends on your personality type. I’ve never had a spending plan or a budget at any point in my own life. Instead, it was a simple set of values to apply just before I make any purchase or commit to any expense: “Is this the best possible use for this chunk of money, if my goal is creating lifelong happiness for myself?”
Since I valued freedom and financial strength, this automatically ruled out quite a few purchases. For example, as a young man I was a major car enthusiast. But I didn’t run out to borrow money to buy an Acura NSX, because I valued having that money for other things more than I valued a fancy car. Nowadays I can finally afford a car like that without even borrowing, but I am happy to discover that the desire has disappeared.
Some people might think so much cost-cutting is akin to living like Scrooge and not having any fun. How would you respond to that?
If you tell yourself that is how it will be, then you will create your own truth and life will not be fun. But if you understand the fundamentals of what it means to be a happy person, you realize that buying more stuff for yourself has no relationship at all to how happy you are. These fundamentals include things like close relationships with other people, health, rewarding work, a chance to be creative and help others.
Work on those things and you’ll start living a much better life immediately, and soon wonder where the odd compulsion to own a yacht with a submarine came from in your old self.
Surveys suggest there are a lot of people out there who are worried about retiring, who don’t have enough money saved, who feel like they may never retire. Can you offer people in that situation any words of advice in terms of how to turn their situation around?
The quickest way to turn things around is to realize that you are in much more control than you realize. The time to reach retirement depends on only one thing: your savings rate as a percentage of your take-home pay. And this depends entirely on how much you spend. So the moment you can learn to live a less expensive life, suddenly the clouds clear up and the financial picture brightens considerably.
What would you say to someone in his 50s or 60s who maybe doesn’t have any credit-card debt, but is paying a mortgage and has about $100,000 saved for retirement? Is there any scenario where that person would be able to retire in, say, his early 60s?
That’s not a great starting point, but the turnaround can be incredibly fast once you realize where your money has been leaking out and change your life so that you can save much more of your income. Ten to 15 years is plenty of time for most people to go from zero to financial independence, so with a $100,000 head start and the kids all out of the house, this 55-year-old might be in a good place. Adding in Social Security income, the time to retirement would be even faster.
Do you think that the rule of thumb of needing about 85% of pre-retirement income in retirement is accurate, useful, dangerous, innocuous?
This is a good guideline for people who currently spend almost everything they earn, and plan to continue that habit in retirement. But for the rest of us, it is ridiculous!
A much more useful idea is to separate the idea of income from that of spending. Your income is determined by what you do for a living. But your spending should be decided based on your needs — the things and experiences that truly make you happy. As an example, my family’s needs and wants have always ended up adding to about $25,000 a year. So that’s how much we spent, whether we were making $25,000 or $200,000.
So as soon as our retirement income safely exceeded $25,000 a year, we were financially independent and we decided to retire.
I hate to get morbid, but the idea of how long one is going to live is sort of a crucial piece to a retirement plan. How are you handling this impossible-to-answer-yet-essential question? Are annuities and/or long-term-care insurance part of your long-term financial plan?
If you plan your retirement right, your expected longevity might actually have nothing to do with your planning. This is because the amount of money required to fund a 30-year retirement is almost identical to the amount to fund a person forever — an odd behavior of the equation for amortization of a large sum of money.
I’m not into annuities or any type of insurance myself, although those products do have value for some. Both of those ideas are based on statistics and probabilities, and when you do the math you can actually be safer handling things yourself. With a big enough collection of income-producing assets (stocks, rental property, etc.), your savings will easily outlive you, and probably be much larger by the time you die. This big chunk of savings also allows you to pay for unexpected expenses without rocking the boat too much — you have many years to adjust if you do hit a bump that forces you to deplete part of it for something like a medical expense.
You have said in the past that it’s important to “make your dollars work for you.” Does that mean the idea of an emergency savings account at the bank is overrated? Should people be investing more of their savings in the financial markets, via a taxable account, rather than using bank accounts?
Yeah, I’ve always questioned the idea of an emergency fund. It’s a great tool for the financial beginner who lives from paycheck to paycheck, and for whom a broken water heater would make the difference between making ends meet and borrowing via a credit card. But once you get off the ground, your credit card is a monthly buffer and your investment accounts are the emergency fund.
So I have no savings account at all, and keep just a few thousand dollars in the checking account. If a huge unexpected expense ever came up that was greater than my income, I would put it on the credit card along with all other monthly spending. Then just sell some shares of an index fund and transfer that back to the bank before the credit-card automatic payment happened at the end of the month. And I’ve still never had to run a credit-card balance in my life.
The great part is that if your spending is much lower than your income, these emergencies become very rare, because there is always a surplus, which you have to sweep away into investments each month. So if the water heater dies, you buy a new one and just invest a little bit less that month.
To what degree would you say rental income was key to your ability to retire early?
A small degree — I haven’t had the most brilliant landlord career so far, so my results have been only average. But rental properties chosen wisely can return much more than stocks, which could really speed up a savvy person’s retirement program. In my own case, I probably saved only about one year of work by using rental houses along with stocks.
Would you say it’s better to use extra savings to pay down one’s mortgage, or to invest in the financial markets?
For people in a high tax bracket, 401(k) plans in low-fee index funds win this battle pretty easily, especially if there is an employer match. For investment in taxable nonretirement accounts, it all depends on the interest rate (and if you’re pretty well-versed in investing, the stock market’s valuation or P/E 10 ratio).
Right now, with stocks expensive and interest rates very low, it’s probably a somewhat uninspiring tie, in my opinion, and you could do either. But if mortgage interest rates were 6% or more, I’d start getting more excited about paying off a house.
For people with other debts, like student loans, car loans or credit-card debt, at higher rates, I’d prioritize debt payoff even more.
It sounds as though a lot of your success has to do with cutting costs. But I know that some of my readers are really tired of hearing the “cut out the lattes” idea. What would you say to those readers?
For most people, cutting costs is by far the most powerful way to increase wealth. This is because it is easy to burn off almost any amount of money — just ask the 78% of NFL players that have financial problems shortly after turning off the cash fire hose of a pro sports career. It is also possible to cut almost any budget in half, leaving the happy latte cutter saving 50% or more of her income.
But the key to making this work is not cutting out treats — it’s eliminating your desire for those treats in the first place. Driving my 2005 Scion hatchback would be a chore if I had a desire for a 2014 BMW. But since this little Scion is more than enough car for all of my wants (and I usually ride a bike anyway), I am actually winning and living a happier life even while saving $20,000 a year in depreciation and other costs. The handy part of all this is that anyone can eliminate the desire for any of the expensive luxuries currently dominating most of our spending.
Do you have any sorts of items you love to buy and won’t give up?
That’s a tricky question, because our lifestyle does include quite a few luxuries that are fun to have around. I enjoy nice coffee at breakfast and wine many nights at dinner, and the food we eat is very high-end these days. And we live in a pretty fancy house full of nice stuff and take a lot of trips. While I enjoy all of these things, I also make fun of myself for living such a decadent lifestyle, as a reminder that none of these things are essential components of happiness. I would give them up in a heartbeat if we couldn’t afford them — for example if we were in debt or if they compromised our ability to live a free life. But since life is an adventure and there is no need to seek perfection, we dabble in all of the normal treats of American life.
You write a lot about doing things oneself — including being your own handyman. What would you say to people who feel they aren’t good at fixing things and aren’t confident enough to work on their own homes? Is home maintenance going to be a budget killer for them?
You get better at what you do. I think that every homeowner, with possible exceptions for very busy CEOs and rock stars, should be able to take care of a house and can easily learn how to do it. Outsourcing these basic chores is expensive and fussy — it often takes more time to find and supervise a contractor than it takes to do the job yourself.
The key is starting with the assumption that everything is easy, because it is. Then you just grab a book from the library and watch a few YouTube videos on the topic, and dive in. You can also attend the free workshops at Home Depot and ask for help from the handy people within your network of friends. People generally love to help others, and I spend a lot of my own free time giving free home-renovation advice and help to my own friends when they ask for it.
When it comes to spending, what about travel to foreign lands? A no-no because of the steep expense?
Travel can be as expensive or as inexpensive as you choose to make it. We do quite a bit of it these days, spending every summer in Canada and a good part of last winter in Hawaii, with other trips to quite a few other countries in recent years as well. But if you live like a local once you get there, going for the slow and authentic experience rather than flashy hotels and bungee jumping every day, it costs a lot less. One of my favorite trips was a winter driving trip from Colorado down to the Gulf Coast, where we brought along a tent and a kayak and hung out on as many beaches and waterways as we could find in the tropical belt of Texas for a month.
Why did you start your blog?
It was a 50/50 mix of inspiration and exasperation. My wife and I retired from real work at the end of 2005, but all of our friends and peers kept working around us. As their careers blossomed and earnings grew, I kept hearing these complaints about money being tight and retirement being an impossibility. But looking at their lifestyles, I could see exactly where the money was leaking out unproductively — even while they seemed to be missing it. So I decided to start the blog and share the ideas with the world, rather than annoying friends with unrequested financial advice.
By Andrea Coombes
January 17th, 2014.