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Pop Quiz – How Serious Are You About Early Retirement?

Pop Quiz – How Serious Are You About Early Retirement?

How serious are you about early retirement?Retirement is a serious topic. None of us can work forever and we need to save for the rainy days. Early retirement is even more complicated because we don’t have as much time to work and save. However, we can’t be serious all the time. That’s an easy way to get burned out on FIRE.

Today, let’s have a little fun with early retirement. I’ve got a pop quiz for you. A quiz is never fun when you’re in school, but this is an easy Cosmo type of quiz. Don’t worry, it will be easy to answer and you can finish in just a few minutes. Besides, wouldn’t it be interesting to see how your score compares with everybody else? Today’s quiz – How serious are you about Early Retirement?

You need to keep track of your own score for this quiz. The questions are just TRUE/FALSE. You get a point for every TRUE. Then simply put your score in the poll at the end.

The Basics

1. Track your net worth

It’s important to track your net worth because it can tell you how close you are to early retirement. Generally, your net worth needs to be at least 25x your annual expense before you can consider early retirement. This means you can withdraw 4% of your investment to pay the living expenses. Historically, the retirement portfolio has a very good chance to last over 30 years with 4% withdrawal rate. Of course, everyone’s situation is different and some people may need to save more. For early retirement, 3.5% withdrawal is way safer.

One easy way to track your net worth is to let Personal Capital do it for you. I update our net worth on my Excel spreadsheet every month, but I also check my Personal Capital account almost every day to get a quick update. They have several nice tools for DIY investors. Check them out if you don’t have a free account yet.

2. You have a Roth IRA

The great thing about the Roth IRA is you won’t have to pay tax on the gain*. Also, it’s an easy way to access your retirement account without having to pay the 10% early withdrawal penalty. You do this by building a Roth IRA ladder. If you’re planning to retire early, then a Roth IRA can be very useful. Here is how to start a Roth IRA in case you don’t have one.

*No tax and no penalty once you’re older than 59 ½. However, your contribution can be withdrawn at any time with no penalty or 5 years after rolling over from an IRA.

3. No consumer debt – car, credit card, etc…

This is a big one for many people. The average US household owes about $38,000 in consumer debt – credit cards, auto loans, and student loans. That’s a lot of debt. They’ll have to pay interest on all these debts and it’s tough to invest for retirement with the drag.  We don’t have any consumer debt and I love it. We don’t have to worry about the car payment or paying down the credit cards. Life is a lot simpler with zero consumer debt.

I think it is okay to have mortgages. The rate is low and some people prefer to diversify. I don’t want our house to be our most valuable asset because it’s not generating any income. A student loan is probably okay too if you got a good job out of it.

4. You have a “retire by” date

Setting a goal to retire by a certain date or year will help you focus and make it real. I was 36 when I made the goal to retire by 40. Fortunately, everything fell into place and I was able to quit my engineering career 2 years later. Having a goal to shoot for will help motivate you and get you through those tough days. You can always change the date if it’s too aggressive.

More Difficult

5. You have a side hustle or two

It’s important to increase your income at the main job and most of us should focus on that. However, having a side hustle can be very helpful too. The extra income can go straight into an investment account and accelerate your timeline. Another huge benefit is that the side hustles can help pay the bills after retirement from your main career.

I started blogging when I was working full time and didn’t really expect to earn much income. Luckily, Retire by 40 grew and the blog income will help cover a significant portion of our expenses in the years to come. Thanks to my online income, we’ll be able to minimize withdrawal from our retirement accounts after Mrs. RB40 retires.

6. Passive income > 25% of your expense

When you first start working, you should focus on increasing your earned income. However, passive income becomes a lot more important when you want to retire early. You really need to focus on passive income because early retirement can last a very long time. You don’t want to erode your principal if you can help it.

To get a point, your passive income needs to be over 25% of your expense. I call this the FI (Financial Independence) ratio. Once your passive income exceeds your expense consistently, you’re set for early retirement. You don’t have to draw down your principal and you won’t have to worry about money anymore. See how we generate passive income here.

*FI ratio = expense / passive income

passive income

7. Your investments are worth more than your house

A house is a liability, not an asset. There are a bunch of expenses associated with owning a home. We have to pay the mortgage, insurance, property tax, utilities, maintenance, and all kinds of stuff. It costs a lot of money every year to live in a house. A primary residence is not an asset because we can’t make any income from our house unless you’re willing to become an Airbnb host. It’s best to think of a home as a shelter and not an investment. Having a house forces people to save and that’s probably the best thing about it. Appreciation is nice, but you can’t count on that.

If you’re serious about early retirement, then your investment should be worth more than your shelter. People achieve this in different ways. Some people live in a van and it’s easy for their investment to exceed the cost of their shelter. We live in a duplex and rent one unit out. In both cases, our investments are worth far more than our shelter. Personally, I don’t think it’s wise to have more than 50% of your net worth in home equity. You need to diversify and it’s easier to generate income from other investments.

8. You have a post retirement plan – volunteer, etc..

Some people dream of retiring early, but don’t have a plan beyond that. This is a mistake because early retirement can last 50+ years. You need to have a post-retirement plan so you won’t be bored and dissatisfied. I planned to become a stay-at-home dad/blogger after I retired and it worked out beautifully. These activities keep me busy and my retirement has been fulfilling. There are a lot of things you can do when you have more time, but I think you need at least one huge long-term project to work on. It’s a mistake to just focus on the retirement date and neglect what comes after.

Related – 7 Years After Early Retirement.

Advance FIRE

9. Save more than 50% of your household income

This one is really tough! Saving 50% of your income requires special conditions. You’d have to make a lot of money and/or live very frugally. This isn’t possible for most people. However, if you can save 50% of your income, you’ll be able to retire much earlier than an average person. The key here is you have to spend a lot less than your peer. You can’t keep up with the Jones when you’re trying to save 50%.

For this question, let’s just go with 50% of your take-home income (after taxes, health insurance, and other payroll deduction.)

Bonus point – if you save 50% of your household gross income, that’s even better. Give yourself an extra point!

10. You have backup plans

Here is another one about planning for early retirement. “No battle plan survives contact with the enemy.” That’s a military strategy quote, but it applies to any plan. You never know what’s going to happen so you need to have some backup plans and be flexible. What happens if you retire early and the stock market crashes down 30%? Would you be able to stay retired? Every early retiree hopeful should have some backup plans in case things don’t work out as expected.

No, going back to work isn’t a contingency plan. That means you couldn’t make early retirement work. However, I count working part-time as a good backup. You have to use your own judgment here.

*Sometimes, you can’t foresee how life is going to work out. My mom was diagnosed with dementia in 2018. This caused a lot of problem for my family and we’re still trying to deal with it. In this kind of situation, you just need to be flexible and have some cushion.

Bonus point – You cut your own hair

Cutting your own hair shows commitment to the frugal lifestyle. It’s much easier to go to the salon and get a haircut, but why pay so much? The hair will just grow back anyway. Hair is so superficial. It also trains you to not care what people think. You’ll need a thick skin when you retire early. I admit, this one is a lot easier for guys. We just need a buzzer and even I can cut my own hair. That’s why it’s a bonus question.

For the ladies, how about doing your own nails and other grooming? No bonus point if you got a mani-pedi or any kind of waxing in the last 12 months.


Okay, how did you score? Don’t get upset if your score is low. That just means you have room for improvement.

  • 0-5: Skeptic. You’re probably here for a free stock or found us through Google. It’s fun to read about early retirement, but you don’t really believe it’s possible.
  • 6-7: Novice. Alright! You’re in the beginner phase, but you should be able to reach FIRE if you keep at it.
  • 8-9: Committed. You’re committed to early retirement and you’re well on your way.
  • 10+: Driven. If you aren’t retired yet, you’ll get there very soon. Congrats!

Poll – What’s your score?

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

What do you think of my early retirement pop quiz? Should I add anything? I’ll keep updating this and repost occasionally. It’s a fun and easy quiz.

*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. I log in almost every day to check on my investment. It’s a great site for DIY investors.

Disclosure: We may receive a referral fee if you sign up for a service through the links on this page.

The post Pop Quiz – How Serious Are You About Early Retirement? appeared first on Retire by 40.

Source: Retire By 40


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