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In the past, the norm was to work at a 9 to 5 job until you retire at 65. But, today with the increasing popularity of FIRE movement(i.e. Financial Independence and Retire Early), more and more people are exploring the possibility of early retirement and living life on their own terms.
So, what does early retirement really mean?
It simply means that you are leaving the workforce at a much younger age than the statutory retirement age.
Benefits Of Early Retirement
So, is it good or bad to retire early?
Of course, early retirement has its obvious benefits.
Advantage #1: You can have more time to spend with your family, especially if you have kids or elderly parents to take care of. With early retirement, you can watch your kids grow up without missing any milestones of their lives.
Advantage #2: You are free to do the things that you love and travel anywhere you want. You can develop new interests and acquire new skills. If you are the adventurous type, you can travel around the world, go to interesting places and experience different cultures.
Advantage #3: You have the option to work only if you want to, and choose to work on projects that stimulate and challenge you.
Advantage #4: You will probably be healthier and live longer if you retire early because you don’t have any more work-related stress. According to a study published in the Journal of Health and Economics, public-sector employees in Holland who took early retirement had a 42 percent lower five-year mortality rate than those who continued working into their 60s.
Advantage #5: You will probably spend less because you don’t have any more work-related expenses such as transport and office clothes.
How To Decide You’re Financially Ready To Retire Early
Question #1: If you stop working today, do you have enough savings and passive income to sustain your current lifestyle for the rest of your life?
There are a lot of early retirement calculators.
But the thing with early retirement calculators is that they make assumptions that are a bit too optimistic.
For example, it assumes that your money will grow at a decent rate every single year.
Personally, I would have preferred a set of more conservative assumptions to calculate my numbers because I want to know the worst-case scenario that can happen.
This way, I can prepare myself better and be confident about my post-retirement finances.
Now, let’s look at some numbers to get a basic understanding of how you decide you are ready financially to retire early.
Let’s assume your monthly expenses are $2,000 and you can expect to live for another 30 years.
If we ignore inflation and everything else, you will need at least $2,000/month x 12(months) x 30 (years) = $720,000 in savings.
Question #2: Do you have any investments and/or businesses that can bring you passive income every year? Is passive income more than enough to pay for your monthly living expenses?
Let’s say you have saved aggressively and invested wisely over a number of years. As a result, you have accumulated a portfolio of dividend stocks that are worth $800,000.
Assuming a dividend yield of 3%, it will give you $24,000 in passive dividend income every year.
That’s $2000 every month. And it is enough to cover your monthly expenses without having to withdraw your investments.
Having a passive income that can more than cover your living expenses is the ideal scenario for any early retiree.
Question #3: Do you have any outstanding debts that you need to pay off?
Is the house you are living in fully paid or you still have unpaid mortgage loan?
Do you still have your car loan, student loan and credit card debt to service?
It’s advisable to clear any outstanding debt before you decide to retire early, so you are in a much better financial position going into retirement.
Question #4: Have you taken into account any unexpected medical costs that you and your family might incur?
Big unexpected medical bill can potentially jeopardize your early retirement if you don’t have the proper medical insurance coverage.
Question #5: Have you taken into account any unexpected adverse change in your retirement fund?
If you have invested the majority of your retirement fund in the stock market, do you have any contingency plans in the event that the stock market crashes and your portfolio value drops significantly?
Or if you are solely relying on rental income from your rental properties, do you have any contingency plans in the event that your rental income drops significantly (e.g. high vacancy rate)?
Question #6: If you have children, have you already put aside enough funds for their education and other expenses?
According to recently published data, parents as of 2015 may expect to spend $233,610 ($284,570 if projected inflation costs are factored in*) for food, shelter, and other necessities to raise a child through age 17. This does not include the cost of a college education.
Question #7: If you have elderly parents, do they need your financial support as well?
If you need to financially support your parents, you need to take into account that cost as well when you make your early retirement decision.
How much do you need to set aside every month for that? And for how long?
What You Can Do To Retire Early
So, how can you retire early?
In short, the key is to accumulate as many income-producing assets as possible and cut down your expenses as much as you can.
Once your income-producing assets can generate a monthly passive income that exceeds your monthly expenses, you are financially free and can retire early if you choose to.
Now, let me ask you this: what are income-producing assets?
Is your house that you are living in right now an income-producing asset?
No, it is actually the opposite.
It does NOT put money in your pocket. It actually takes money out of your pocket every month because you need to pay many expenses such as repair, maintenance and tax.
Income-producing assets are assets that put cash into your pocket every month. These are GOOD assets.
Here are some common examples of income-producing assets:
- Rental properties
- Dividend stocks
- REITs (real estate investment trust)
- Profit share from businesses you have an equity in
- Online businesses
So, how do you get started accumulating income-producing assets?
First, you need to (significantly) increase your income and (aggressively) reduce your expenses. So, you can allocate more money to accumulate good assets and accelerate your progress.
If you are working at a full-time job, find ways to add value to the company and ask your boss for a pay raise.
If you still have free time outside your job, you can consider starting a side hustle to earn extra money.
As you earn more money, you should cut down your expenses at the same time.
Here’s one good tip to help you reduce your cost. Record down every single expense you have in one particular month in an excel spreadsheet or a notebook.
Out of all the expenses, you need to group them into five categories:
- Non-recurring essential expense(e.g. Medical bill)
- Non-recurring discretionary expense (e.g. designer handbag)
- Recurring essential fixed expenses (e.g. rent & car insurance )
- Recurring essential variable expenses (e.g. food, gas & electricity)
- Recurring discretionary expense (e.g. daily latte & movie tickets)
For discretionary expenses, you can ask yourself how you can cut it down by at least 50% (or a percentage that you are comfortable with)?
For essential expenses, is there any way to lower it further? For example, you can move to a place with lower rent or you can eat at home more often and dine out less.
If you are serious about early retirement, you should track down your expenses every single month and review it regularly. It might seem very tedious and boring, but it will help you stay on track to retire early.
Next, you must learn the right way to buy income-producing assets. If you skip this important step, it might cost you money and also possibly set you back years from retiring early.
How You Can Retire Early With Real Estate
Real estate is one of the most commonly known ways to help you achieve financial freedom and reach your early retirement goal.
Robert Kiyosaki is one good example of achieving financial freedom and retiring early with real estate.
You see, not all properties will generate income for you.
There are good rental properties and there are not so good ones. Good rental properties give you positive cash flow and potential capital appreciation in the future while bad ones can make you lose money.
Robert Kiyosaki’s strategy is to buy as many income-producing rental properties as possible with no money down. For every property, the rental must exceed all the property-related expenses (i.e. mortgage payments, maintenance, tax and etc).
So basically, tenants are paying off the house for him and plus paying him every single month.
How great is that, right?
Let’s look at a hypothetical example.
For example, I bought a rental property with zero downpayments. Every month, I receive $1000 a month in rental income from this property.
My mortgage and other property-related expenses are $700 a month.
So, this gives me $300 in passive income every month while my tenant helps me pay off the house.
Now imagine that I had 10 of the same kind of rental properties, then I would have $3000 in passive income every single month while the tenants pay off these 10 properties for me.
If my living expenses are less than $3000 a month, I can be financially free and retire now because my passive income can more than cover my living expenses.
How You Can Retire Early With Dividend Stocks
Real estate is not the only way to retire early. You can consider accumulating high-quality dividend stocks.
Jeremy and Winnie of GoCurryCracker stopped working and retired early to travel around the world in 2012 after accumulating a sizable dividend stock portfolio that gives them enough passive income to cover all their day-to-day expenses.
They worked hard and saved about 70% of their salaries every year (extreme savings!), and then carefully invested their savings in the stock market through 401(K) and brokerage accounts.
So, over a span of less than a decade, they managed to grow their portfolio to 1 million dollars.
For you to retire early, how much passive income do you need to cover your monthly living expenses?
Below is a table where you can find out how big a portfolio size you need in order to generate the required passive income.
Assuming that you need $2000 a month in passive income to retire early, you will need to build a dividend stock portfolio of $800,000 in the most conservative case.
If this seems daunting to you, then you might want to read on because I am going to show you a faster way to retire early without having a dividend stock portfolio at all.
How You Can Retire Early With An Online Business
With an online business, you can generate a handsome income for yourself with a laptop from anywhere in the world.
I have been able to leave the corporate world and live my life on my own terms, all thanks to my online business.
This all started after both my husband and I lost our jobs because the company we worked for suddenly closed down.
During that time, I also found out that I was pregnant with our first child.
As you could probably imagine, it was a very stressful time for us.
This painful experience made me realize that I had to take control of my income and my time.
So I decided to start my own online business.
My very first online business was called Service Arbitrage.
Here’s how it works.
First, you find in-demand services that freelancers are already offering at a super low price on freelancing websites.
Then, you market their services to businesses that need it. Once you get a sale, you hire the freelancers to deliver the work for you.
How you make money is that you quote a higher price to your clients than what your freelancers quote you and pocket the price difference as your profit.
This can be considered another variant of freelancing.
The only difference is that you are outsourcing the work to other freelancers instead of doing the work yourself.
In a short span of a few months, I was able to grow my service arbitrage business to a consistent 4 figure business with only working on the business a couple of hours a day.
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After I have had success with this business, I decided to launch my own online courses as well as coaching program to share what I have learned.
This has became my second online business which has been generating a steady passive income for me.
The best part about my online business is that it is run on auto-pilot. In other words, sales can come in even when I am sleeping or traveling overseas.
With my online businesses, I was able to quit the rat race and live my life on my own terms.
If I could do it, I believe you can do it too. And it all starts with taking the first baby step.
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