One of the more interesting financial trends of the past few years has been the appearance of “extreme savers,” folks who aim to retire early by spending nothing and putting away every dime.
It’s a challenging idea: What if you could save 70% or more of your income? Beg, borrow, steal, whatever it takes. Live in someone’s garage, eat cheaply, drive a used car for a decade…then just stop working and retire early?
Or, as an alternative, accept a life of irregular unemployment, working and saving and then taking a year off on occasion to “short-term retire,” as some do?
USA Today recently reported on a few folks trying out this idea. It’s a high-wire act, for sure. In a time of high unemployment and great uncertainty about healthcare and housing, it can seem like choices are fewer and fewer.
Yet their stories are compelling. If you truly plan to retire early, why make your target 60 or your mid-50s? Why not 40?
First of all, leaving a career permanently at 40 to retire early is pretty unlikely. More than a few “normal” age retirees quickly find that doing nothing is not what it’s cracked up to be. They pine for the schedule of a workday. Many return at least part-time or look for ways to volunteer.
Secondly, the wager you make as an early retiree is that your ability to invest properly over many decades will not face serious challenges. Inflation will not roar out of control. The stock market will not wipe out your net worth. You will successfully generate a steady income from your savings.
But by far the biggest factor in your retire early planning, as USA Today notes, is cost. Building a low-cost, reliable portfolio is absolutely crucial.
According to the newspaper:
Extreme early retirees must be very savvy in managing their nest eggs. If they’re too aggressive, or make a big mistake, such as panicking and selling in a bear market, they could devastate their portfolios. But if they play it too safe, they won’t get the returns they need to make a portfolio last for 60 or more years.
It’s hard to overstate the importance of this concept. Any retiree at any age will need both the solidity of fixed-income investments and the growth associated with stocks.
And they will need to counterbalance these investments with other asset types, including real estate, commodities, small caps and foreign equities. Importantly, they must do so using very low-fee index funds.
Look, if you can retire by 40, more power to you. But before you start planning that first round-the-world trip or whatever else you have in mind for when you retire early, remember to take some time to consider how your money will grow safely.
It wouldn’t be an awful thing to realize the plan’s not working and, a few years later, return to work to build up cash again.
But it would be disastrous to be forced back to the workforce well into your golden years and against your will because high-fee mutual funds and lack of planning ate your savings alive.