There’s a movement of young retirees. How do they stop working without worrying about money?
Most people believe that retiring at age 40 is something that only lottery winners, celebrities, heirs and technology entrepreneurs can achieve.
But there’s a growing movement of retired youth who are shaking up the conventions: they’re not born millionaires, they didn’t win the lottery, and they don’t know all the secrets of Silicon Valley.
They come from all walks of life. Some had well-paid careers in banks or engineering firms, while others were teachers or writers. Some were entrepreneurs, while others worked in an office.
However, these retired youth have a common characteristic:
#1. Understand the mathematics of financial independence
Conventional wisdom suggests that in order to retire, you need to have a huge savings and a source of income at least equal to the salary you received.
In 2012, Aon Hewitt discovered that the average employee needs a “keeper” of up to 11 times his current salary to be able to stop working comfortably.
That is, those who want to retire must have a source of income 85% higher than their current salary.
The problem with these numbers is that they don’t take into account that retirees still spend.
Therefore, young people who stop working understand that the “magic number” is not in income, but in the savings rate as a percentage of their salary. Considering this, an early retirement doesn’t sound so far-fetched.
As Peter Adeney of the popular early retirement blog “Mr. Money Mustache” explains: “If you spend 100% of your salary, you will never be ready to retire. If you spend 0% of your income (imagining that you still have the means to subsist), and you can maintain this discipline, then you can retire today.
This early retirement calculator shows us how elegantly simple this process can be. It doesn’t matter if you earn $500,000 or $50,000 pesos a year. If you can save 50% of your pay, you can retire in 16.6 years. If you save 75%, you can do it in 7.1 years.
A higher salary helps you save more, but maximizing your savings percentages is the key to stopping working sooner.
#2. Spend less, but are just as happy
Young retirees spend less than they earn. It may not be surprising that savers can retire earlier, but it is important to note that these people do not see frugality as a sacrifice.
In fact, they have developed a very convenient attitude in which they maximize their consumption.
“When we buy something, we usually look at the price, but what really matters is how much I enjoy the new item,” explains J.Money of BudgetsAreSexy.com
“I’m just as happy to have a beer at home as I would be in a bar… I enjoy a jam sandwich just as much as a new restaurant.
Does this mean that I never buy clothes, like on the street or drink a craft beer that costs an ‘eye of the face’? Of course not! I love doing all those things. But when I compare the joy these things bring me with that which the simple pleasures of life give me, the difference is not much. I do more cheap things so that I can really enjoy the tastes I give myself.
#3. They invest early and for decades, not years
Young retirees have no access to investment secrets. Instead of trying to beat the market, they have simple financial strategies.
Many use savings funds with plans that last for decades rather than months or years.
They also start investing much earlier than other people their age, which generates higher interest on their money.
To illustrate the power of investing “early in life,” Jim Wang of WalletHacks points out that, assuming you have an interest rate of 7%, someone who has invested $100 a month from age 20 to 30 would have more money than someone who invests $100 a month from age 30 to 60.
#4. Avoid High Investment Rates
Young retirees know how to avoid investment vehicles full of commissions.
Many people know they should start investing, but they don’t know how.
As a result, they hire the first services found in the bank.
Nate Tsang of InvestmentZen.com
The problem is that most of these institutions actively promote funds with exorbitant commissions, even though they have lower returns than other tools in the market.
What are the alternatives?
Lately there have been thefts – financial advisors who, thanks to their algorithms, help form a low-cost investment portfolio.
These tools are simple to use, but not the answer for everyone. Tsang says that “each theft-counselor calculates with different structures and methodologies. Be sure to choose the fund characteristics you require for the right price. You should also compare the commissions you would be charged and how they would affect your return on investment.
#5. Buying assets that drive cash flow
Alternative investments are a smart way to diversify a portfolio and shore up your income to retire at age 40.
The most popular alternative in this branch is real estate.
However, entering this sector is not as simple as buying a property and waiting for it to increase in value. Investors must “do their homework” and identify properties that meet the golden rule: the monthly rent for real estate must be at least 1% of the purchase price.
Revenue-producing websites are another investment alternative that has grown in popularity in recent years.
They can be acquired by annual profits multiplied two or three times, which translates into annualized returns of between 33 and 50 percent.
However, while profits may be high, this type of business requires more experience than other investments.
Those interested in such tools should know digital business in depth and spend time researching the potential of the Web site.
In a nutshell…
Most people don’t think they can retire at age 40, so they don’t even try. Perhaps the biggest lesson we can learn from the young retiree movement is that to achieve ambitious goals, you must fit your lifestyle around them.