I don’t think a single day goes by that I don’t think how I can invest and get to financial independence and the option to retire early faster. The reason I think about my investments so much is I always think there might be another option out there. Because I do not see a blueprint for early retirement I decided to share my very own Early Retirement Blueprint.
I wrote the Early Retirement Blueprint as more of a business plan. This is not an executed financial statement ready to be published and audited by the SEC. This is important to remember when reading my plan and putting it together with your own.
I’m going to touch on each point later in the post and where I am in my journey today. Most of the research done for this article was based on my experiences and what I find to be working in the early retirement community.
Most early retirement plans are anywhere from 5-17 years in length depending on your savings rate. If you are able to obtain a savings rate of 50% then you will find yourself close to 17 years before financial independence.
If however, you are able to obtain a massive savings rate closer to 80% the time frame dwindles down to closer to 5 years.
The Shockingly Simple Math Behind Early Retirement by Mr. Money Mustache and Jacob Lund Fisker’s How I live on $7,000 per year document the math and high savings rates that one needs to accomplish such feats.
The math is simple. If you want your savings rate to be as efficient as possible you should have all personal debt paid off. If your student loans consume $200 of your monthly income and you pay them off, your savings rate increases. This allows the number of months or years needed to reach financial independence to decrease.
David Carlson from Young Adult Money makes a good argument against this. Although I can’t say it’s one I agree with. David mentions in his article that this is a math problem only, which in this scenario makes him close to being correct.
My argument would be too many statements are made as an assumption. For example, taking emotion out of the equation. Paying off your student loans in 10 years or less. The stock market will give you an 8% return or greater during that time. Lastly, I don’t see paying taxes on this money involved in the equation(I understand this could open up Pandora’s box, but either way I didn’t see it mentioned).
Very few if any early retirement bloggers mention keeping personal debt, with a mortgage being the exception. For that reason alone making sure your personal debt is paid off should be at the forefront in any Early Retirement Blueprint.
While I do not think you should stop your life financially, I do believe paying off debt should be your number one priority.
For example, a savings plan of contributing to your 401K to receive the company match should be included. However, if you are on the true path to early retirement of 5-17 years, the minimum expectations on the path to early retirement. Your savings rate should be 50% or higher. Anything below this and the term early retirement loses some of its luster.
There are 2 common schools of thought on investing.
I tend to think both are correct just at different times of your life. I believe that when you start out you should put all of your eggs in one basket and watch it like a hawk. The investment can be of your own choosing and comfort level.
After you have put all of your eggs in one basket and made a significant amount of your early retirement nest egg this is when you need to put your eggs in different baskets and look to diversify your income streams.
I think the best way to relate this type of investment strategy is to compare it to a successful business. When Coca-Cola first started out they sold Coke and that was it. Today if you head to their website they sell over 100 different brands.
Another example is Google which originally started as a search engine and now have a wide assortment of revenue streams. Social media, cars that drive themselves, investments in other start-ups, this list could go on for days.
Here’s the thing, they started out with one catalyst, one big investment. Coke didn’t start out with 100 different brands instead they built the one most important to their success. Then over time, they branched out to diversify and created other revenue producing income streams.
A few examples of focusing on one investment strategy as a catalyst in the blogging world includes Tawcan with his investment of choice, dividend investments.
1500 Days started with a catalyst of individual stock investments. JL Collins true to his love of keeping things simple choice is Index Funds. Chad Carson, who I recently had an opportunity to interview uses real estate as his catalyst.
All great examples of choosing a primary investment and essentially putting all of their eggs in one basket and watching it like a hawk.
This is the one that falls under the radar so often.
Having that initial catalyst investment is so important but like any good business all of their income does not come from one source, it’s just too large of a risk.
The most comment investments for early retirement are real estate, index fund investing, and dividend investing. Other sources of passive income not so commonly talked about include: owning a small business, bonds/preferred stocks, REIT, personal lending (hard money lender, peer to peer, etc), CD’s, Money Market savings, and many others that could be considered a secondary investment.
Let’s highlight some great Early Retirement blogs that make it known that one investment is a great start but they subscribe to creating multiple streams of income.
While Mr. Money Mustache doesn’t openly talk about his investments. He does share a great deal about his frugality, savings rate, and many bad-assity references which most of us enjoy. Pete Adney aka Mr. Money Mustache does briefly mention in his Getting Rich post that he uses real estate, dividend investing, peer to peer lending, and index investing which seems to be his catalyst of choice.
Retire by 40 has a wide variety of passive income streams as it applies to his Early Retirement Blueprint method. He mentions real estate crowdfunding, dividends, interest, rental income, and online small business with his website.
I mention 1500 Days one more time as he is in the process of switching from his catalyst of individual stock investments, a strategy rarely talked about as it relates to early retirement. One of the main reasons is the roller coaster ride that individual tech stocks incur. Recently he has moved to a more diverse portfolio as he as added index fund investing and real estate with a number of unique purchases.
Financial Samurai mentions stocks and bonds, online income, real estate, investing, and even CD’s as his investment of choice. I met Sam in San Diego just before my wife and went Stand Up Paddleboarding and while Sam waited for his jet ski to be ready.
Based on the amount of bonds and CDs, I would consider Sam to have one of the more conservative investment approaches I have found. Despite his need for speed on the jet ski, his conservative investment approach appears to bring in close to $200,000.
Diversification comes in many income streams and if you are not using one or many of these I expect a downturn in your future.
At this point in our journey towards financial independence, we are currently heavy in index fund investing. Our current portfolio consists of too much cash which is currently parked in a money market savings through Vanguard. The decision to sell our Chicago home has left us with a good chunk of money that awaits our decision on the next move, whether that be real estate or otherwise.
Over the next couple of years, I look forward to getting this closer to a more balanced approach. I look forward to the ongoing challenge of finding the most diverse stream of passive income that not only reduces our risk but also our tax bill. My personal thoughts are if you have more than 50% of your portfolio for your early retirement income you are asking for a kick to the groin and nobody likes those.
For some of you, this might be a little counter-intuitive, while I certainly suggest stuffing your tax-deferred investment accounts full during your working days, with our Early Retirement Blueprint approach to early retirement we do not want to rely on one form of income.
Also if you take a look at some of the savvy tax deferring individuals they are not relying solely on a 401k/Traditional IRA transfer to Roth IRA to live off of.
A couple of my favorites on this topic include Brandon from the Mad Fientist who talks about the Traditional IRA vs Roth IRA which in the comments get more talk about the small amounts you will need to take out to avoid taxes and the 5 year waiting period on the conversion.
The Mad Fientist also mentions the need to wait 5 years for the conversion period and his suggestion to use your individual taxable investments to get through this waiting gap.
I’m going to take this one further and recommend not touching any of the conversions to your Roth IRA at all. Instead, wait at least until 59.5 to take out this money. This will allow time for your investment to grow. Also important is the role this money can play as a bonus of sorts in retirement.
Our Next Life has laid out a similar approach to early retirement. Tanja and her husband Mark have an early retirement vision that has retirement phases. The retirement phases include using tax-deferred investments during the later years at the more traditional retirement age.
I look at this as a fail-safe in the Early Retirement Blueprint.
Most early retirement bloggers seem to plan retirement in the 35-45 year old range. Most calculations that come up from any study on a 4 percent rule tend to lean towards a 30-year window.
Briefly reading observations about the Trinity Study and Monte Carlo simulations there is still a failure rate. What if instead of allowing an entire 30 year window it was condensed to 15 or 20 years, then the remaining 10-15 years are instead supplemented with a Roth IRA full of money.
Plus don’t forget another retirement only account, the Health Savings Account better known as an H.S.A. The Mad Fientist details this as the “Ultimate Retirement Account“. An H.S.A., while used primarily for health, can be used later in retirement to fund as you see fit.
Go Curry Cracker who is officially retired talks about his cash management strategy and his real life experiences associated how he funds early retirement. While I can’t match what real-life experience he has I can agree with many of the points he makes, I found this to be a great addition to read if you are interested in cash management and how it relates to early retirement.
I think most of this discussion really goes back to making sure our early retirement income is diversified. Even based on the most simple budget of $2,000 month/$24,000 a year, the early part of your retirement stage will need to depend on accounts other than tax-deferred.
Just a quick note, while I mentioned H.S.A and IRA’s for retirement accounts, don’t forget about pensions. Some companies and many government agencies(police, fire, military, government) actually offer them and can add on to your retirement.
For some early retirement would just be a bridge to the bigger payday. Most would use a pension closer to the typical retirement age. In my case with my small pension, I would probably only be able to buy an extra 6 pack of beer a month, but I’ll take it. Craft brew for everyone, well at least 6 of us!
First off I want to make clear that the topic of an emergency fund is for when you retire early. Not the actual journey to early retirement. For this, I recommend having an emergency fund that helps you sleep at night. These are two different topics.
My plan is to have a revolving door of cash during early retirement. In my perfect scenario, I would defer touching any investments until at least 1 year has passed.
My investment strategy is currently index fund heavy. Let’s take a look at how I would use my emergency fund in this scenario.
Let’s say your expenses amount to $48,000 for the year. I would want $48,000 sitting in my money market savings account ready to be transferred on a reoccurring basis.
During the year that we are using the $48,000, the index fund investments would grow. Even the dividend could be used to repurchase shares or provide the flexibility to use this income and reduce the amount used from our reoccurring transfers.
We are looking at using 1 year’s worth of expenses, but this number could be higher even as high as 3 years worth of expenses. However, this decision is really based on your comfort level and what fits your Early Retirement Blueprint.
In the Early Retirement Blueprint, I mentioned many early retirement bloggers out there and some of the strategies they are currently using.
I also mentioned a few details about where I am at with my personal blueprint, but here’s a better picture of what Even Steven Money Early Retirement Blueprint looks like.
I paid off all of my personal debt at the end of 2015. Much faster than the much further expected date of June 2020. I speak of this very lightly here, but paying off over $100,000 in personal debt is anything far than a light accomplishment.
My catalyst for early retirement has done an effective 180. Less than a year ago, we were heavily invested in real estate as our major catalyst to financial independence. Today that has flipped entirely.
We currently hold zero investment properties after the sale of our Chicago house hack. The move into our rental property in Miami which now acts as our primary residence changed all of that. This is a far cry from having 2 investment real estate properties that I considered my catalyst to early retirement.
As things currently stand the money from our real estate sale sits waiting for action in a Vanguard Money Market account. This money earns a small amount of interest as we decide our secondary investment of choice that will bring passive income.
The investment could be real estate and the reason it currently sits in a liquid money market account. This investment could even adjust to a heavily concentrated stock market diversified portfolio. The decision has yet to be made.
The problem still remains as is I have not made up my mind on which passive investment income best suits me. It’s a good problem to have. One I thought would have more clarity as I moved closer to financial independence, but no such luck thus far.
What I mean by this is when you turn 59.5 these accounts could take over in case of failure of your major investment or secondary investment. My plan is for this to be bonus income during the later stages of retirement. During our journey to early retirement, this will be an ongoing contribution. A contribution we are working to make higher each year.
My goal for this to have a revolving account that has 1-3 years worth of expenses. During the year I will use this money for everyday expenses while my passive income builds for the following year.
I’m still working on when is the best time to fund this account as it relates to financial independence. My current thoughts that make the most sense to me would be as close as possible to our early retirement date.