Is it possible to retire in just five to ten years? Jacob of Early Retirement Extreme thinks that most people can become financially independent in less than ten years and in less than five if they are truly determined. He also thinks that most people are not willing to make the necessary changes. I agree with him on both points.
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Jacob became financially independent at 31 and retired at the age of 33. He now lives in the California Bay Area and spends about $500 a month, more than half of which is rent. He had a plan for attaining financial independence and achieved it. If you think you might want to retire or become financially independent in the next ten years, here is his plan.
First you need to find ways that don't rely on shopping for your needs. Simple living focuses on what is important and ignores what is not important. There is a strong do-it-yourself component to it which keeps life interesting. Most importantly, though, is to live close to work and stores to be able to get around without a car. The average person spends 20 percent of his budget on cars. Not having a car is an easy way to increase savings by 20 percent.
It is also important not to go overboard in terms of bedrooms and bathrooms and find a place that does not cost a lot and does not require a lot of upkeep. A small place will fulfill the needs of most people. It should be chosen because it is interesting to live in and easy to maintain rather than because of anticipated appreciation that may not happen.
It may be necessary to think outside the box to achieve this. Jacob currently lives in a 289 square foot motor home because he has chosen to live in one of the most expensive areas of the country. His housing budget is equivalent to owning $100,000 home, which may be a better choice in other parts of the country. If you need some more help on getting your expenses down to that level, Jacob has a 21-day makeover that will show you how to seriously reduce your expenses.
Once you have reduced your expenses, you need to save 75 percent to 85 percent of your after-tax income. Don’t worry too much about where you should put your savings. Jacob has his mostly in dividend-paying stocks but when you are saving as large a percentage of your income as this there won’t be much difference between the return on most investments over this short of a time period.
There are lots of resources for you to investigate your various investment options. If you spend $6000 per year, a 75 percent to 80 percent savings rate is obtained by earning $24,000 $30,000 after tax. If you do not earn that much, you can either try to reduce expenses even more or take on more work. If you make a little less than median income then the plan will just take a little longer to complete.
After you have been saving for a while you will see your savings grow substantially. Now multiply your monthly expenses by 300 to 400 and compare that amount to your savings. If your savings are the higher amount then you have achieved financial independence and you are able to retire early.
Most people won’t want to make the necessary changes (stop shopping, sell the car, move closer to work and live in a smaller place) needed to achieve financial independence in five years. I am not committed enough (and my family would have to be committed too) to achieve financial independence in five years but ten years doesn’t seem too far-fetched. Even if you just make some of the changes you will likely be able to retire years earlier than you otherwise would. If you want to take a more detailed look at this plan, you can read how Jacob became financially independent in five years.
Andy Hough writes about frugality and living well on a small income at TightFistedMiser.com.