Posted by Tim Stobbs on March 3, 2011
Every once in a while I come across a good story of how someone else managed to retire early. Often I get get a guest post or interview from them and share what worked for them. I hope you enjoy this story by dave (not our regular writer of Tues posts). – Tim
At age 39 (and 2 days before my 40th birthday) I walked in to my boss’s office with a letter stating that I was retiring. It came as quite a shock to my boss, many of my co-workers and even my friends. Even though I had discussed my plans for early retirement with some of them, they were all still stunned and asking the same question: how did I retire by 40?
Well there were no lottery winnings or inheritance or great stock that I cashed in on. In fact we never really made a lot of money in our jobs either. In the 12 years from when we got married to when I retired (1998 to 2010) our salaries ranged from the high $40,000’s to the mid to high $60,000’s. Oh and it’s probably worth mentioning that our total net worth when we got married was under $100,000.
So what’s the secret? Well it’s not as hard as you think, but here are the five key points that helped make it happen for us.
1) Find a Good Partner. First and foremost I have to say that having a good partner is the most important. I have an incredible, smart, hard working, rational thinking, like minded wife, who truly believes that we can do whatever we set our minds to. I know of so many relationships where she’s and saver and he’s a spender (or vice versa) or, where she wants one thing out of life (live in the city) and he wants something else (live in the country on a lake). It is important to have a common goal. If a couple hasn’t discussed and agreed on a common financial goal then all other money conversations are futile. My wife and I decided when we first got married that we wanted to work really hard at getting ahead financially while we are young so that we did not have to work hard and be stressed over money issues when we are older. This was our high level common goal, along the way we had several lower level common goals like saving up to buy real estate, or paying down the mortgage. When you have a common goal then you are both moving towards the same target (not crashing into each other or going different directions) and that makes a huge difference.
2) Accept Lifestyle Sacrifice: What are you willing to endure or go without to achieve your goal? This was my way of thinking when it came to the return on investment (ROI) of “personal sacrifice”. Let’s say me and the co-worker next to me both made the same salary of $50,000. I choose to drive a 10+ year old Honda that’s paid for meanwhile my co-worker chooses to drive a brand new Lexus with an $800 payment. Now for him to get the $800 into his pocket so he can give it to the finance company, he needs to make about $1200/mo which is $14400/yr. Therefore I would look at this as being the equivalent of me getting a $14400 raise over my co-worker on my “personal sacrifice.” I would apply this same philosophy to all monthly expenditures like choosing not to have cable, or that magazine subscription and also choosing to live in a modest house that needed work and deal with the inconvenience of having a tenant living in our basement. Then of course there are the one off expenses like the new flat screen or the leather sofa or the trendy expensive clothes. It’s not about how much you make… it’s about HOW MUCH YOU KEEP!
3) Make Investments That Work For You: For my family I guess you could say our investment of choice is real estate. We don’t have any stocks or mutual funds. We started out in an older house that we built a basement suite in and that rent essentially covered our mortgage payment. So we were double income no kids and very little housing expense for the first several years. This meant our capacity to save was very good and our predisposition to not spending frivolously helped out as well. This let us buy fixer uppers, selling and/or renting them to continue building our wealth.
4) Hard Work: When people would ask us about getting a rental or buying a fixer upper, I would reply “It’s not free money!” Dealing with tenants is work as is living in a renovation and a lot of sacrifice! There were several times that we felt like we were living in a perpetual construction zone for years. Not everyone can handle that. Funny enough I found that some people would get burnt out just house hunting for a fixer upper or rental as it was too much stress on the relationship. Whether you are shopping for a house, renting a house, renovating a house, or selling a house, it’s all stressful and it’s all a lot of work. Nothing is free in life, so be prepared to work for your money.
5) The Numbers: Often after asking “How did I retire by 40” the next most common question was “How do you plan on living?“ About 10 years ago we put some numbers on a spreadsheet to help us determine, if we had no mortgage and no other debt how much monthly income would we really need to live? This spreadsheet change slightly over the years but basically the number stayed roughly the same and that number is $2000/mo. This includes property tax, insurance, utilities, gas, car insurance, phone, internet, food, household items, clothes, medical, and even a little bit of savings. It is important to note that this number included no “lifestyle” (vacations, toys, etc) Our plan was to generate $2000 a month of passive income (rental income and interest/returns from investments) so that if we didn’t get out of bed, all our bills would be paid. Now having said that, my wife and I are not lazy people, we are not the type of people to just do nothing. So we undoubtedly would do something. Perhaps we would start a small home based business of some kind, who knows? But what ever it might be that we did decide to do, and whatever money we may or may not make, would be strictly “lifestyle money” used for vacations, vehicles, new stuff for the house, new tools, quad, other toys not something we need to pay the bills.
Over the years, and especially as I was nearing my 40th birthday (when I planned to retire) I would be regularly consulting people who were nearing retirement, or already retired, and seeing what their numbers were and what they actually lived on? I also started to scour the internet for info on the topic, (which is how I stumbled upon Canadian Dream: Free at 45) and to my surprise everyone’s numbers were very similar, they all hovered around that $2000/mo mark, The only people that seemed to argue with my numbers were those who had just come back from their “financial advisor” who convinced them that they will need to have 70%-80% of their pre retirement income for their retirement.
I’m now 41 and have thoroughly enjoyed my first year of retirement. I’m currently spending my days finishing up a few projects around the house, finalizing plans and making arrangements for the building of our dream house, and a lot of playing Frisbee with my dog.
So there you have it, the story of my early retirement or financial independence. I hope you find some insight and encouragement from it.