Around this time of year, something truly terrible happens: You switch your clock from daylight saving time to standard time and find yourself getting up before sunrise to go to work, and not getting home till the stars are out. Five days a week you devote every daylight hour—and more—to fulfilling someone else’s agenda.
And sure, we all need to keep those dollars coming our way. But how long do you want to keep this schedule going? Wouldn’t it be nice to put aside enough money to be able to take control of your life while you’re still young enough to enjoy it?
If you’re around 30 now, that means you’ve got nearly an entire quarter-century to sock away sufficient cash to buy your freedom by age 55. That’s barely older than famed surfer Laird Hamilton is today. I can’t help you marry the next Gabrielle Reece, but I can offer a 25-year playbook to escaping the workaday grind.
I know: The idea of budgeting kills the mood faster than your girlfriend’s granny panties, but let’s get it out of the way now.
You’re not in control of your finances till you know exactly where all your money is going. Try one of the millions of budgeting apps, or just go old-school and keep track on a yellow pad. You don’t need to make a note of every cup of coffee, but you do need to know exactly what you’re spending every month.
If you’re serious about early retirement, fully 15% of your income needs to go straight into a 401(k) or its equivalent. Then come the necessities—rent/mortgage, utilities, student loans—followed by the things that seem like necessities but need a second look: What about sticking with your iPhone 6 instead of upgrading to the 7? And could you get a cheaper plan? Be ruthless.
Oh, and learn to cook. It’s not only a lot cheaper, it’s also better for you than just about anything Seamless will deliver.
That said, a lot of personal-finance gurus will scold you about your daily cup of Starbucks and other spending habits that add up over time. Yes, it’s important to keep an eye on those things, and there’s a whole subculture of savings nuts who can help you find ways to pinch pennies. Just Google Clark Howard.
But the big-ticket items can save you huge bucks with one smart choice. Money guy Allan Roth calls his crummy old Pontiac his “millionaire’s car” because of the huge savings he reaps by not leasing a new Lexus every few years. Spend $500 a month on a lease and that’s $6,000 a year—plus hefty insurance costs. Over 10 years that’s $60,000. Buy a $25,000 car and drive it for a decade, and you’ve saved more than $35,000; and the insurance savings will help cover maintenance costs.
If you go to the trouble of brown-bagging it all week, don’t squander that savings by leaving it in your checking account slush fund. Take the next step: Transfer that money to a savings account—or, better yet, right into a retirement account. Just use the Notes program on your phone to write down the amount each time you save, then transfer the total at the end of the month. Or try an app like Acorn, which automatically transfers small amounts into your savings based on your spending patterns.
If you put $15,000 a year under the mattress for the next 25 years, you’ll end up with $375,000. Invest that cash at 8% interest yearly, however, and you’ll have more than $1 million.
Since none of us knows what the stock market is going to do in the next 25 years, the best strategy is to own a broadly diversified portfolio of ultra-low-cost index funds, which will expose you to almost every stock market on earth.
One caveat: Right now, stocks and bonds are expensive by historical standards. That suggests modest returns in the coming five or 10 years. But don’t let that get you down. One of these days the markets will crash again, and you’ll be buying on the cheap. Boatloads of academic research have shown that the best approach is so-called “low-cost passive investing”—cheaply tracking the market’s return rather than trying to pick stocks that beat the index.
But occasionally the market offers a sale that’s so dramatic, it makes sense to take advantage. For instance, right now California-based Research Affiliates forecasts that emerging-market stocks are priced to return about 8% a year after inflation, versus an inflation-adjusted return just over 1% for U.S. stocks.
Because you’re looking at a distant horizon, and bonds are about as expensive as they’ve ever been, this is a stock-heavy portfolio. The single divergence from passive management is the Harbor bond fund, because its managers have the freedom to reduce their holdings of the most expensive bonds. (Insider tip: Harbor bond is run by the same team that runs the better-known Pimco Total Return fund, but the expense ratio is one-third less, so you’re getting the same expertise for less.) Consider this:
Jack Otter’s recommended “retire early” stock market portfolio:
35%: Vanguard Total Market Index (VTSMX) expense ratio = 0.16%
30%: Vanguard Total International Index (VGTSX) expense ratio = 0.19%
10%: Vanguard Emerging Market Stock (VEIEX) expense ratio = 0.33
12.5%: VanguardTotalBondIndex (VBMFX) expense ratio = 0.16%
12.5%: HarborBondFundInstitutionalClass (HABDX) expense ratio = 0.51%
Important note: Your 401(k) may not have these exact funds, but they are a useful guide; compare your index options to them, and try to keep the expense ratios at this level or lower. Most big providers, like Fidelity and Schwab, offer similar funds.
In addition to your 401(k), stash as much money as you can afford into a Roth IRA. When you take money out of a Roth, you pay absolutely no tax. If your 401(k) doesn’t offer good, low-cost index funds, you can still make use of it: Invest at least enough to get the full company match, then plow $5,500 into a Roth.
Retiring at 55 shouldn’t be an entirely DIY project. At some point in the next five years, hire a fee-only financial adviser. Advisers charge around 1% of assets, so unless your finances are tricky, just pay a one-time fee to make sure you’re on track.
Then, in another five to 10 years, check back in. Among other things, you’ll want to adjust your portfolio as you age and as the markets change.