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What to do? (In order to retire--hopefully early)
Old 08-21-2019, 05:50 PM   #1
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What to do? (In order to retire--hopefully early)

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...
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Old 08-21-2019, 06:14 PM   #2
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Snowball - nice summary.

I'd add a "0". Prepare for a career where you can be gainfully employed with low risk of job loss, and make a better than average salary, without going into six-figure debt. Follow work, and live in areas where good-paying jobs are located.

5.d. I'm REALLY lousy at rebalancing. If I had done this earlier, I would have held a much lower percentage of value funds when they weren't doing well, and I was early in my career. I lost a huge early advantage over this one, and with my early haphazard investing style, I didn't have an AA, or an investment strategy. I'd be at least $200K ahead if I had been more diversified in the 1990s.

Thanks!
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Old 08-21-2019, 06:24 PM   #3
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Great list. However, you make no mention of insurance. As part of your job benefits make sure that you have adequate health insurance. One serious illness or injury can blow-up everything else. If possible fund a Health Savings Account (HSA) for future expenses. Your employer should also be a place to purchase low cost disability insurance if you are not able to work for a period of time.

The same goes for home and auto insurance. Look at policies with higher deductibles and don't purchase expensive add-ons. Verify your liability limits. One lawsuit could wipe you out for years.

With all insurance coverages, review regularly.

Welcome to the FIRE mentality.
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Old 08-21-2019, 06:47 PM   #4
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Originally Posted by pjm-7 View Post
Great list. However, you make no mention of insurance. As part of your job benefits make sure that you have adequate health insurance. One serious illness or injury can blow-up everything else. If possible fund a Health Savings Account (HSA) for future expenses. Your employer should also be a place to purchase low cost disability insurance if you are not able to work for a period of time.

The same goes for home and auto insurance. Look at policies with higher deductibles and don't purchase expensive add-ons. Verify your liability limits. One lawsuit could wipe you out for years.

With all insurance coverages, review regularly.

Welcome to the FIRE mentality.
pjm-7

True. I probably should have said a bit more about insurance than the side comment in #8. I think your summary is spot on.
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Old 08-22-2019, 07:22 AM   #5
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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.
This is really insightful, SnowballCamper. Numbers 2-7 are all numbers-based, and so they are things that get debated endlessly, but you still summarized and organized them nicely. But 1b is really key, something a lot of people ignore, yet it's why people can know the right thing to do and still not do it.

Then again, I'm a behaviorist by training, so of course that's what caught my eye!
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Old 08-22-2019, 08:06 AM   #6
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Good list. I would add, spend some considerable time thinking about how your tax situation could or would change over time/life events etc. Not all income is treated equally, soo tax (gain/loss) harvest when and where it makes sense.

Save an Emergency fund that is equal to at least 3months if not 6 months to a year in liquidity. Whether it's MM or high yield, but I for one prefer the rates on MM over checking.

IF you never get to that emergency fund level, you need to re-adjust because you should be able to save 3 to 6 months of your budget once you land that entry level job.

This will alone will reduce a lot of unwanted stress, and allow you to make easier and wiser decisions with your money when in a pinch.
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Old 08-22-2019, 08:08 AM   #7
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This is really insightful, SnowballCamper. Numbers 2-7 are all numbers-based, and so they are things that get debated endlessly, but you still summarized and organized them nicely. But 1b is really key, something a lot of people ignore, yet it's why people can know the right thing to do and still not do it.

Then again, I'm a behaviorist by training, so of course that's what caught my eye!
one of my favorite all time movies... The pursuit of happyness, with Will Smith. Brought me from rock bottom to an actually productive member of society. A life changing movie, but what I took out of it is that life is always changing and evolving, but you need to live the best life for you...

Once I understood the cause of my unhappyness, and actually addressed it, things got A LOT EASIER!.
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 08-22-2019, 12:04 PM   #8
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How are you going to keep yourself on track? I would start with things in this general order.
.
Nice job... and agree with the order.
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Old 08-22-2019, 12:11 PM   #9
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... 1d. Marry a financially compatible spouse and don't get divorced.
Determine your goals before marriage, and form a pact with your spouse that you will both work toward those same goals.

I followed a career path that offers a 20-year pension with healthcare coverage. It gives us a small pension. So we rely on our investment portfolio to make our retirement work.
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Old 08-22-2019, 12:19 PM   #10
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I agree with most of what OP says, but I disagree on this point:

Quote:
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.).
Bad luck (or life as I tend to call it) doesn't necessarily mean a FIRE failure. I divorced in 2004 and had to start over financially (with the exception of my military pension). I also was the primary caretaker for my Dad for a while. As you can see in my sig, I am doing just fine.
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Old 08-22-2019, 01:50 PM   #11
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FlyBoy,
Yes, #8 probably needs a redo. Maybe call it: manage life's risks.

I've been told I'm lucky a few times, and it sometimes bothers me because I made a lot of methodical decisions along the way, and still do to avoid bad situations. So I've been lucky in the sense that I haven't had serious setbacks. One could say that you're lucky because your challenges didn't derail your early retirement. I've seen (and see) lots of people get financially obliterated by bad luck. This is a hard topic to address in a pithy short paragraph.

Thanks.
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Old 08-22-2019, 02:17 PM   #12
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Many people have told me that I am lucky.

All I can say about 'luck' is that it sure took a lot of hard work. I have made many mistakes along the way, and I have a lot of scars from all that 'luck'.
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