40

Welcome to Wealth Informatics! If this is your first time visiting the site, please start here.

Early retirement strategy on one income : Can we still retire early with our income cut in half?

We have a dream of retiring early.  What is early, you ask? Age 40.

Early retirement to us means financial independence. We don’t want to just stop working altogether and “retire” in the traditional sense. We want to have the freedom to work because we want to instead of needing to.

We didn’t start saving seriously until we were in our late 20s. Better late than never right. I had a plan, I had it all worked out. I was 28, 12 years should be enough to plan a scheme for financial freedom.

In a nutshell

We want to retire by 40. The goal just got more challenging with me quitting my job, thus cutting our household income in half. Our road map to financial independence involves us traversing 4 different terrains – making more money, saving more money, changing our lifestyle and overcoming our psychological barriers.

The plan was simple – start earning more, start reducing the expenses and save the rest.

Technically the plan was solid, except, I overestimated my patience. By far. I couldn’t handle another 10 years of working a corporate job. I wanted to quit. I wanted to quit right away. And I did.

So what happened to our early retirement plan? Nothing. We still want to retire by 40.

With our income cut in half, is it still possible for us to achieve this dream? We are 31 now, so we still have a good 9 years.

Cut the income in half AND not compromise on things that are important to us AND retire with a decent nest egg at 40? If I didn’t know me, I would ask what I was smoking? That is impossible.

Well, I am determined to make it possible.

I decided to write a detailed proposal, a road map, plotting our course to financial independence.


Early retirement plan

What is our ultimate goal?

Our ultimate goal is to create a non-profit organization that will serve mentally challenged kids. We are saving for that right now, but to completely give ourselves to the service of these wonderful kids, we have to stop thinking about ourselves. Which brings us to – financial independence. We want to stop thinking about going to work just so we can pay the bills. We want to stop thinking about how we are going to put food on the table if we donate our entire paycheck to charity. We want to stop penny pinching on things that give us the most pleasure and satisfaction in life. We want to be financially free!

Why do we want an early retirement?

I touched upon this already in my “why”. Early retirement gives me the freedom to pursue life as we see fit instead of conforming to a model that just feeds my consumerism. There are other reasons as well,

  • We are not happy with our life as it is now. We have everything to be happy, but we feel we take more from this world than we give.
  • We want to make a difference.
  • We want to do more things than to have more things.
  • Because we want to die wealthy : We want to leave a legacy. We don’t want to have money just for our existence but we want to set up a foundation and enough seed money in that foundation for others to add on and use solely for charitable purposes. It might be counter intuitive to retire early if we want to accumulate more money. As I mentioned earlier in this post, we don’t want to stop working completely when we retire, we want to stop working to fund our survival.
  • Finally, I am really blessed. I am blessed with a loving husband, wonderful parents and sister, great education and more than enough material pleasure. I want to be a blessing in other’s lives.

When do we want to be financially independent?

By 40 or in terms of an exact date – Dec 31, 2021. If we can achieve my goal earlier, awesome, but we definitely want to get there by 40 at the latest.

How to get there, esp. given that we have cut our income in half?

We have done both good and bad things with our finances in the past. Starting now, we want to have mostly good things. The execution of my plan involves 5 steps – figuring out how much money we need to be financially independent, making more money, saving more money, changing our lifestyle and overcoming some mental barriers we have built for ourselves.

Make more money

We plan to generate more income via several different streams including

  • Sell stuff on Craigslist/Amazon/eBay
  • Freelance/Self employment
  • Invest in riskier and investments with higher returns
  • Acquire rental properties
  • Buy dividend stocks to generate cash flow

Save more money

We want to curb our expenses before we work hard on increasing my income. Why? Won’t it be easier to budget if we have more money to work with? Yes, but I believe optimizing our lifestyle will do even more wonders with increased income, otherwise we will just increase our spending as our income grows.

  • Extreme frugality is not for us. We want to enjoy life AND save money. We want the best value for our money.
  • Cut ruthlessly on things that are not important to us. For things that matter to us, look for ways to cut the cost but still get the same pleasure.
  • Continue to save for retirement with concentration on cash flow rather than a lump sum.

Make lifestyle changes

This involves more than reducing our spending. We want to reduce waste and increase our life efficiency.

  • Learn/update our skills. This will help us do a lot of things ourselves which we would have outsourced otherwise. House maintenance/renovation, taking care of our cars, learn to cook more cuisines
  • Plan for health care expenses. I want our retirement health care expenses to be less than what they are now. We can’t account for everything that can go wrong, but one thing we can do is get fitter physically.

Identify our psychological barriers and work on it

Just 3 years ago we were living paycheck to paycheck, so it is not an easy feat for us to even think that we can achieve all this without depriving ourselves of the things that are important to us. We have to work out every situation and every mental objection to convince ourselves.

  • Go against the traditional consumption based model we have built around us.

Translating this all into timelines and milestones brings us -

Year # Age Year Milestone
1 32 2013
  • Buy our first home
  • Reduce our expenses by 25%
  • Make at least 25% of my last salary from business
2 33 2014
  • Make at least 50% of my last salary from business
3 34 2015
  • Make at least 75% of my last salary from business
4 35 2016
  • Replace 100% of my last salary from business
5 36 2017
  • Pay off the house
6 37 2018
  • Buy a rental property
7 38 2019
  • Invest enough in Peer to Peer lending to generate $500-$750/month income
8 39 2020
  • Invest enough in dividend stocks and CDs to generate $500/month income
9 40 2021
  • Generate enough passive income to cover our living expenses

I am going to rely on you, my readers to keep me accountable. I will update you on our progress and different approaches to reducing our expenses/increasing our income. I already share most of this information, the only addition will be case studies on how much we saved with each move we make.

 

{ 37 comments… read them below or add one }

Michelle

Sounds like a great plan. Good luck!

Reply

Suba

Thanks Michelle. I will update as I go froward and also shared what worked and what didn’t.

Reply

Marie at FamilyMoneyValues

That is quite a plan – you dream big. But, without the dream you would never start the journey. Good Luck.

Reply

Suba

Thanks Marie. It is ambitious but it is only slightly above our limits, thats what makes me want it even more :) Usually I have a very rigid plan and if something goes wrong I come crashing down, this time I know things will go wrong. So I “think” I am better prepared. Time will have to tell.

Reply

Greg

Great plan. I’m implementing a variant of this for my own life. I’ve found the Mr Money Mustache blog to be extremely encouraging and even enlightening regarding really early retirement. I love his combination of money-saving strategies and lifestyle philosophy. To reach financial independence it is important to have the right attitude towards spending, consuming, and work.

Keep us updated and God bless!

Reply

Suba

Thanks Greg. I found his blog after I heard him give an awesome talk @ FINCON12. I have been reading his archives, he has changed my mentality on something I thought were non-negotiable. Hopefully I can implement most of it to my life and of course come up with my own strategies that might help other people as well.

Reply

Lance @ Money Life and More

A game plan/road map is a great tool in achieving goals and I need to make one myself. It seems like a reasonable goal and I think you’ll be able to pull it off if you stay focused!

Reply

Suba

Definitely! I have been expanding on each of these points in even more detail for us to work with (actual numbers and all), I can clearly see the path and the challenges ahead. I cannot account for every road block but now I know of a few things ahead of time so we might be able to prepare accordingly.

Reply

Mad Fientist

I too am on track to achieve financial independence at a young age (within the next five years, hopefully). It is very exciting and the journey itself has many unexpected benefits that I did not anticipate (i.e. I enjoy my job more now that the end is in sight, I’m actually happier with less things, etc.).

One thing I’d ask is what are your motivations for wanting to buy a house? I am currently a homeowner but I am thinking about selling my house before reaching financial independence so that I can rent instead. There are a lot of unexpected costs associated with owning a home so I find that it is more difficult to plan for FI as an owner rather than a renter. Not only are there costs for things like replacing the roof or fixing a broken appliance but also, as this great article by Jim Collins describes, there’s an opportunity cost to owning that most people do not think about – http://jlcollinsnh.wordpress.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

I’d like to hear your take on renting vs. buying since I’m facing a similar decision in the next few years (albeit the opposite one…whether to sell and rent).

Good luck and I look forward to reading about your journey!

Reply

Suba

Our motivation behind buying a house is two fold. (1) We pay a LOT of rent now in Los Angeles. It doesn’t make sense for us to buy here (I did buy vs rent analysis as well) but we would like to move somewhere cheaper where we can use our rent to build us some equity (2) I would like to have some real estate as part of our portfolio. We could do some REIT funds I suppose, but the actual real estate market is interesting to me as a wealth building vehicle as well.

As we get closer to actually buying a house (within the next one year) I will do an even more thorough analysis. Good luck with your journey as well! Financial freedom fighters unite!

Reply

Mad Fientist

Wow, what a great buy vs. rent analysis! I apologize for not reading that article prior to leaving my comment; I’m a relatively new Wealth Informatics reader and I haven’t made it that far back in the archives yet. The spreadsheet from that article looks great so I can’t wait to play around with it a bit more when I get home tonight!

I’m really interested to see where you end up buying and I look forward to even more of your detailed analysis on real estate!

Speak to you again soon.

Reply

Andi

Full disclosure: I’m a real estate agent in PDX. Your plan peaked my interest as I was actually discussing wanting to sell my house once its value reaches a certain point. My principal argued that since my payment is so low it may be better to hold onto it as a rental property. It’s something I’m considering, but not necessarily sold on. I’m not sure I want to personally deal with property management so I’d have to outsource that, and it’s something that I have to weigh carefully. Purchasing real estate is as much about personal introspection as it is about numbers. Some people love real estate as a wealth building tool while others shy away from the potential liability concerns.

Reply

Kathleen @ Frugal Portland

Wow awesome — you make it look so simple! NOT EASY mind you, but simple.

Reply

Suba

Simple but oh so challenging :)

Reply

AverageJoe

Wow! What’s cool is that if I can see it clearly, it’s ultra-clear to you.

When I’d ask people to dream like this in financial planning meetings, it was nearly always a struggle. Once you have this vision, though, it’s easy to make course corrections along the path.

Reply

Suba

Thanks Joe! We are now working on the finer details of each of our milestones (exact numbers, the how and what needs to be done now to get there…), putting everything in writing did a great deal for us to focus on the goal and see the challenges ahead.

Reply

Daisy @ Add Vodka

Wow. You are ambitious. I’m jealous of your ambition! But, if you are determined enough to do it, I have no doubt in my mind that you can.

Reply

Suba

Thanks Daisy!

Reply

20's Finances

Looks like a great plan, Suba. It certainly is challenging. I plan on keeping my job to expedit the process for us (hopefully I don’t give up and just go the self-employment route). Are you planning on investing in P2P lending and dividend stocks at the same time or achieve one goal at a time. For example, obtain 500-750 from p2p lending and then move on to dividend stocks?

Reply

Suba

I have already started investing in both of those. We can’t do sequential investing, then I will start timing the market (if I wait for 2 years to start and the market is not great for buying I will be tempted to wait longer, it never ends :) ) I will write posts on what we bought and how we did, approach,etc.

Reply

Canadianbudgetbinder

What a great plan that’s amazing. If more people did this it would help us to see the path that we want to take. I’m not even this prepared but would love to retire early as well. I have a few years before I hit 40 but not sure that retirement is in the cards. I’ll be reading along.. best of luck. MR.CBB

Reply

Suba

Thanks CBB, I think we have a reasonable plan, now just have to buckle down and start the ride :)

Reply

Dominique Brown

Good luck on your plan! My wife and I are also planning to retire by 40 and we have set up our own road map to help us reach that goal. It is important to make lifestyle changes to be able to save up more money. My question is.. why buy a house then pay it off so quickly? If you get a mortgage in this market it will be at around 3%. You can use the money you were going to use to pay off the house to buy more rental properties and give you financial independence faster.

Reply

Suba

Dom, the main reason to payoff the mortgage on the primary house is to not have a housing expenses category in our “retirement”. Yes, we won’t get a better ROI than keeping the mortgage but we want to pay off the primary house solely for cashflow purposes. Our rentals, will have the mortgage for however longer we can push it. I think it comes down to us thinking of what is an investment and what is a home. Our home gets paid off as soon as possible, our investments will use the leverage of lower rate.

Reply

Financial Samurai

Nice plan Suba! Nice infographic too :) Maybe you should start an infographic site! Seriously!

I suggest really giving a go at affiliate income. I resisted it for a while, partly b/c I didn’t have a cause or know any products I really liked. But then, I realized I love several financial products, and they have affiliate products, so why not! Affiliate income is really the long term, viable, golden goose.

All the best!

Sam

Reply

Suba

Thanks Sam. I am practicing to include one infographics in every post. It takes a lot of time, I have to practice more to speed things up. Affiliate income requires a lot of traffic which I don’t have right now. In fact I am removing most of the ads from wealth informatics to make me not concentrate in any of the monetizing efforts. Counter intuitive to what I just said in the post (make more money) but I figure I will now concentrate on making my posts better and more useful, hopefully money will follow later.

Reply

Financial Samurai

That is counter intuitive, but sounds good. I didn’t write a single affiliate post for the first 2.5 years of my site. And when I went back to look at related articles, I realized, I have a lot of affiliate worthy posts with no ads. Once I “flipped the switch” things took off

Reply

Little House

Well laid-out plan. As you know, I also live in LA. Where are you thinking of buying? This winter I’m taking a trip up north to check out one less expensive city and one parallel city (at least in terms of cost). I hope I like the less expensive option! ;)

Reply

Suba

LH, We are currently looking at Portland-OR, Vancouver-WA (pretty much Portland, but no income tax, so I am thinking if we like the area it is best of both worlds) and Davis-CA (this one is a may be, the housing is cheaper but everything else pretty much seems like a toss up between here and Davis cost wise). Recently stumbled upon Santa Rosa-CA but that needs a little more research.

Reply

Thomas S. Moore

Having a great plan is a great start but also having the patience and will to carry it out is very important as well. I keep hearing mixed feelings on the P2P lending but I think it is wise to add it to the mix. Wow you plan to pay off you home in 4yrs. Now thats something I would like to do as well. Looking forward to following this journey. Best if wishes and retirement by 40!!!

Reply

Suba

Thanks Thomas! Yes, paying the primary mortgage off in 4 yrs is the plan but it will only work out if we move out of LA. I am actually visiting Portland, OR as I write this, hopefully something will pan out before the end of year, we will see. I will def. write more about our search for a perfect city (or close to perfect anyway).

Reply

Brick By Brick Investing | Marvin

This is by far one of the most extensive retirement plans I have ever read. Kudos to you my friend for sitting down and methodically planning it out. I have been trying to help my parents with their retirement but they keep skipping this CRUCIAL step. They haven’t decided what the want, they change their minds every week, literally! I look forward to following your progress.

Reply

My Multiple Incomes

You seemed to have a well laid plan, though I think it is quite challenging given that you’re income got cut in half. But, if you really want things to happen, you can! you just need to put a lot of effort to realize them.

Reply

My Multiple Incomes

You seemed to have a well laid out plan, though I think it is quite challenging given that your income got cut in half. But, if you really want things to happen, you can! you just need to put a lot of effort to realize them.

Reply

Marie at Family Money Values

Good luck to you Suba. I love your infographic!!! You should make those part of your business.
I was just getting started at 40, after staying home with the munchkins for many years.

Reply

TAOST

Congrats on the great plan.

I especially like how you recognize, accept and include in your plan that extreme frugality doesn’t work for you. Nothing makes a plan fail more quickly than unrealistic expectations.

Good luck.

Reply

Financial Samurai

Hey Suba! Whatcha up to nowadays? Hope all is well!

Sam

Reply

Leave a Comment

{ 3 trackbacks }

Previous post:

Next post: