SnowballCamper
Full time employment: Posting here.
- Joined
- Aug 17, 2019
- Messages
- 691
As a newish early retiree I thought I'd post my take on how to do it. I think this is mostly common knowledge, so for the aspiring early retiree the hard part is probably the self discipline. How are you going to keep yourself on track? I would start with things in this general order.
1. Avoid unnecessary expenses
1a. Eliminate consumer debt, because the interest is an unnecessary expense. A house mortgage is ok, and a low rate car loan can be ok (because the interest rate is below average investment returns).
1b. Happiness is a necessity, because if you're not happy you won't be able to stay on track.
1c. A strict budget is not necessary, but living below your means is necessary.
1d. Marry a financially compatible spouse and don't get divorced.
2. Get employer matching funds from their retirement savings plan.
2a. Even better, get a job with a pension plan (the ultimate employer match). Most of these jobs are in government, so you won't get rich quick, but you can get rich slowly.
2b. This may involve buying education and/or training to get a better employer. Be careful here by avoiding debt, and using scholarships.
3. Maximize savings to avoid future consumer debt. There are various rules (usually in months of income to have on hand for emergencies). I never saved more than the cost of a modest new car in a cash account.
4. Determine your asset allocation and investment strategy. This was and is what I spend the most time on. Write down what you decide on, and why you decided. When you think you want to change it, go back and read what and why you decided. This should include a discussion of the Efficient Market Hypothesis and what you think/believe about it. I ended up keeping a small portion as my speculative pile of play money (in my Roth IRA brokerage where DW couldn't pester me about it).
5. Maximize investments each paycheck (use dollar cost averaging).
5a. Make maximum contribution to Roth IRA.
5b. Make maximum contribution to 401k and/or traditional IRA if you are in a high tax bracket and low cost index funds are available.
5c. Accumulate low cost index funds/ETFs in a taxable brokerage.
5d. Rebalance regularly, paying attention to transaction costs.
6. Goals: I found that the above process of minimizing costs and maximizing savings for retirement actually enabled me to accomplish goals. Had I kept a bunch of different accounts trying to get to the $ goal in each one, I would have gone crazy trying to track it all, and probably had much more in transaction costs. Also, conventional wisdom would have me in cash savings for shorter term goals, and missed on significant market upside. By going with the flow of the market, some goals got pushed back to match upswings. Not timing the market, but skipping the big purchase until the market value is well above the cost basis. This works with a broad market index...maybe not so much with hand picked stocks.
7. Generally avoid financial planners. I got screwed by one early on (sold me a fund with a hefty load---I was young and dumb). Know that anyone offering individual financial advice is actually selling you something. If you are paying them AND they have given you an affidavit that they are a fiduciary, then they're still selling you something, but they have to put your interests first. You can get all the information you need from the local library and reputable sources on the internet. However, paid professional advice is warranted for things like complicated tax returns (accountant), estate planning (lawyer), and for significant changes like a windfall (large inheritance, etc.).
8. Luck: you don't have to be lucky, but being unlucky will make it impossible (divorce, paying for long term care of a relative, skimping on insurance before a disaster, etc.).
The most significant contributions for our early retirement were eliminating debt early, living below our means, getting a job with a good pension (both of us), and paying off the house.
Finally, a note on minimizing expenses. This doesn't always mean to get the cheapest item. The pertinent question about any purchase is, "How much use am I going to get out of this?" And next is, "Can I get as much, or nearly as much use from a similar item with lower cost?" So for example, I did spend $600 on a set of kitchen knives in 2003, but they are still used daily. However, I only order tap water to drink when I go out to eat.
Looking forward to the comments...
1. Avoid unnecessary expenses
1a. Eliminate consumer debt, because the interest is an unnecessary expense. A house mortgage is ok, and a low rate car loan can be ok (because the interest rate is below average investment returns).
1b. Happiness is a necessity, because if you're not happy you won't be able to stay on track.
1c. A strict budget is not necessary, but living below your means is necessary.
1d. Marry a financially compatible spouse and don't get divorced.
2. Get employer matching funds from their retirement savings plan.
2a. Even better, get a job with a pension plan (the ultimate employer match). Most of these jobs are in government, so you won't get rich quick, but you can get rich slowly.
2b. This may involve buying education and/or training to get a better employer. Be careful here by avoiding debt, and using scholarships.
3. Maximize savings to avoid future consumer debt. There are various rules (usually in months of income to have on hand for emergencies). I never saved more than the cost of a modest new car in a cash account.
4. Determine your asset allocation and investment strategy. This was and is what I spend the most time on. Write down what you decide on, and why you decided. When you think you want to change it, go back and read what and why you decided. This should include a discussion of the Efficient Market Hypothesis and what you think/believe about it. I ended up keeping a small portion as my speculative pile of play money (in my Roth IRA brokerage where DW couldn't pester me about it).
5. Maximize investments each paycheck (use dollar cost averaging).
5a. Make maximum contribution to Roth IRA.
5b. Make maximum contribution to 401k and/or traditional IRA if you are in a high tax bracket and low cost index funds are available.
5c. Accumulate low cost index funds/ETFs in a taxable brokerage.
5d. Rebalance regularly, paying attention to transaction costs.
6. Goals: I found that the above process of minimizing costs and maximizing savings for retirement actually enabled me to accomplish goals. Had I kept a bunch of different accounts trying to get to the $ goal in each one, I would have gone crazy trying to track it all, and probably had much more in transaction costs. Also, conventional wisdom would have me in cash savings for shorter term goals, and missed on significant market upside. By going with the flow of the market, some goals got pushed back to match upswings. Not timing the market, but skipping the big purchase until the market value is well above the cost basis. This works with a broad market index...maybe not so much with hand picked stocks.
7. Generally avoid financial planners. I got screwed by one early on (sold me a fund with a hefty load---I was young and dumb). Know that anyone offering individual financial advice is actually selling you something. If you are paying them AND they have given you an affidavit that they are a fiduciary, then they're still selling you something, but they have to put your interests first. You can get all the information you need from the local library and reputable sources on the internet. However, paid professional advice is warranted for things like complicated tax returns (accountant), estate planning (lawyer), and for significant changes like a windfall (large inheritance, etc.).
8. Luck: you don't have to be lucky, but being unlucky will make it impossible (divorce, paying for long term care of a relative, skimping on insurance before a disaster, etc.).
The most significant contributions for our early retirement were eliminating debt early, living below our means, getting a job with a good pension (both of us), and paying off the house.
Finally, a note on minimizing expenses. This doesn't always mean to get the cheapest item. The pertinent question about any purchase is, "How much use am I going to get out of this?" And next is, "Can I get as much, or nearly as much use from a similar item with lower cost?" So for example, I did spend $600 on a set of kitchen knives in 2003, but they are still used daily. However, I only order tap water to drink when I go out to eat.
Looking forward to the comments...
