If you think building up enough cash reserves and income to retire within ten years is impossible, think again. The reality is, early retirement is absolutely possible. All you need is some education, some street smarts, and dedication to your goals to make it work.
Don't believe me? If retiring early sounds unrealistic, consider a few people who have done it already. Take the blogger behind the website Mr. Money Mustache, for example.
MMM, as he’s commonly called, worked together with his wife to live frugally and save bountifully, starting in their early 20's. By the time they were in their early 30's, they had over $1 million in investments stashed away.
These days, the Colorado couple lives off the interest they make on the investment accounts - and they have been doing so for more than ten years.
The difference between Mr. Money Mustache and most of the world is that most people don’t think too much about retirement life until after they’re retired. Only then do they find out how unprepared they were, and how many things they should have been doing all along.
In other words, they find their shortfalls by looking at life through retirement’s rear view mirror. But, we all know what "shoulda, woulda, coulda" gets you - not a lot.
Deacon Hayes, who teaches others how to achieve early retirement through his website, WellKeptWallet.com, believes that planning ahead is the most important part of acquiring enough money to retire or retire early.
“You might think that retiring early means you must have a large income, but in fact it’s possible to do this with many levels of earnings,” says Hayes.
Still convinced that having enough money to retire in 10 years or less isn’t doable?
Let’s look at some of the income sources of those who have been able to retire early. Once you realize how early retirement works for others, it's a lot easier to imagine how it might work in your own life.
Three Key Income Sources for Early Retirement
If you do a Google search for popular income sources for funding early retirement, you’ll probably find that there are three key multiple income streamsmost early retirees focus on:
- Stock market investments
- Real estate investments
- Business ownership
Although there are other avenues of income generation to provide for retirement, these three seem to be the most common among the early retirees I have read about and met personally.
Then, there's my own story. Ultimately, my own path to financial independence was paved not only by my business endeavors, but by my willingness to live frugally early on so I could fast track my investment savings.
The reality is, most people who retire early - and wealthy - have several irons in the fire and several different income streams to fund their goals and enhance their lifestyle.
How Much Money Will I Need For Retirement?
But, let's not put the cart before the horse. Before you can calculate how to save or invest enough cash for retirement within ten years, you need to know what your target post-retirement monthly income needs will be.
The fastest way to determine that number is to create a potential post-retirement budget.
Write down every expense you’ll need to cover, including basics such as housing costs and extras like travel and entertainment.
Don’t forget to include a line item for saving for future emergencies such as replacement vehicles, car repairs, or home repairs. And don’t forget that you should try to cut your expenses, too.
Keep in mind that, the lower your expenses, the faster you’ll be able to retire, notes Benjamin Brandt, financial planner and host of retirement podcast Retirement Starts Today Radio.
"Reducing your expenses will allow your retirement savings to stretch as far as possible, thus bringing your retirement goal closer," he says.
While paying off all credit card debt and other unsecured debts is a no-brainer no matter where you are in your financial journey, try to pay off any consumer debt or mortgage debt to whittle your post-retirement expenses down even further.
It's also important to decide what your retirement housing situation will look like: Will you continue to live in your current home or will you transition to something smaller and less expensive?
As you discover what an ideal budget in retirement will be, you can use that targeted monthly number to determine your retirement savings goals.
For the sake of example, let’s say your retirement expenses will be $4,000 per month.
How can you create a $4,000-per-month income source that will position you for retirement in ten years?
Here are a few ways to get there.
Stock Market Investing
The amount of money you’ll need in the stock market to meet your retirement income goal of $4,000 per month will vary depending on a couple of factors - the investment options you choose and the performance of the market.
If you invest in a traditional blue chip low-cost index fund, you can conservatively expect a 4-6 percent annual rate of return.
The Dow Jones Industrial Average, a stock market index, has had a return around 11% since inception, however. Still, it’s best to be safe when planning for long-term retirement income.
Let’s say you plan to spend thirty years in retirement. Using the investment world’s “rule of 4,” you should be able to safely withdraw 4% of your investment fund’s balance each year to live on and have enough money to retire indefinitely.
This means that, in order to retire with a monthly income of $4,000, you would need an investment account balance of $1.2 million.
But, how can you save $1.2 million in just ten years? Let’s look at one some numbers, starting with stock market investing.
If you invest $6,100 per month over a ten-year period in a mutual fund earning an average of 10 percent annually, you’ll have just over $1.2 million in ten years.
If you have already accumulated some money in investments, you can reduce your monthly savings or retire even earlier than ten years.
Does saving $6,100 per month sound unrealistic to you? If so, then maybe real estate investing is your key to retiring early.
Real Estate Investing
Financial planner Tony Liddle of Prosper Wealth Management says that he's seen real estate investing work out wonderfully for some people and disastrously for others.
Where some of his clients and acquaintances have been able to replace their income and retire early by investing in real estate, others have lost their life savings, he says.
"The key to success is knowing what you are doing," he notes. "Just because a real estate flip works every week on TV doesn’t necessarily mean it will work for you."
Liddle believes that the best way to offset the inherent risks of real estate investing is to find a mentor and learn from their triumphs and mistakes.
Still, here's one hypothetical situation where investing in real estate could help you retire early.
Let's imagine you buy a single family home in the suburbs with 5 percent down and a ten-year mortgage. You pay $125,000 for a three-bedroom, two-bath property, which you use as your primary residence. Then, you save diligently to pay this property off.
By living frugally and saving as much as you can, you put tens of thousands of dollars aside to prepare for the next leg of your journey - buying a second similar home to live in.
Once you find a second property to purchase and move in, the first house is now being rented out for $1,300 per month.
Around $300 of that amount goes toward taxes, insurance, and potential repairs, leaving you an extra $1,000 per month in additional income.
As you live in house two, you use that additional $1,000 to save as a down payment for a third and fourth rental home, both of which you’ll buy in a few years with the rental income and other money you’ve saved.
You create a plan which allows you to use your income from your regular job – along with your rental income – to pay off the other three houses in a six-year period.
In ten years, you own four free-and-clear houses, which you rent out for a total of $4,000 in monthly income. You can now rent or purchase a fifth house to live in as you rent out the other four.
Business Ownership
Another common path to retirement is through business ownership. If you’re interested in owning a business and ultimately making money on your own terms, determine what usable skills you have to create an income.
But, it might also help to find something you actually care about, says Long Island financial advisor Joseph Carbone.
"Many of my clients who were able to retire in a short period of time turned something they loved and were truly passionate about into a business," says Carbone.”
The best results often come when you can combine a passion with usable skills you already have, he says.
As an example, let’s say you have the technical skills and passion to create websites for businesses. You start your website design business out of your home and work on building up a client list.
Since top-notch service and a quality product are your priorities for business growth, you hire a small team of smart and dependable employees who are being trained to eventually run the business without you.
As you grow your business with proper marketing and excellent service, your income increases.
Once you get to the point where your business income can pay all employees and other expenses – including your $4,000 per month salary – you can delegate your business tasks to the point where your role is limited.
It Can Be Done
The examples listed here represent just a few of the paths you can take to retire in ten years or less. However, they do convey the message that it can be done.
In Deacon Hayes new book, You Can Retire Early, he says it's all about making decisions that can help you reach your goals early on.
“People who have succeeded at retiring early make their decisions about life based on what seems right to them rather than what everyone else is doing," says Hayes.
And, let’s be honest; most people you know are not busy saving for retirement. They are busy spending their money instead.
It’s up to you to decide whether to follow the crowd - or to stay busy creating a personalized plan that will help you to retire in the next decade.
The longer you wait, the longer you need to work to retire. But if you dedicate yourself to the cause, your ten-year road to retirement could start today.
