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This is my road map to retire by 40. Everyone’s situation is unique and I can only tell you what I’ve done so far. To retire early, you need to build up a big war chest and that’s what I’ve been doing in phase 1 of my plan (20 -40 years old.) I have been working in the tech industry for about 15 years and I took advantage of every form of savings and incentives my employers offered. Here are what I’ve done so far.
The right partnership helps each other work toward the same financial goal.It could be paying off debt or retirement or saving for a house. If both people work together and support each other through hard times, then the journey is so much easier. The Mrs. is great at saving and both of us can handle delayed gratification and we make a great team.
We never carry any credit card balance and we haven’t had a car loan in over 4 years. We started with 0 baseline when we graduated from college and never started accumulating debts like so many people did. Thanks to our parents, neither one of us had any student loans. If you’re in debt, you need to get to 0 net worth as soon as you can.
We always spend less than we made and that’s the key to building wealth. No matter how much money you make, you can spend it all and then some. It is very important to grow your income, but good defense almost always beat good offense (read The Millionaire Next Door.) If you don’t have a budget, make one now. There are many resources on the internet. Check out my detailed post.
We keep 3 months of living expenses in the savings account. This enables us to weather most emergencies. The last emergency we had was when our old car completely broke down in the middle of a busy intersection. We have the emergency fund and then saved up for 3 more months, and we could purchase a replacement vehicle with cash.
I started contributing to my 401k since my first paycheck. After a few years, I maxed out contribution and have been maxing out ever since. The Mrs. also maxed out every year she worked. She took a few years off to serve in the Peace Corps. and a few more years to get her graduate degree, but other than that, she always contributed to her 401k plan. The 401k is a great investment vehicle and everyone should take advantage of this.
We maxed out our Roth IRA contribution when we were eligible. The Roth IRA will help balance our tax burden when we withdraw from the retirement portfolio.
I maxed out on my company stock participation plan. I get at least a 15% discount so this plan worked pretty well for me. I try to keep company stock to about 5% of my portfolio so I don’t have all my eggs in one basket.
#5,6,7 are especially important because all these come out of my paycheck before I see the money. This helps keep our lifestyle inflation down and compounds our investment. Some of these investments didn’t do that great, but if I had the money in my pocket I would have spent it instead of saving it.
We purchased a modest home in 2000 with a 15-year fixed mortgage. This was a great move and the home appreciated in value over the last 10 years. We moved to a new place in 2007 and rented the home out. This started us down the real estate investment path. Now we have another rental condo and I’m working on getting a 4-plex. A rental property is also a good hedge against inflation because the rent goes up with inflation and the mortgage loan is worth less.
We had a brokerage account since I started working and I kept adding to this account with any extra money left. I can purchase any type of investment I want in this account and I use it to balance my asset allocation.
We started investing early and never stopped contributing to all the accounts. We had two huge bear markets since I started working, but we persevered and kept investing through those markets. In 2011, our portfolio is doing pretty well and I am close to my retire by 40 goals.
These are the things that I’ve done to build up my war chest. The next part of the plan is to figure out how to quit the corporate job and keep this war chest locked until I’m in my 60s (phase 2.) See the rest of my Exit Strategy on my About Page. I’ll keep everyone updated as the plan unfolds. You can see my Financial Goals at 40 here. If you have any suggestions for my last 3 years in phase 1, please share.
Here is a nice chart for those of you who are more visual.
retirebyforty’s money flowchart