15 Secrets of People Who Retire Early

By Tim Lemke, Wise Bread on 16 July 2018 0 comments
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15 Secrets of People Who Retire Early

Do you really want to spend more than 40 years of your life working? Do you really want to wait until after age 65 before finally allowing yourself to retire?

There's no rule you have to wait that long to stop working. In fact, countless people have found ways to amass enough wealth to retire at age 50, age 40, or even earlier and start traveling the world.

It's not easy, but it can be done with some hard work, discipline, and the right financial mindset. A little luck also comes in handy.

What do many early retirees have in common? Let's examine some common characteristics.

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1. They get started early

Let's say you want to retire at age 55. That may seem impossible, but if you begin saving and investing aggressively at age 21, you have 34 years to allow your money to grow. If you contribute $500 per month into an investment account during this time period ($6,000 annually), you'd have more than $1 million saved, assuming a 9% return on investment. Save $1,000 per month, and you're looking at $2 million. One of the most powerful tools for getting wealthy is time. Start saving and investing as early as you can, and you'll give yourself a long enough time to amass a large sum of money.

Wise Bread guide: How to get 25x higher interest on your savings account.

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2. They save as much as they can

You'll never be able to retire early if you're not saving money to begin with. Even a few dollars a month isn't going to cut it. Those with a plan to retire early make saving and investing a major priority. They direct as much money as they can into saving and investing accounts, and often set up automatic transfers so they are never tempted to spend it. They avoid lifestyle inflation by stashing away any extra income they have and increasing their savings rate as their salaries rise.

Many financial advisers recommend saving 15-20 percent of your income to retire comfortably. But that's if you want to retire at age 67. If you want to retire earlier than that, boost that savings rate to 25 percent or even more, if possible.

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3. They live within their means

The most financially savvy people know how much they earn, and never spend more than that total. They pay close attention to their monthly income and spending and always end up in the black. This means they engage in careful budgeting on things like housing, food, and entertainment costs. They postpone big purchases, clip coupons, search for sales, and look for the best value in everything they buy.

Those people who consistently live within their means are comfortable making sacrifices. They may live in smaller houses or drive older cars. They may cook at home instead of going out to eat. They're fine using an old flip phone rather than the latest smartphone.

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4. They avoid high housing costs

It's very difficult to retire when you're still saddled with a high monthly mortgage payment. Many people have found themselves in financial straits because they purchased a home that was too expensive or too large, or they obtained a loan with unfavorable and onerous terms.

A home is a big expense, but it should be viewed as a path to building a high net worth. If your payments are high and you're building equity in your home very slowly, your house may be the thing that's holding you back.

Those who retire early tend to keep their housing costs as low as possible. They put down sizable down payments to ensure that their mortgage loan is manageable. They refinance to shorter loan terms to pay off the principal faster. In some instances, they purchase homes free and clear and avoid monthly housing payments altogether.

Freeing yourself from high housing costs means freeing up your money to pay off debt, save, and invest.

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5. They invest smartly

It's very difficult to save enough for a comfortable retirement if you don't take some risk and place savings in the stock market and other investments. Those who invest in the stock market can earn far more over time than those who simply leave money in a bank account. Savvy investors look for stocks, mutual funds, and exchange-traded funds with a track record of good performance. They also seek out investments with low expenses and fees.

It's possible for someone to retire early by getting rich from a single investment that exploded in value. Surely, there are people out there who retired early from the returns from their Amazon stock. But the more likely path to early retirement is investing as much money as you can in low-cost funds that mirror the performance of the stock market. Those with a higher risk tolerance can boost returns by investing in more volatile stocks, but they are careful to avoid placing too much of their savings at risk.

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6. They avoid financial disaster

Amassing enough wealth to retire young is as much about protecting your money as growing it. There are many important ways to build a moat around your wealth to keep it from being wiped out:

  • Avoiding risky, volatile investments will keep you from losing large sums of money if the stock market tanks.
  • Having a sizable emergency fund (enough cash to last several months, at least) will enable you to handle major unexpected expenses or a loss of income.
  • Good health insurance, life insurance, auto insurance, and homeowners insurance will save you thousands of dollars if disaster strikes.

You can't get rich if you lose a good chunk of your money in one fell swoop, so protect yourself and your financial well-being.

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7. They focus on their net worth

Those who retire early work toward growing their assets and reducing their liabilities. Anything you purchase — especially anything that rises in value — is an asset. Debt, such as a mortgage loan, student loan, or big credit card balance, is a liability.

Early retirees don't concern themselves with accumulating objects. They focus on accumulating assets. Stocks, bonds, and real estate are assets that can rise in value and contribute to your net worth over the long term. A $2,000 flat screen TV is not.

Early retirees also know that high income does not, by itself, guarantee a high net worth. If you spend your high salary on material items and fail to save or invest, your net worth could be far less than someone of more modest means.

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8. They stay out of debt

How can you possibly save for retirement if you are paying thousands of dollars toward credit card bills? How can you build wealth if a huge chunk of your income is going to pay off student loans, auto loans, or a big fat mortgage?

Millions of Americans struggle to save for the future because they have found themselves lost amidst an ever-growing pile of debt. But people who retire early are often living free of these burdens, especially the kind of debt with high interest rates.

There are some instances when borrowing money may help you build wealth (like when investment returns are outpacing interest rates), but you must ensure it's a manageable debt load that can be paid back. Late payments and rising debt levels can hurt your credit score and make the problem even worse.

If you want to retire early, don't be a slave to debt.

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9. They work very hard

Retiring early often requires earning a great deal of money early on in your life. That doesn't come without putting in the hours and the effort. This means developing skills that employers will find valuable. It means burning the midnight oil to impress your boss. It means working countless hours to build and grow your own business. Unless you've been the beneficiary of a huge inheritance or other windfall, your early retirement will come from a heavy dose of sweat and tears.

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10. They find passive income streams

Retiring doesn't mean you've stopped bringing in income. It just means you're done with the 9-to-5 grind. There are many ways to make money without a ton of physical effort. It could mean investing in dividend stocks that make quarterly payments to shareholders. It could mean getting involved in peer-to-peer lending, in which you are essentially collecting interest payments from other people's debt. Many of these passive income streams require some work and investment on the front end, but over time can generate lots of cash with little effort.

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11. They earn money from many places

Those with a goal of retiring early aren't content to accept a single paycheck. They look for more money wherever they can find it. They may take on a second job, freelance, or develop a lucrative "side hustle." They may rent properties, or list them on Airbnb, or drive an Uber on the weekends. They are only limited by the amount of time they are willing and able to commit. This extra income on top of their "day job" can mean the difference between retiring early or waiting to quit work like the rest of us.

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12. They aren't materialistic

When people decide to retire early, it's because they value their time. They want to experience life outside of a cubicle and the daily demands of work. They are less concerned about having a fancy car, wearing designer clothes, or going after the latest luxury items. These people don't suffer from envy of their neighbors who may appear to be living a lavish lifestyle. To them, a long hike in a pristine park or time spent with a good book is more satisfying than any material object. Thus, they have the discipline to live frugally, save large portions of their income, and stop working full time at an earlier age.

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13. They are disciplined

Unless you've won the lottery or experienced some other big financial windfall, retiring early requires immense levels of discipline. It means laying out a plan and sticking to it. It means being maniacal about monitoring spending and maintaining budgets. It means avoiding emotional purchases. It means monitoring your investments for optimal returns. People who retire early are very good at setting goals, following a plan, and staying the course.

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14. They got lucky

This is certainly not true for all early retirees, or even most. But there is certainly a segment of those who retired early that benefited from some good fortune. Many early retirees have been able to stop working because of large inheritances or sizable gifts from relatives. Others may have had unusually good luck investing in stocks or were lucky in their timing of purchasing real estate. This is not to dismiss hard work and discipline as key players in an early retirement plan. But sometimes, you just luck out.

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15. They have identified a new purpose

Retirement isn't always about stopping work. It's often about freeing yourself to focus on what you are passionate about. Young retirees don't just quit their jobs and spend the next 40 years sitting on a beach. They start new businesses or non-profit organizations. They travel. They go back to school. They pursue creative writing or art. They go on a years-long quest to catalog every species of butterfly. Many retirees find that they are just as busy as they always were, because they're devoting their lives to the things they care about most.

This article by Tim Lemke was originally published by Wise Bread.


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