You wake up. Go to work. Get home. Repeat. For many, it feels like being stuck in a hamster wheel. What if you decided to call it quits and retire early? If youâ€™ve ever wondering what itâ€™d be like to walk away from the rat race… this article is for you.
Whether you want to retire and sail away, or you just want to retire and pursue hobbiesÂ¬â€”that part is up to you. But letâ€™s explore what it takes to make an early retirement a reality. I recently had dinner with a college buddy that started sailing a MacGreggor 26, and since the idea of sailing away has a certain ring to it, weâ€™ll use that as our goal.
Will you work part-time?
The first big question is, will you earn an income in retirement? Some people continue to work in a limited capacity with freelance writing, graphic design, or consulting, etc. Others just live off their investments. Letâ€™s assume youâ€™re going to quit everything and just live off investments. Itâ€™s more fun that way.
Save, save, save
Before you cut the cord, youâ€™ll need to earn as much as possible for as long as possible. At the same time, youâ€™ll need to cut your expenses. Cutting expenses is a quick win, while trying to earn more money can be difficult and take longer to achieve. For example, a $1,000 cut in expenses is like a $1,330 raise (assuming a 25% tax bracket). So, gym memberships, fancy cars, eating out, expensive phones, lawn serviceâ€”goodbye.
The 4% rule
Saving enough money so you never have to work again is a tall order, especially if youâ€™re in your 50s with a long life ahead of you. To figure out how much youâ€™ll need to save, we look to the 4% rule. Itâ€™s a rule of thumb used to determine how much to withdraw from a retirement account each year. The 4% rate is considered a â€œsafeâ€ rate, with the withdrawals consisting primarily of interest and dividends, leaving your principal intact.
What will you spend each month?
Youâ€™ll need to figure out your monthly living costs. The good news about a boat is, you have limited expenses. Sure, youâ€™ll have to buy the boat. But you can get a used 40-foot sailboat for about $60K. Much cheaper than a house.
Even though youâ€™re living in 150 square feet, youâ€™ll still have to pony up cash each month for marina fees/docking, boat insurance, food, health insurance, and more. Based on sailing blogs, the monthly cost for a couple living on their boat in the Caribbean is about $2000. My clients are use to a little more, so we’ll say $2,000-$3500 a month all-in.
Ok, gimme a number
There are a lot of variables when it comes to determining how much cash youâ€™ll need to save in order to retire. They include your age, any health issues you may have, Social Security savings, etc. So, itâ€™s very hard to provide an accurate number without having more details. But for rough back-of-the-napkin-math, a couple will need to sock away at least $800K into investments in order to live off $3,000 a month. Again, this is very rough math, youâ€™ll need to work these numbers out carefully on your ownâ€”or better yet, with a financial advisor.
Whether you want to leave it all behind and hit the high seas, or retire early and make model train sets, youâ€™ll need to go through a rigorous retirement-income planning process first. But the good news is, if youâ€™re feeling like a hamster, there are ways of getting off of that wheel forever. It just requires crunching some numbers and dreaming big.
About the Author
Richard Feight is a Fee-Only Certified Financial Plannerâ„¢ and Professional NAPFA-Registered Financial Advisor at IAM-Financial. Rich has 20 years of experience offering low cost â€œFee-Onlyâ€ comprehensive financial planning and investment advice. For more information, email: email@example.com