I recently had somebody talk to me about leaving my job and early retirement. The conversation was very congratulatory in nature but ended with the question, “How will you pay for sustenance?” I sort of mumbled through an answer about dividends and flipping real estate, but I think the question was rooted in not understanding how possible it is to retire early.
There are three underlying issues regarding early retirement that most people can’t relate to. The first is not having a paycheck. The second is fear. And the last one is answering “How much do I need to retire?”
The average person relies on their paycheck. It’s nice to get a regular deposit every 2 weeks. The date and amount is always known. As long as spending is less than the paycheck, life is grand. Without this regular deposit, life falls into disarray. Mostly because most people spend 90%+ of their earnings.
Fear plays a role here as well. It’s scary to leave a job. Scary to lose a regular paycheck. Scary to enter the unknown.
Finally, most media and standard advice about “your retirement number” and retirement age are extremely conservative. It all stems from the standard of needing 85% of pre-retirement income each year. That’s a big amount to save for most people. But this advice fits the average person that spends 90% of their income.
How Do I Address These Three Issues?
I’ve tried to recreate a paycheck by investing in dividend paying stocks. Many of these companies have increased their dividend each year for decades. So I get fairly predictable and reliable cash deposits into my account. I have enough dividend income to cover my lifestyle. I think we live a ridiculously luxurious life, but it might not seem that way to others.
Regarding fear, I am scared about not having a paycheck. Companies have cut dividends. And they usually do this when stock prices are down, so capital gains can’t cover the difference. But I’m more scared of missing out on time with my young family. And scared of working my life away when I could be having adventures.
Finally, we don’t spend 85% of pre-retirement income. Our spending is much, much less. According to The Shockingly Simple Math Behind Early Retirement, we had a savings rate of ~70% – or spent ~30% of our income. That means we only need 1/3 of the standard “retirement number”.
Worst Case Scenario
Importantly, if our attempt at early retirement doesn’t work out, we’re young enough to get a job in the future! Our worst case is everybody else’s normal! That’s not quite a scary gamble, now is it?