The following post is by ESI from ESI Money, a blog about achieving financial independence through earning, saving, and investing (ESI). Itís written by an early 50ís retiree who achieved financial independence, shares whatís worked for him, and details how others can implement those successes in their lives. He is also the author of a free ebook titled Three Steps to Financial Independence.
Early retirement is all the rage these days in personal finance circles.
And when I say “early”, I mean really early.
I retired at 52 and today’s crowd makes me feel like a slacker. People are retiring in their 30’s and 40’s these days with a handful even in their 20’s.
Of course the definition of “retire” is rather broad. Many still bring in income through side hustles or part-time work. But the common thread is that they are retired from full-time work.
If you would ever like to retire — and especially if you’d like to retire early — there are some landmines you need to avoid along the way.
Here’s my list of the top five killers of early retirement (and maybe retirement overall). I’ll also include some tips on what to do if you’re facing any of these challenges.
1. Having too much debt.
Debt is a killer in many ways.
First of all, interest costs add up, thus keeping you from saving enough to retire. Even with today’s low rates homeowners with 30-year mortgages are going to pay tens of thousands of dollars in interest.
And that’s if they actually pay off the house in 30 years. Many Americans have revolving mortgages due to moving, taking cash out of their home, and so forth that leaves them with one mortgage or another for well beyond three decades.
Second, debt’s mere presence will make it harder to reach a retirement number. For instance, if you have no or limited debt, the amount of income you’ll need to retire is going to be much lower (and thus easier to reach) than if you’re saddled with a ton of debt.
We got serious about our debt early in our marriage and paid off everything, including our house, within ten years. We then had 20+ years of hyper-savings to build up assets which allowed us to reach financial independence in our 40’s and eventually retire in our early 50’s.
What to do: List all your debts and start working on a debt snowball. Also, review your budget and identify places where you can cut expenses. Do all you can to pay off debt asap and then never borrow again.
2. Owning an expensive house.
The more I study people’s money habits the more I become convinced that the “American dream” of a huge, expensive home is a knife to the heart of retirement plans.
Sure, some people will “luck out” and see tremendous property appreciation, but last I checked “planning on being lucky” isn’t a viable retirement strategy.
The vast majority of people who buy expensive homes find that they are a financial anchor. There are a few reasons for this:
- The mortgage is a killer. See above. In addition, most people buy as much house as their budget allows, squeezing out additional retirement savings.
- The associated costs are a killer. Taxes, insurance, maintenance, upgrades, and on and on. More expensive homes have more expensive associated costs.
- The “keeping up” costs are a killer. Consider the following quotes from Stop Acting Rich (from the same author who wrote The Millionaire Next Door)…
What we don’t realize is that the true cost of living in certain homes and neighborhoods is unseen but truly devastating. I believe the greatest detriment to building wealth is our home/neighborhood environment. If you live in a pricey home and neighborhood, you will act and buy like your neighbors. In other words, human beings have an innate tendency to act and be like those around them to fit in and even compete. The type of home we live in and where we choose to live often takes the greatest toll on our financial wealth, and from it, all other perils flow.
The reason why so many homeowners today are having a difficult time making ends meet goes way beyond mortgage payments. When you trade up to a more expensive home, there is pressure for you to spend more on every conceivable product and service. Nothing has a greater impact on your wealth and your consumption than your choice of house and neighborhood. If you live in a pricey home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised.
The more expensive, the more affluent neighborhoods are a vortex of sociological forces. The more affluent the neighborhood, the more its residents spend on almost every conceivable product and service. From cars to haircuts, and from wine to watches, those living in ìprestige estatesî spend more. We take consumption cues from our neighbors. If many of our neighbors have a much higher level of income and wealth than we do, we will have set ourselves up to lose the war before we have even begun to battle.
So you can see how an expensive home can keep you from reaching retirement.
What to do: If you already have an expensive home, you may need to sell it. You will need to consider closing costs and the like, but if a huge house is taking you down, now may be the time to cut it loose. If you don’t have a home yet but are looking to buy, simply buy a house you can afford — one that meets your needs, fits easily within your budget and allows you to pay it off in 15 years at the most.
3. Living in a high cost-of-living area.
This isn’t a news flash to anyone, but there are vastly different costs associated with living in different areas of the country.
For example, let’s look at costs of various cities from Sperling’s Best Places†(FYI, “100” means it’s an average-cost city in the U.S. — higher is more expensive and lower is less):
- San Francisco — 273
- New York — 180
- Boston — 170
- Washington, DC — 159
- Colorado Springs, CO — 105
- Nashville — 100
- Grand Rapids, MI — 87
- Cincinnati — 86
Here’s how you read these numbers:
- San Francisco is 173% more expensive than Nashville and 93% more expensive than New York City.
- Cincinnati is 14% less expensive than Nashville and 19% less expensive than Colorado Springs.
There are several factors that influence these numbers, of course. For instance, many of the high-cost cities are expensive because of housing. As such, if people living in those areas can tame their housing costs, then the area will likely become much more affordable. A simple example of this can be found using local lawn maintenance costs. According to LawnStarter, the average mowing price for a yard in Cincinnati is $42.50. Whereas, the average lawn mowing price in San Francisco is upwards of $50.00.
Obviously, there are non-monetary factors that drive location like lifestyle and family considerations. But if looked at from a money standpoint alone, some cities are simply retirement killers.
Some will say that more expensive cities also offer higher average incomes. This is generally true, but if you look at the data it will show that higher incomes in more expensive cities do not make up for the higher costs in those cities.
Personally, the option I recommend is having a high income in a low cost-of-living market.
Even assuming there is some compensation for higher incomes, you’re still paying 20% to 50% (or more) to live in some cities.
Just think, would your retirement savings be better off if your living expenses were 20% to 50% lower? I’m thinking it would.
What to do: If you live in a high cost-of-living city you can do two things: 1) try to minimize costs as much as you can and 2) move. If you live in a low cost-of-living city, you still need to watch costs, but the wind will be at your back.
4. Not working to grow your career.
Your career is a multi-million dollar asset.
If you don’t believe me, do some quick math. Someone starting at a salary of $40k per year, getting 3% average annual increases, and working 45 years will earn $3.7 million over their working lifetime.
The good news is that you can make your career worth more. Much more in fact.
Let’s say you implement the seven steps to grow your career and instead of 3% annual increases you average 5% increases. You will earn almost $2.7 million more than at 3%.
But many people will not work to advance their careers. They think getting ahead takes a lot of time and effort and the path to doing so is unclear. These assumptions couldn’t be further from the truth. Will they take some effort? Of course. But isn’t an extra $2.7 million worth a bit of effort? I think so.
Besides the steps to grow your career are simple steps and take just a bit of time each day. Many of them can be done in the normal course of business.
Furthermore, there’s a bonus. Many of the steps also make work more enjoyable.
By not working to grow their careers, some people are literally leaving millions of dollars behind, money that could help them retire much faster.
What to do: Develop a plan for implementing the seven steps. Try to make a bit of small progress every day. Doing so will add up to big gains over time and your income (and retirement) will benefit greatly as a result.
5. Spending like crazy.
No matter how much you make, you can spend it all.
Someone who makes $1 million a year but spends $1.1 million loses ground while someone who makes $50k and spends $45k is gaining ground. Sure, the former has the potential to save more, but you don’t fund retirement on potential savings.
We’ve seen multi-million dollar making athletes and movie stars going broke time and time again. Why? Because they spent way more than they earned!
Most early retirees saves 25% or more of their incomes. The early, early ones are above 50%. While I was working, we averaged 36%.
Coupled with a high income, a high saving rate can be a big retirement win. On the other hand, spending like it’s going out of style will get you nowhere other than working when you’re 85.
What to do: You must have a budget. There’s no other proven way to keep your spending in line. Massage your budget over time to balance lifestyle and savings. Life isn’t all saving and no fun, but too much fun (at too high of a cost) can be bad for your retirement possibilities.
Yes, there are other habits that could slow down your retirement, but these are the top five IMO. If you can conquer them, you will be well ahead of the pack and on your way to a prosperous and early retirement.