Stop Lying to Yourself About Early Retirement, It's Not About Saving Millions

Ever indulged in that dream of basking in the sun by your cabin on the lake while you're still young enough to enjoy it?

Early retirement -- the idea of living "happily ever after" starting at the age of, well, say 30, is just a fantasy to most people. But there are some who are doing it and they claim it's not as difficult as you may think.

One story we've heard is that of a couple with a child -- the parents are both about 40-years-old now -- who've enjoyed being retired for nearly a decade. They do it by living off their investment income. But what really made it possible was their philosophy of living: enjoying life with less.

Spending vs. Saving

They believe you need to bank about 25 times your annual spending to retire. Financial independence simply means that your living expenses are covered. To do that your investment savings should yield 25 times what you spend each year. Even less if you'll someday collect a pension or Social Security.

The key is to separate the concept of income from that of spending. Your income is determined by what you do for a living. But your spending should be based on your needs -- what truly makes you happy. This family’s needs added up to about $24-25,000 a year.

Since you can generally count on your savings to deliver a four percent return over most of a lifetime, this couple's goal was $600,000 in total investments. That's enough to generate $24-25,000 of spending money annually which can go a long way when you have no rent or mortgage to pay (they own their $100,000 home free and clear).

So, the amount of time it takes to reach retirement depends on only one thing: your savings rate as a percentage of income. And this depends entirely on how much you spend. When you can learn to live a less expensive life, the financial picture has a lot sharper focus.

Do financial planners disagree?

This couple disputes the advice of financial planners -- who they believe are obsessed with retiring at an old age with millions of dollars saved so you can keep spending $100,000 a year until you die. Instead, they say, you need to get a handle on your materialism so you can live more happily for less. It's the sure way to retire 20 to 30 years early.

What's most important is to understand how to be a happy person -- to truly appreciate things like close relationships with other people, good health, rewarding work, a chance to be creative, and to help others. Then you realize that buying more stuff for yourself has no bearing on how happy you are.

They also found, if your spending is much lower than your income, emergencies become rare, because there's a surplus going into your savings each month. So, if an emergency happens, you can cover it and reduce what you save a little bit that month.

Your savings allow you to pay for unexpected expenses without breaking the budget. And you have time to adjust if you do hit a bump like a medical expense.

The amount of money required to fund a 30-year retirement is very close to the amount needed to fund perpetual retirement, a happy result of the equation for amortization of a large sum of money.

With enough income-producing assets, like stocks and rental property, your savings should easily outlive you.

What are the best ways to save?

Their advice on investments is simple. For people in a high tax bracket, 401(k) plans in low-fee index funds are best, especially if an employer contributes matching funds. For investment in taxable non-retirement accounts, it all depends on the interest rate.

Rental properties chosen wisely can return much more than stocks, which could really speed up your retirement program. But management and maintenance costs have to be considered.

Entertainment, socializing, dining out can all add to your expenses if not controlled and done in moderation.

Do-it-yourself maintenance on your necessities can be a big saver. It's easy to get advice on computer fixes, car maintenance and home repair and renovation.

Speaking of computers, cars and shelter -- the more you can simplify and discount the costs of these useful but sometimes indulgent needs -- the more you'll save.

Don't forget the costs of medical care. Maintaining a healthy lifestyle can have a priceless impact on your needs for doctors, medication and medical treatment over the years.

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Finding the 'cabin on the lake'

The single biggest expense and investment in the life of this family (and most others) is their "cabin on the lake."

The choices of where to live out your retirement dream are as varied as those who dream. Living overseas appeals to some and can offer great savings on living expenses compared to those here at home. But unpredictable political or social changes outside the U.S. can put all that you're worked over those many years at immediate risk.

When it comes to settling down here at home, this couple drew on their guiding philosophy of enjoying life with less. They did a thorough inventory of all that was important to them as far as a home, community, environment and lifestyle. They then applied that criteria to careful research of potential places to live across the country.

This family chose a rural community in upstate Texas with a small population density, low crime rate, and friendly neighbors to live their dream of early retirement.

Housing costs in the area are more than 20 percent below the national average, yet it's still little more than an hour's drive from the attractions of the state's biggest metropolitan area.

A state park is adjacent to the town and the park encompasses a big lake popular for recreational boating, water sports and angling.

This family found their cabin on the lake off the beaten path. It's nothing fancy, but it's a comfortable, modern home, with an inviting lake view. And the water's close enough to walk to.

It's where they're "living the dream" you might say.

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