Disclaimer: I’m not a financial advisor. It would be more accurate to think of me as your crazy drunk uncle with money advice.
Un-disclaimer: I’m really, truly retiring at 33-as in not working anymore and will never need to work again. As a blanket statement I promise anyone can shave years to decades off their career regardless of circumstance.
Why is the Retirement Age 67?
It seems to be common knowledge that the age of retirement is 67. But why? Will I show up to work on my 67th birthday to be greeted by the CEO of my company who anoints me with freedom, removing my earthly shackles so that I can ascend into happily-ever-after? Seems silly, but really, think about it. Have you ever thought about this? I hadn’t. I had accepted that 🌈one day🌈 I would retire, and 🌟one day🌟 would probably be my 67th birthday because that’s the age of retirement, whatever that means. The truth is that the age of retirement has nothing to do with when we can actually retire.
The age of retirement is a legality. It’s when the government will start mailing out social security checks and Vanguard will allow me to withdraw from my 401k. That’s it! There’s no rule that says, “Please wait patiently and continue working until you’re 67 no matter what your financial situation is.” It also helps to know that social security checks and 401k savings aren’t the only tools for retirement. Depending on your age and how much you make, those two things might only be a retirement backup plan or a nice juicy cherry on top.
Everything I knew about saving for retirement wasn’t meant for me, it was meant for people in their forties or fifties earning a median income or less. Think back to your own childhood. Is your knowledge of retirement investing based on what your parents were deciding to do when they were middle-aged? What could you do with an extra 20 years, more risk tolerance, and a larger income?
A lot. Here’s how vast the difference is: a 50 year old with $50k invested would have 15 years to let it grow to $158k. But a 30 year old with that same $50k invested would have 35 years to let it grow to $740k — almost 5 times more.
A 50 year old also needs a guarantee that their money will be available when they retire at 67. That means taking less risk, and less risk means slower growing investments. The 30 year old with 35 years until retirement has the luxury of time. They can trade slightly more risk for higher growing investments. Why are these two people given the same retirement advice?
By saving early in life we become completely financially independent which opens up a wealth of opportunities: retiring early; taking sabbaticals; being a rich old lady; or having the freedom to pursue work that’s more fun or meaningful.
This Isn’t Your Grandpa’s 401k. Here’s How You Should Use It.
If you’re young and want to retire early then is there any reason to lock money into a 401k where it can’t be withdrawn? Yes-ish! With limits. 401k contributions are invested tax-free, allowing 25% more money to be invested and grow over the next 35 years. They often come with a company match which is free money. A 50% match is a 50% return before even considering growth. To put that into perspective, the average market return is 8%, so take the money.
A 401k is a must, but don’t make the mistake of putting all your savings into it where it’s locked up until you’re 67. Think, instead, about what you actually need. I only invest enough to get the full match; and I’ll stop contributing once it’s at $150k. Why stop? I’ll reach that point when I’m 33, which means it will have over 30 years to grow before I’m allowed to touch it. That $150k, without any additional contributions, will be worth $1.5 million when I turn 67. This is completely separate money from what I’ll have invested elsewhere, or social security, or the fact that I’ll have a paid off house. What would I need more than that for?
If You Want to Retire Early
Invest in the Target Date 20XX fund through Vanguard. If you have a 401k, it’s probably linked to this mutual fund, so why invest in it again? A 401k has rules that restrict you from withdrawing before age 67. But if you invest in that same Target Date fund in a personal Vanguard account, outside of your employer 401k and without all of its rules, you can withdraw money from it whenever you want.
That’s right, the Target Date fund and a 401k are completely separate things. A mutual fund, like the Target Date fund, is nothing more than a bucket of investments, like stocks and bonds, that a broker, like Vanguard, has put together for our convenience. It’s the actual place where our money goes when we invest. A 401k is nothing more than legal rules for a mutual fund-like a power-up. It’s the rules that allow a company to let employees invest tax-free but also restrict us from withdrawing before 67. You can invest in both an employee sponsored fund and your own personal fund so that you get tax savings from one and the freedom to withdraw from the other. You don’t want to only invest in a personal account and miss out on free money, but you also don’t want to put everything in the employer 401k and be the richest person in the cemetery, or the first AARP member with platinum dentures and a gold-plated walker.
If you’re 30 today and you start putting $1000 a month into this personal fund then you’d have over $2 million by age 67. Nobody needs $2 million on top of the $1.5 million from the employee 401k, on top of social security checks. Choose how much of that $2 million you don’t need and-since you can withdraw from it anytime-retire early!
By the way, I’m getting all my fancy numbers from this investment calculator. Target Date funds reliably return the market average of 8% so you can use that and play around.
Why Vanguard? I forgive them for their ugly website because they’re investor-owned. Their entire business model is when you make money, they make money. Every product they offer and every decision they make aims to make you more money. They even invented low cost index funds for us little people. Other brokers are family owned, special interest owned, large-investor owned, or worse. Only Vanguard is willing to bet their entire business on making us money.
Opening up a brokerage account with Vanguard takes minutes and their customer support is exceptional. After opening an account you can transfer money into it which can then be used to contribute to the Target Date fund. The easiest way to get started is to call customer service. Tell them you want to create a personal account to invest in the Target Date fund, and that you want to set up automatic recurring contributions.
If Vanguard doesn’t feel right then services like Wealthfront, Betterment, and Acorns might feel more comfortable with their user friendly tools for building a portfolio and investing. I recommend those three because of the ease of adjusting risk, the quality of the pre-selected portfolios, and the strategies used by their founders-especially Wealthfront which offers a portfolio option that mimics Ray Dalio’s All-Weather portfolio used by Bridgewater. As with the Target Date fund, the most important thing is consistency. Set up automatic monthly contributions and then leave it! For most people, taking this one step with any broker would be enough to retire a decade or two early.
If You Want to Retire Earlier
The main benefit of the Target Date fund is that it’s managed for you. As you get closer to the target date, funds are automatically moved to less risky investments that are guaranteed to be available when you retire. But until about 40 years of age, Vanguard isn’t doing any managing since it’s so far away from the retirement date. You don’t get the main benefit of the Target Date fund when you’re younger, so it’s worth considering a growth fund instead-a similar mutual fund that has double the returns.
Growth funds try to grow as quickly as possible which sounds scarier than it is. This only implies that these funds are comprised of companies with growth potential (like Amazon, which continues to grow it’s revenue) rather than companies that offer stable dividend payments to compensate for plateaued revenue (like Johnson & Johnson).
The fund I chose is . It’s a large-cap fund, meaning it includes a limited group of big and reliable companies like Google, Visa, Nike, and Amazon. This fund performs well above the Target Date fund because it cuts out the more volatile small companies that are responsible for most of the lost value. Think about it, smaller companies tend to fail which result in a 100% loss whereas larger companies might take a 10% dip, ultimately survive, and climb back up. Very few small companies make it big, but many can’t survive economic dips.
The fund also cuts out bonds and international stocks which together make up half of the Target Date fund. These are risk mitigations that have no practical use for young investors. By cutting out the volatility and unnecessary risk mitigations, it reliably returns above 15%-nearly double what the Target Date fund returns. According to Vanguard’s own assessment, both of these funds have the same risk score for investors under 40.
If you’re 30 today and invest $1000 a month into VIGAX until you’re 67, you’d retire with over $11 million. Decide how much of that you don’t need and, you guessed it, enjoy retiring early.
Like many Vanguard funds, VIGAX is offered as an Admiral Fund or ETF. With Admiral Funds you can set up automatic recurring contributions and, at any time, transfer money from one Admiral Fund to another without selling or paying taxes. I invest everything into VIGAX knowing that when I’m closer to 40 I can effortlessly transfer money into the Target Date fund where Vanguard will manage making it safer over time.
For the money nerds, you could transfer portions of VIGAX to any low risk fund you want. One great no-risk bonds fund is . If you’re the type of person who feels comfortable making your own strategy for reducing risk over time, this can be a great option. I plan to do this because strategizing money moves is something I love, but more importantly, I earn enough money to learn from my mistakes instead of getting crushed by them. Please do your research and get second and third opinions from financial advisors-Vanguard advisors are happy to help.
Plan a Life of Freedom
Retirement is usually presented as an all-or-nothing deal: you’re either retired on a beach and inexplicably happier than you’ve ever been, or you’re in a cubicle as part of an ancient sacrificial rite by which your manager attains eternal youth by consuming your soul. Reality is much more exciting and flexible than that. “Early retirement savings” should really be called “life freedom savings”-define what freedom means to you and buy some of it back.
Do you want to work longer and retire a millionaire, or retire as early as possible and travel the country in a van? Would you enjoy work if you could do it part-time? Maybe your passion job pays less-a paycut that you will be able to afford. If you don’t want committed work, seasonal work like being a snowboard instructor is an option. How about working for a non-profit abroad? There’s nothing wrong with retiring and doing nothing, but don’t be afraid of work either. Redefine what work can be and what it means to you. Consider all the new opportunities available now that you can choose work free of financial dependence.
It might be hard to guess what you want before you try. How will you really feel after sitting at the pool for a month? Mini-retirements are a great way to do some self-discovery early on instead of making a decades long bet when you don’t truly know yet what will make you happy. Use some life-freedom money early as a retirement appetizer.
Let’s say you do want all or nothing. It’s only retirement if you can sit on a beach forever. In that case, how much do you need? This is a great article on that. And one more. Here’s a simple way to think about it. I know from my budget that I want about $45k after tax to live. You can see how I budget here. After applying capital gains tax on withdrawn investments, lets round up and say that means I’d need $55k. Well if I have about $360k saved returning an average of 15% every year, 15% of $360k is $55k which is exactly what I need every year! That means $360k in investments could support my lifestyle indefinitely. From here I can adjust for risk-I don’t feel comfortable depending on a 15% return forever, so I can base my savings on a lower return rate. This is a good starting point and a simple way to think about how much you need invested in order to never depend on income again.
There’s no shortage of F.I.R.E. (financial independence, retire early) articles that can help you think creatively beyond the typical all-or-nothing retirement plan, and do some financial planning.
One thing to keep in mind when patiently sticking with your plan is nothing hinders a cure so much as frequent changes of treatment. You don’t have to get your strategy completely right from the start, but you should notice that the adjustments you make to your investing strategy become smaller and less frequent over time.
How to Not F*ck Up
You can only retire if you have control of your finances! How much do you spend per year? How much did you save last month? Are you prepared for a flat tire? And most of all, how much is enough? Have you ever priced out your dream life-actually written line for line what you want, researched your options, and added up the cost? Or have you only dreamed of it? See how I budget here. This budget allows me to save over half of what I earn consistently and clear the way to early retirement.
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