My Strategic Early Retirement Plan began in 1998 when I was age 40. I decided I wanted to retire by age 50 and an early retirement strategy was needed. The wide-world-web was cranking along but I can’t say that there were websites talking about early retirement yet. There were books on the subject and I did read a few of them.
To get my plan started I sought out a financial adviser. I talked to a few CFPs who said it was unrealistic to retire early. I finally settled on one who was on-board with my plans. In fact he had similar plans and actually retired at the age of 56 shortly after I did. He followed his passion for teaching and is now teaching at a High school. He is another retire early and often success story living a passion-driven lifestyle.
First – Financial Assessment
Before starting my early retirement strategy, which was a 10 year plan, I needed to know where I was. I needed to understand what my strengths and weaknesses were.
My Strengths
An engineering job with a $68,000 salary. I was still passionate about it and I have a proven technical and performance record. I was 20 years into a career that still had a 30 year pension benefit. That is if I could hang in there another 10 years.
I was debt free and paying my credit card balance off monthly. We had started living a simple life with spending discipline. I already had a great start saving $100,000 in my 401K plan which was set to automatically max out the yearly contribution limit. I was a homeowner with a modest $137,000 mortgage balance and a manageable monthly payment.
My Weaknesses
I was too conservative with my 401K investments. There was too much of my 401K in my Company’s stock. That was because all of the company 401K match was in that stock. I had also purchased some of it early on when there were limited investment choices in the 401K plan.
I was under-insured to cover my family’s expenses if something happened to me. It was obvious that I was risk averse and had no investing knowledge. I had no savings outside of my 401K. I wrongly thought that maxing out my 401K yearly contribution and my future pension benefit was enough to retire early.
My Strategic Early Retirement Plan Recommendations
- Start a 10 year term $250,000 life insurance policy to go with my company provided life insurance of $100,000. I also had another little policy for $100,000.
- With having a 10 year plan I need to manage my risk aversion. Change my 401K investment direction to a more aggressive 75% US Stock Mutual Fund, 15% US Bond Fund, and 10% International Stock Fund. Also sell all of my purchased company stock and move it to the US Stock Fund. That left only the company 401K match company shares which I couldn’t move.
- I needed to set up an emergency fund to help support us for 6 months if something happened to my job. We settled on $12,000 as the target. The thought being that it along with unemployment payments would cover us. I began with an automatic payment of $500 a month into a money market account.
- Once my emergency fund was funded I would then continue with the $500 a month payment to a ROTH IRA.
- Do as much as I can to stay with the company the next 10 years to secure whatever pension benefit there is left.
- Continue to max out my 401K contributions and look for opportunities to increase my income to add it to my savings.
The Two Parts To My Early Retirement Strategy –
Part 1- Spending Discipline
Growing up low-income and then fighting our way out of our early married and young family year’s debt had us frugal about spending. But there was still room for cutting waste. I had to make some cuts to save the plan-recommended additional $500 a month. We started a NEW budget where I would also track our spending. We were pretty good but we had to do better.
I cut all cable premium channels, I took my lunch to work, we cut way back on eating out, and there were a number of things cut that did add up. None of what I cut had a negative impact on our happiness or family life. I had a lot of practice budgeting but without having a clear goal and Strategic Retire Early Plan I didn’t know I could do better.
We began tracking expenses at a lower level. In 1998 my kids were ages 18, 15, and 13. Our budget was far different back then than it is now. Our budget was sustainable and I was able to save the additional $500 a month and more right up to when I retired 11 years later.
Strategic Retirement Plan Tip
Here is a tip I learned when our finances were not where we wanted them to be in our early family years. Set short, mid and long-term goals to allow yourself the time to achieve financial improvement. If you are tracking your expenses, debt repayment, income, and savings, then set time-frame goals.
Seeing your financial improvement in measurable ways will keep you motivated. Everything you are doing to reach your goals will become a habit and worth every effort to accomplish.
I expect to add 4% a year to my yearly budget to account for inflation. Not everything goes up but some line-items go up far more than 4%, like medical insurance or my homeowners insurance. Sometimes I adjust my budget up to account for them. But I always try to find where I can make smart cuts to counter any specific item increase.
My Budget- Areas I made cuts through my 13 Years of early retirement to save money and counter high inflation items.
When I first retired early I had a term life insurance policy that I kept to pay off the mortgage for my wife if something happened to me. But since I have paid off the mortgage I decided to drop the insurance. That and the premium at the 20 year term renewal went from $50 a month to $150 a month due to my older age. I dropped this coverage and consider myself Self Insured.
I had enough when my home owner’s insurance rate jumped from $1600 a year to $2400 over the past few years. I got competing rates and now a new insurance company. Savings = $1407 a year. Since then it has creeped back up and now all competing rates are nearly identical. I will have to suck it up until there is insurance competition again.
I cut the cord to get rid of the cable bill. We spent around $150 for a recommended roof antenna for my area and a Roku streaming box. We dropped the extended basic cable. Savings = $1116 a year.
Health – Medical and Dental Insurance
Medical/Dental insurance is my largest budget item. It is a retirement benefit from my career company that keeps going up. When I retired in 2009 my Medical/Dental insurance cost $470. In 2022 it rose to $1,640. Medicare is now just around the corner for us and I will see a substantial budgetary reduction in healthcare to counter inflation’s bite in 2023.
In the 13 years of my early retirement our medical insurance rate more than tripled. It is a use-it or lose-it benefit and it was a decent policy.
I always thought that once it hits $1000 a month I am done and will have to consider going to the Insurance exchange. Our lower taxable income will limit what we will have to pay. However with the ACA always under heavy political attack to end it, we stuck with the employer associated retirement healthcare benefit.
Biannual Budget Reviews
I usually check my budget at least twice a year. Sometimes more if something has significantly changed. Always keep in mind that the less your lifestyle costs, the less you need to have saved and invested to fund it in retirement.
Something to understand is that while I was budgeting and saving our way to financial independence, our financial discipline became habits. The budget doesn’t need to be scrutinized with every purchase. I just live my life without even considering what the budget says. That’s because my budget and lifestyle are aligned or in sync with how we want to live. Checking it twice a year allows me to see if things are still on track or have gone out of sync for some reason.
I hope I have given you an example of a budget process to use in your strategic early retirement plan. The plan is to live a smart-frugal and balanced life within your own frugal threshold. A budget that is sustainable as you pursue early retirement and after you retire.
Part 2- Saving and Investing
When I was saving to retire early I had to challenge my weakness of risk aversion and try to grow my savings as much as possible. The goal in 1998 was to grow my retirement savings from $100,000 to $250,000. At that time my projected retirement pension lump sum buy-out was also $250,000. My early retirement strategy was to retire with $500,000 to fund my new early retirement lifestyle.
In 1998 the financial advice was you could safely withdraw up to 8%. Some said 10% was a safe withdrawal rate from your retirement accounts and not run out of money. WOW! Of course today the advice is to withdraw up to 4% from your retirement accounts. Some even caution that it is too much. That is why you need to re-evaluate your plan as time goes on. Things change and change in a big way. Fortunately I was able to retire with more than that first recommended $500,000 figure.
Now that I am retired, my investment portfolio concentrates on income. For the first 8 years of early retirement I had a number of funds within my SEPP IRA which made monthly 72t payments (IRS rule 72t) to me. My 72t allowed me to avoid paying any early distribution penalty (pre age 59 ½). See my page “How I Fund My Retirement” for more details. I also had other IRAs and ROTH IRAs as part of my portfolio that are not part of my SEPP 72t IRA.
Our portfolios consist of various stock and bond funds aligned with our financial goals and within our risk tolerance. There are some REIT and other non-market based investments for diversification and income.
Why I Use a CFP
The rules around having a SEPP IRA making monthly 72t payments are very strict.
Running afoul of the IRS results in a 10% penalty going back to day one. That is why I had a financial company handle things. My cost for all the handling of these accounts is a 1% wrap fee.
Would I rather keep most of that fee to myself? Yes I would. But I really don’t have the desire or knowledge to investigate companies and funds at this time. They also act as a buffer for my overly conservative and risk averse investing tendencies. It’s worth it to me to let the experts take care of things. So far I feel that they have done a great job and I don’t sweat market volatility.
I do manage a couple of funds outside of these as a test. A test to see if once I turn age 59 ½ I can feel comfortable going the self-managed route. I still struggle with investment risk aversion. However simply investing in some low-cost index funds or ETFs is a direction I consider but have stuck with my CFP.
The Power of Compounding and Dollar Cost Averaging.
You want to get investing as soon as possible. Making monthly contributions spreads your purchases out over different share buy costs. Whether the Market is up or down your monthly averaging smooths things out.
As an example of money compounding I have 2 ROTH IRAs that I started contributing $250 a month to each in the year 2000. I bought shares through the first Tech Bubble Market Crash, through the market highs in 2007, and through the Market Crash of 2008 and 2009. This means I was buying at various share prices both up and down. I stopped contributing to them when I retired the first time in 2009 and have let them ride.
On January 1, 2010 my NMSAX Investment was $26,157 and my basis (what I contributed) was $27,000 so I was at a -$843 loss. Without adding another penny on June 30, 2014 it has grown to $54,586. It is now a +$27,586 gain above my basis.
On January 1, 2010 my AQEAX Investment was $19,525 and my basis (what I contributed) was also $27,000 so I was at a -$7,475 loss. On June 30, 2014 it had grown to $39,737 which is +$12,737 in gain above my basis.
These examples illustrate the need for financial discipline. These Roths have since been moved to other index fund investments and continue to grow untouched. However, without adding any additional funds over the many years since first retiring early, the combined value has climbed from $54,586+$39,737= $94,323 in June 2014 to $171,641 in March 2023. A substantial tax free Roth investment fund even with 2023’s down market conditions.
In Closing
Everyone thought the world was ending in 2009 and withdrew their money. Turning a paper loss into a real financial loss. On my advisor’s advice I stayed the course. Keeping my eye on the long-term goal and the markets did rebound. It was a definite challenge to my risk aversion. The same can be said even today in 2023 during this difficult inflationary investment market. It is up and down with every Fed, inflation, or world event news.
Hopefully seeing my early retirement strategy helps you understand what you can do to retire early. Everyone’s income and lifestyle costs are different depending on where one lives and what one does to earn money.
- It’s not that complicated to make the plan.
- Create a sustainable plan.
- Try to keep it simple.
“Disclaimer: This content is not provided or commissioned by any investment company or financial adviser firm. Opinions expressed here are author’s alone and are there as examples for readers to research and investigate their own best investment strategy. As the author is not a financial adviser, there is no implied recommendation being made on a professional level and readers shall invest at their own risk. There are never guarantees in investing”.