In theory, accumulating wealth for a secure, early retirement is actually very simple…
In practical, it’s hard.
Why?
There are far too many distractions.
It’s simple because there are only 3 early retirement tips:
- The amount of money you save & invest.
- The growth rate of the money you save & invest
- The amount of time you save & invest
Straightforward and not exactly rocket science.
Unfortunately, few people consider themselves successful in building a solid & sustainable retirement nest egg because it has nothing to do acknowledging book theory and everything to do with effective execution.
The challenge isn’t in knowledge, but in executing that knowledge into actionable results.
Then you live your lifestyle sticking to the rules you set which bring you results.
This is critical. The rules are easy to understand but surprisingly hard to live by. Living them is the key… and also the problem.
Ponder over the below – whether or not your lifestyle & habitude (habit + attitude) are in congruence with each of the following early retirement tip.
By the end of this article, you should know whether you are living in integrity with what is taking you toward wealth and an early retirement.
Early Retirement Tip #1: Plan a Strategy
The first mistake most people make is they fail to map out a strategy to build financial security.
You don’t go to war without a strategy.
Similarly, you won’t be able to measure how close (or far) you are to your retirement goals without a strategy & goals set.
It may be a simple process, but accomplishing your retirement goals happen randomly. You make it happen by taking deliberate action. A written plan with goals provides the road map and is a necessary first step.
Retirement planning success is a choice. it is a culmination of a series of small decisions you make everyday, every week, every month without breaking the chain. Hence, without a strategy in place, your financial life is like navigating a yacht without GPS: there are motions but you aren’t going closer to your destinations.
Plans and goals provide the necessary context to focus each and every decision in your life with purpose. It reduces wasted effort, increases efficiency.
To get results like that you must create written savings and cash flow goals, and you must formulate a plan complete with specific action steps to achieve those goals.
You want to formulate your plan based on three separate financial stages during life:
- Aggressive accumulation during active and peak earning power phase
- Continuous growth of assets during semi-retirement phase
- Depletion of accumulated assets during late retirement stage when all earned income stops
How you manage your income and assets will vary with each financial stage of life thus requiring a unique strategy.
The primary strategy though, is to utilize your career and semi-retired years to build passive income in business, real estate, and/or paper assets so that your passive income exceeds your living expenses.
So, when you reach that point, you will always feel abundant and avert poverty consciousness.
Early Retirement Tip #2: Always have Surplus
People in modern day are always keeping up with the Joneses, where they feel the trappings and illusion of wealth over the freedom of actual wealth. They want to appear wealthy rather than really wealthy.
A luxurious lifestyle NOW is too tempting and with that, they violate the first principle in the early retirement equation: accumulate assets.
You must control your spending so that your lifestyle lags behind your income. This will create surplus for your investment activities.
The life cycle of building nest egg for retirement dictates the most important factor early in financial planning is your savings and reinvestment rate.
Then, at some point in the wealth accumulation process, you cross a threshold where the return on your assets is more significant than your savings rate, but that is much later in the equation.
However, in the early stages you must build the assets so that you have something to grow. For most people that starting point is to save money.
The common distraction here is consumer debt. It is the #1 antithesis of wealth and should be averted at all cost.
Every day you are making choices between lifestyle now and wealth accumulation for tomorrow.
If early retirement is your objective then your habitude must be to earn interest and compound your assets — not pay interest and compound your debt.
The only debt that is acceptable is to buy income-producing assets. A home mortgage, positive cash flow real estate, and certain business debt all qualify. Debt for consumption dis out.
Early Retirement Tip #3: Invest in Your Freedom Fund
Financial intelligence. You must learn before you can earn.
Knowledge leads to intelligence. No one is born intelligent and know it all.
Every investment in acquiring financial knowledge will pay dividends for a lifetime.
You should sharpen your financial savvy-ness by taking courses, reading, and researching so that their financial intelligence grows faster than their wealth.
Also, have the right expectation that financial intelligence cannot be developed overnight any more than wealth can be accumulated overnight. It takes time and deliberate effort.
The earlier you learn your lessons, the less they will cost you. As you progress in life, you will realize you cannot afford to make more and bigger blunders compared to when you are younger with the ‘nothing to lose’ mindset.
In other words, the longer you wait to learn these lessons the more they will cost you when you are older.
From a different angle, this could also comes in the form of years of missed opportunities and mistakes made with big investment decisions later in life that can’t be offset by savings.
In a nutshell, by growing your financial intelligence every day, you are investing in your financial future. Are you living in integrity with this early retirement principle and regularly learning about retirement and the broader aspects of personal finance?
Early Retirement Tip #4: The Power of NOW!
Einsten said
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
The power of compounding is is not to be underestimated especially if you’ve got 20-30 years down the road because money grows geometrically instead of arithmetically — but only when you give it time to work.
Procrastination kills time, and as a result it kills more plans for retirement security than all other culprits combined. It is wealth suicide in installments!
Every day you delay is another day where opportunity is thrown away.
Why people procrastinate?
Because they feel uncomfortable and out of place making financial decisions.
They feel ignorant or the subject seems dry and complicated with confusing technical jargon.
No worry!
No one is born with super financial intelligence. Everyone has to start somewhere. Just get started and fumble through it. That’s the best way to learn. Small foolish mistakes are better than doing nothing at all.
Obviously, the earlier you start the easier the process is to swallow.
Interlude
Up until here, these are the core points we’ve discussed:
- Always have surplus from your income
- Grow your financial intelligence while concurrently accumulating retirement nest egg so that you can make wiser, more profitable financial decisions.
- Start early because time is the most important factor in compounding wealth.
Notice how it is the opposite of get-rich-quick: it is the slow and steady path to wealth.
Get-rich-quick uses various principles of leverage which increases the risk and lowers the probability of success.
It’s faster, but less likely. And it taps on human emotion – GREED.
The slow-and-steady method requires more discipline and time but the odds for success are extremely high if you actually do what it takes. It’s a proven formula that just plain works.
But only if you work it.
If you get started late you will either have to save an impossibly large portion of your income or apply a leveraged strategy to make up for lost time.
Regardless of the path you choose, your wealth is always a function of the amount of investments multiplied by their rate of growth and the number of years they grow.
Something a 5 years old can understand.
Unfortunately, as I’ve said before, it is also difficult for most people to live.
The first four tips above are indispensable but if you really need to turbo-charge to an early retirement, then the next 8 will help you walk the talk and shorten the learning curve by avoiding some of the more obvious and common mistakes..
Early Retirement Tip #5: Automate your Finances
The easiest, least hassle way to save your way to wealth is automatically.
Structure your finances so that every month/quarter, certain actions take place that automatically grow your assets without any decisions or extra effort on your part. This keeps you on track even if you are busy with life.
Below are a few examples:
- Rental Real Estate: Rental income from real estate properties in prime locations are one of the best source of retirement income without depleting your retirement nest egg. Furthermore, it is a type of expenditure which goes up in tandem with inflation, so it combines the best of both worlds when you are the landlord – passive income which is growing. But be careful: make sure the property has a safety margin of positive cash flow when you take a mortgage on the property your owned for investment, and make sure you’re willing to deal with the potential headaches of being a landlord. It isn’t right for everyone, but owning a rental property can be a great automatic wealth building tool for some.
- Regular Savings Plans (RSP): Another no brainer, consistent approach to savings that reduces the temptation & distraction to spend your entire paycheck is the automatic savings plan. If your tendency is to splurge on vacation/fine dining/branded items/gadget then these programs are a must. The money is deducted from your pay before you ever see it, making the whole process of saving a lot less painful. The key principle is the money is saved automatically. The only one time thing you need to do is to set up the process. After that, it is on auto-pilot.
- Subscribe to Educational Finance Newsletters: The world wide web contains endless source of financial and retirement education, and much of it is freely available. Newsletter issues come regularly causing you to grow your financial intelligence over time and automatically. Consider the free investment newsletter from this web site as a good example of this strategy.
Make nest egg accumulation a daily routine so that it happens automatically while the rest of your life runs its normal course.
Early Retirement Tip #6: Be Accountable of your personal Financial Matters
You are solely responsible for organizing your life so that wealth accumulation is a habit. You can seek advice or coaching, but nobody else will do the heavy lifting for you except yourself.
You are the one that decides what your priorities are. If you procrastinate and end up underachieving your financial goals, the onus is on you.
The fact is this:
When you own it up and take the right actions consistently, it will be a question of “when” – not “if.”
You can hire a financial adviser for second opinion, but the decisions therefore the results are yours to own. That is how you learn from your mistakes and improve the next time.
Now, some individuals feel intimidated by the idea they are fully responsible for their results, but in fact, it is an empowering concept. It means that no matter what your results have been to date, you have the power to turn it around beginning right now.
Bottom line – You own the results.
Early Retirement Tip #7: Commitment to your Set Goals
Successful retirement planning requires you to provide the necessary resources to reach the goal. Half-hearted effort don’t work.
For example, you don’t want to build a retirement passive income plan around owning and managing rental properties if you don’t like dealing with tenants. Operating real estate requires effort and can be appropriate for some people and not for others depending on your values, interests and skills.
Don’t commit to real estate as your path to retirement security just because other people are doing it successfully.
Similarly, you don’t want to build your retirement plan around passive investing in paper assets if you’re in your late 50’s, have zero net worth, and are just getting started.
Time is not on your side and may not be able to dabble into using investment leverage to make up for the late start.
On the contrary, if you are below 45, and plan to save and compound your way to wealth with paper assets, the good news is that it’s a mathematically viable strategy. You can stand it even if the market takes a dip today, because you have years ahead of you to recover.
Every person’s situation is different and successful retirement planning must reflect that. One size does not fit all.
Early Retirement Tip #8: Protect your Financial Net Worth
Preventing large losses is equally as important to getting high return rate from investment.
How to prevent large losses?
By keeping away from scams and Ponzi schemes.
Risk management principles to protect your assets apply equally well to your personal finances as they do to your portfolio finances. For example, the rule with insurance is to insure away all risksthat you can’t afford to lose.
The alternative is to put a lifetime of hard work, saving, and investing at risk for one mistake, accident, or health problem that causes a loss large enough to financially destroy you … and that is not acceptable.
You must manage your investments so that you never lose more than is mathematically acceptable, and you must manage your personal financial risk so that you never lose more than you can afford.
Early Retirement Tip #9: Kickstart Legacy Planning
It is irresponsible to leave a burden for those you leave behind. The fact is you will die with 100% certainty.
No one likes to think about it, but that’s the reality.
Your loved ones will be distraught over your passing, busy with their own lives, and not interested in cleaning up a messy financial legacy.
Your estate plan covers your financial assets and also helps set a clear legacy. Get your affairs in order and make all the decisions about who gets what now. Depending on your particular circumstances this might include:
- Powers of Attorney
- Will
- Living Trust
- Life insurance
Many people rationalize avoiding estate planning with thoughts like, “Who cares about all that stuff; I’ll be dead anyway,” or “It’s not that important.”
Nonsense.
After all, what would happen if you were incapacitated but still living?
In short, there is a lot more to legacy planning than just willing away and dividing up your assets. It affects your life and the life of your loved ones left behind. You should care — a lot.
Make sure to seek competent estate planner who will customize a program to fit your personal situation and needs.
Conclusion to early retirement
Financial planning for early retirement is simple to understand and hard to live. That is why so few succeed at it.
It all boils down to prudent, routine management of your investments and personal finances. It’s not exactly rocket science. The principles aren’t complex.
The only question now is, “Are you walking the talk?” You may know most or even all of these principles, but how many are you actually living right now?