How to Retire by 30: 5 Steps to Financial Independence

In August 2010, Grant Sabatier had $2.26 in his bank account. He was also unemployed and living with his parents. Just over five years later, he retired with $1.25 million. He was 30 years old.

Although his story may be one of the more extreme, Sabatier, who shares the knowledge he gained through his early retirement journey on and in the book “Financial Freedom,” due to release in February 2019, is not the only person retiring by 30.

Early retirement is becoming so popular, an entire movement has sprung up around it called FIRE, which stands for “financial independence, retire early.” The idea behind it is that retirement needn’t be defined by the candles on your birthday cake but rather can occur whenever you’ve accumulated enough savings to no longer be beholden to your job. In other words, when you become financially independent.

The old social contract where employees give the best years of their lives to their job in return for their employer supporting them in retirement is broken, says Vicki Robin, who FIRE’d in 1992 at the age of 23 and hasn’t worked for a conventional paycheck since. It was her and Joseph Dominguez’s bestselling book, “Your Money or Your Life,” which provided inspiration for Sabatier to pursue his own early retirement.

“People needed to take the bricks of a broken system and build something sturdy for themselves,” Robin says. FIRE-ees are taking those bricks to pave a faster path to retirement.

Can You Retire Early?

The vast majority of people can retire in 10 years if they set their mind to it, Sabatier says. He admits he was “pretty hardcore.” When other 25-year olds were going out every weekend, he was working, at one point juggling 13 different income streams. That isn’t to say extreme side hustling is the only way to reach early retirement. For instance, you could concentrate on cutting costs instead of increasing income.

Regardless of the path you choose, it will require a lot of work and frugality upfront. Early retirement isn’t for the faint of heart. Investing is risky business to begin with; when the next 50-plus years of your life depend on how your portfolio performs, investment risk takes on a whole new meaning.

If you’re willing to do the work and can stomach the risks, here’s how to retire by 30:

— Change the way you think about money

— Calculate how much you need to retire early

— Reduce your expenses to ramp up your savings rate

— Increase your income to save even more

— Invest aggressively

[See: 10 Investing Tips for Busy People.]

Step 1: Change the Way You Think About Money

To retire early, you need to change how you think about retirement and money.

“Early retirement is a misnomer,” Robin says. FIRE-ees don’t really want to retire in the conventional sense of stopping all work; they just want to reclaim their time to do the things that matter most to them.

To this end, “money only matters if it helps you live a life you love,” Sabatier says. Early retirement isn’t about accumulating as much money as possible; “it’s about having enough money to feel free, and that amount is (probably) different than what retirement calculators say you need.”

A retirement calculator will probably say you need more than $3 million to retire by 30. You may need only half of that.

While retiring early means your savings have to support you for longer, it also means the bulk of those savings have more time to grow. As long as the amount you withdraw from your portfolio is less than your investments earn in that year, your savings can continue to grow throughout retirement.

Andrew Hallam, author of “Millionaire Teacher” and “Millionaire Expat,” did the math on for Billy and Akaisha Kaderli, who retired at age 38 with $500,000 saved in 1991. If they had withdrawn 4 percent (adjusted for inflation) each year from their portfolio but kept the remainder invested in Vanguard’s S&P 500 Index Fund (ticker: VFINX), they’d have $4.3 million in February 2018. (The Kaderlis often withdrew less than 4 percent and have more today than they retired with.)

Step 2: Calculate What You Need to Retire

J.P. Livingston, who retired at the age of 28 with more than $2.25 million and now blogs about how to retire early on, suggests early retirees target a safe 3 percent annual withdrawal rate.

Erin Brand, wealth strategist at PNC Wealth Management, advises an even more conservative 2 percent withdrawal rate for early retirees.

To determine how much you need to retire by 30, divide what you’ll spend each year in retirement by your target withdrawal rate. For example, if you expect to spend $45,000 after taxes each year in retirement and feel comfortable at a 3 percent withdrawal rate, you’d need $45,000 divided by 0.03, or $1.5 million saved to retire. A far cry less than the $3 million-plus retirement calculators are likely to project.

Step 3: Reduce Expenses to Ramp Up Savings

This begs an important point: The less you spend in retirement, the less you need to save. Likewise, the less you spend today, the more you can save for retirement.

“If you want to retire by 30, you probably need to be saving at least 50 percent of your after-tax money,” Livingston says. This may sound ludicrous, but as many early retirees are proving, it’s not impossible.

To increase your savings you can either increase your income, decrease your spending or, ideally, do both.

Sabatier suggests focusing on the three largest spending categories when cutting costs. “The average American spends over 70 percent of his income on housing, transportation and food,” he says. Trimming your budget in these areas will have the greatest impact on your overall savings.

The trick is to find the cost-cutting strategies that work for you, Livingston says. Maybe you can’t tolerate a roommate, but you don’t mind biking to work so you give up your car.

“Making short-term sacrifices but viewing them as opportunities is how you retire as early as possible,” Sabatier says. The sooner you start making these sacrifices, the easier they are to adopt, and the more impact they’ll have on your early retirement goals.

Thanks to the power of compounding, the value of a dollar saved at 25 years of age is worth more than a dollar saved at 35, Sabatier says. Every incremental increase in your savings rate today will reduce the years it takes you to retire. He suggests the 1 percent strategy: “Get to where you’re comfortable, then increase your savings rate by 1 percent every 30 days.”

[See: 7 Investing Fees You Might Not Realize You’re Paying.]

Step 4: Increase Your Income

There is one downside to cutting costs: You can only go so low before life becomes unbearable.

While “there’s a finite level you can cut your expenses, earning power can be infinite,” Livingston says. In today’s economy, it’s arguably never been easier to make money. If you have a hobby or unique skill, turn it into a side hustle. Play your cards right, and your side hustle could become a passive income stream in early retirement.

Step 5: Invest Aggressively

“The key to early retirement is setting up your passive income streams so you’re making money on your money,” Sabatier says. You can accomplish this with a business or by investing in the stock market or real estate.

For the vast majority of stock market investors who want to retire by 30, the best strategy is to invest in lower cost index funds tracking the overall U.S. stock market, like the Vanguard Total Stock Market Index Fund ( VTSMX, VTSAX) or its ETF version ( VTI), Livingston says.

How much you invest in stocks versus bonds and alternatives will depend on your risk tolerance and how early you want to retire.

“If you’re just starting out, be as aggressive as possible because short-term fluctuations won’t matter,” Sabatier says. For him, that meant being 100 percent in equities. He also used VTSAX as well as the Vanguard Total International Stock Fund ( VGTSX, VTIAX) and held shares in a few individual companies.

[See: 8 Simple Rules for Investing in Retirement.]

Even today, nearly four years into retirement, Sabatier remains fully invested in stock because he still has a 50-plus-year time horizon.

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