Saving for retirement

People are always curious about how people who retire early do it.  Like losing weight there are many ways to do it, not every way works for every person and the simple fact is that while everyone has the capability to do it, not everyone can do it.  Also like losing weight the secret is simple but hard.  Excluding winning the lottery it takes a certain mindset and a little luck to get enough money to retire early.  If you don’t have that mindset you won’t be able to lose weight or save money. 

So that is the general philosophical mumbo jumbo.  I like to call how I got to financial independence “Small Rock, Big Lightning”.  It is a mix of small, everyday savings over the long term and large fast(er) gains. 

Let’s start with the Small Rock.  It consists of small, every day solid habits, like a rock. 

Ever since my first real job at 23 I have contributed at least 10-14% of my income to my 401k.  Knowing that it would be decades before I could withdraw the money I continued contributing though up and down markets and different jobs.  Over 30 years that money has grown to over half of the money needed to retire.

Some people will say that it is hard to contribute that much to a 401K but it really is not if you just make it a habit and just ignore it.  I have always considered my 401k deduction like the income tax withholding deduction or health insurance premium deduction and have never missed the money. In addition I usually give half of every raise to my 401k.  If I get a 4% raise, I will increase my 401k contribution by 2%.  That way I still get a little extra spending money and my retirement gets a bump too.  If you never have money, you never miss that money.  For those that are not contributing that much then it may take a short adjustment but you will quickly adjust. 

The 401k contribution a hidden benefits which companies don’t usually emphasize.   Companies will point out benefits such as the company match and lower taxes but they don’t always talk about the benefits for lifestyle inflation.  For example someone makes $30,000 a year.  The rule of thumb is that to retire you should have enough savings to generate at least 80% of your working pay or in this case $24,000 a year.  However if you put 15% of your pay into the company 401k you are actually accustomed to living off of $25,500 a year and 80% of that is $20,400 a year.  At a recommended 4% withdrawal rate that means that instead of needing $600,000 to retire, you just need $510,000 to retire.  So by saving $4,500 a year you will actually need $90,000 less to retire.

$4,500 a year is a big chunk of money on a $30,000 a year salary. How do you get that much?  You get it with small, everyday habits done like a rock.  Bring you lunch almost every day.  Consider if you go out to lunch it will cost about $12 compared to $2 if you just bring lunch from home.  $10 a day 250 work days a year is $2,500 bringing you to over half way $4,500.   Cooking dinner at home saves even more.  Look for cheaper cell phones and service.  Get the $300 phone and use a service like Ting.  I used Ting for years and two phone lines cost a total of $50-$60 a month compared to over $100 for Verizon.  Cut the cord and get rid of that $60 a month cable bill. Get a Costco membership for the cheap roast chicken and gas but avoid overbuying.  Use coupons, use rebate sites like ebates.com, always look for the best value.  Get the McDonald’s $1 Ice tea instead of the $3 Starbucks Ice Tea.  Shop around for your car insurance.

You don’t need to deprive yourself, go out to lunch or dinner a couple times a month.  Just pay attention to your spending, get value for your money and don’t worry about appearances.  The $300 phone will make calls just as good as the $900 phone.  Think carefully if you really need something or if it will really make you happy before buying something. When you do buy something do not be afraid to spend more for quality and durability but don’t get more than you need.  Generally you can get an item that will be 90% as good for 50% the price.  You just need the value mindset but don’t go overboard and don’t expect to be perfect.  Each savings will be small but taken together and done steady like a rock it will grow to a big deal.

Next is Big Lightning.  Frankly speaking Small Rock is good for a regular retirement.  You diligently save money for 40 years and then you can retire comfortably with Small Rock.  Unless you make over six figures there is no way to save yourself to an early retirement without some truly monk-like deprivations like 20 years of instant noodles every day.  To truly get enough money to retire early requires doing something else, something extra, which I call Big Lightning.

 Big Lightning’s are opportunities to make a lot of money fast.  They don’t come around often and you have to have the resources and knowledge to take advantage of them.  These opportunities are different for each person and each situation.  For me it was Real Estate.  I was able to buy a couple of properties around and after the 2008 housing crash which got me a lot of money in just a few years.  I was able to take advantage of the Big Lightning opportunity because I had saved up enough though Small Rock to have a down payment for the houses and I had the knowledge of Real Estate though reading books and taking classes.  Then I had a bit of luck in timing the market just right.

Now I am not going to say too much about Big Lightning as the opportunities are fleeting and different for everyone and there is really no way to control or predict when they will hit.  All I can advise is to prepare yourself to catch the opportunity by diligently saving money since most opportunities will require some investment.  Actively look for opportunities and educate yourself in ways to make big money that interest you.  Study real estate, investing or business.

In other posts I will a lot more about easy ways to save and make money but for now this hopefully this article will give you a good general idea of what needs to be done.