10 goals to hit if you want to retire early in 10 years

So you want to retire in 10 years (or less). That’s a terrific goal, no matter how old you are. I’m going to assume most readers are in their 40s and 50s because that’s the age you start to consider early retirement. However, I’ll also keep younger readers in mind because this is Retire by 40. We have many young readers who want to leave their careers behind and try something else. It is not easy to retire really early, but it is possible. I retired from my engineer career when I was 38 and my wife (Mrs. RB40) is going to join me in a couple of years. We’re all at different points in our journey and it’s hard to know if you’re on track to retire early. That’s why I’m giving you these 10 goals to hit if you want to retire in 10 years or less. Check them out and see how many you’ve achieved already.

Oh, you should keep score. You get a point for each of these goals you already hit. There are bonus points too, so look out for them. I’ll give you a grade at the end of the post.

1. Eliminate Consumer Debt

This first one is a no brainer. You should not have any consumer debt at all if you want to retire early.

These bad debts include, but are not limited to the following.

  • Payday loans
  • Credit card debts
  • Store credit debts
  • Auto loans
  • Medical debts
  • Student loan debts
  • Personal loans

All these debts are horrible and the interest will drag you down. Instead of investing and building wealth for your early retirement, your money will be diverted to pay down these bad debts. If you have any of these, you need to get rid of them as soon as possible. One point if you don’t have any consumer debt.

Bonus point: I don’t include the home mortgage in the bad debt category. I consider a mortgage to be a neutral debt. It’s not bad and it’s not good. We all need a place to live and I think being a homeowner is better than renting. You get a bonus point if your mortgage is paid off, though. That’s a great accomplishment and it’ll help limit your annual expenses in early retirement. Nice job!

2. Saving at least 25% of your income

The saving rate goal is a bit tough to set because it depends on your age and net worth. If you’re older and have been saving for a long time, then you might not need to save as much. Younger folks who want to retire early need to save much more aggressively because they haven’t worked as long. Well, we’ll just go with the minimum. If you want to retire early in 10 years, then you need to save at least 25% of your income. You really should try to save more, though.

To be clear, I’ll give a quick example. If you make $100,000 per year before taxes, then you should save at least $25,000. The easiest way to do this is to max out your 401k and Roth IRA contributions. For 2018, that’s $18,500 + $5,500 for people under 50. That will get you most of the way there. You can save the rest in an after-tax brokerage account.

Bonus point: 25% is just the minimum and you need to increase your saving rate as you get closer to early retirement. If your saving rate is more than 50%, then you’re killing it. Give yourself a bonus point and keep up the good work!

3. Have 10x your annual expense in net worth

We’re working backward with this one. According to the 4% Safe Withdrawal Rate, You need at least 25x your annual expense to retire early. 25x is just the minimum, though. If you want to retire in your 30s or 40s, then you will need some padding. You can learn more about the Safe Withdrawal Rate at Early Retirement Now. Big Ern’s SWR series already has 27 articles and it is still growing. This is required reading if you plan to depend on the SWR for early retirement.

For our purpose, we’ll just stick with 25x as the minimum requirement for early retirement. If you want to retire in 10 years, you should have 10x your annual cost of living right now. This is because it usually takes 6-7 years to double your investment. In 10 years, you should grow 10x annual expense to 25x.

This one takes more work. You need to track your expense and see how much you spend every year. If you don’t already do this, then you should start right away. Tracking your spending is a great way to become more serious about your finances. This is an essential step to figuring out if you can retire early.

Next, you need to figure out your net worth. This is everything you have that can be converted into money. I include our primary residence in our net worth, but it only makes up about 5% so it’s not a big deal. You can read more about our net worth here if you’re interested – RB40 Household Net Worth Breakdown.

Bonus point: Give yourself a bonus point if your net worth is more than 20x your annual expense. This means you’re very close to financial independence. You’re almost there!

4. Passive Income pays 25% of your COL

Passive income is the real ticket to early retirement. If your passive income surpasses your expenses consistently, then you’re set for life because your portfolio can grow without working. I call this the FI ratio and I track it religiously.

*FI ratio = passive income / expense

You can read more about our passive income at my Passive Income page. We have passive income from real estate crowdfunding, rental properties, dividend stocks, interest, and more. I update it every month so check it out.

Passive income is somewhat related to net worth. A bigger net worth means you can put more capital to work. However, you have to focus on passive income to grow it. We had very little passive income until early retirement became my goal. Previously, I concentrated on growing our net worth without considering income. However, you need passive income to pay the bills when you don’t work anymore. When I learned that, I had to switch my focus from building net worth to increasing passive income.

You get a point if your passive income covers at least 25% of your cost of living. This goal is set pretty low at 25%. You should increase it as much as you can before retiring. For this question, capital gains only count as passive income when you sell the investment.

5. Have a Side Hustle

To be totally honest, it’s brutally difficult to increase your FI ratio to 100%. We’re really struggling to get there by 2020.

Let’s go through a quick example here. An average American family spends about $57,000 per year (in 2016.) That’s about $4,750 per month and it sounds pretty reasonable. In fact, that’s just a little below our monthly budget of $4,800/month. How much money do you need to generate $57,000 of passive income annually?

One easy way is to invest in dividend stocks and get 3% of dividend income. The catch here is you’d need about $2 million. There are ways to get more ROI, but it might not be for everyone. Some people do much better with rental properties, but most of us don’t want to be a landlord. The bottom line is passive income is really tough to build.

Luckily, you don’t have to have 100% FI ratio to retire early. You can fill in the gap with side hustles and other alternative income. One of the reasons why I started blogging in 2010 was because I knew there was some income potential from this endeavor. I was hoping to generate $500/month to help fill the gap. If you think about it, making $500 from a side hustle (or a part-time job) isn’t very difficult. Any little bit of active income helps a ton in early retirement. That’s why you should figure out a side hustle that you enjoy. Lazy man has a dog sitting business and a blog. These micro businesses are generating alternative income to help fund his early retirement.

You get a point if you have a side hustle.

6. Know how to invest

Saving money is just the first step. You need to know how to invest to fund your retirement. It’s not enough to put money into a saving account because inflation will destroy your buying power. That’s why it is very important to start investing when you’re young. You need to learn to invest and figure out the best strategy for yourself.

It took me 20 years, but I finally settled on an investing strategy that I’m comfortable with.

  • All the money in our retirement accounts is invested in passive index funds.
  • Our taxable account is invested dividend stocks to help fund our early retirement.
  • We have 3 rental units.
  • I’m working to increase our investment in real estate crowdfunding to $100,000.

This is what works for us and it is still evolving. You’ll have to figure out your own investing strategy to have a chance at early retirement.

I think it is fine to hire a financial advisor to do this for you, but you still need to understand the basics. How will you know if the advisor is doing a good job or not? You need to be able to understand the statement and see if the advisor is worth the big fees you’re paying.

You get a point if you know how to invest. Even if you’re learning about investing, you still get this point. The important thing is to keep improving at investing.

7. Those big lumpy expenses

Most of us will have some lumpy expenses in the future. What happens if your car dies? Do you need to get a loan to replace your vehicle? Do you have kids? How will they pay for college? You need to plan for those big lumpy expenses.

For us, the biggest lumpy expense will be higher education. In 2029, four years at our alma mater (an in-state public university) will cost over $250,000. Of course, we’re hoping for some scholarships and financial aids but we’re also preparing to shell out a ton of cash too. Luckily, we only have one son and we are already saving for college with the 529 plan. Currently, the account is worth about $77,000. I’m hopeful that it will be enough to pay for college in 11 years. Of course, if he wants to go to a private school or get a Ph.D., he’d need to get some student loans to help pay for it. I’d encourage him to work part-time when he’s in college too.

What about you? Do you have a plan to cover those big lumpy expenses? You get a point if you do.

8. Stable family life

You get a point if you have a stable family life and don’t plan to change your current status. This means if you’re single, you’ll stay single. If you’re married, then you’ll stay married and don’t plan to have any more children. A drastic change in family life can alter the early retirement calculation greatly.

Kids are great, but they will increase your cost of living. For example, there is no way I could have retired in 2012 if we had 3 kids. I’d have to work many more years to shore up our finances. We’d need to move to a bigger home, buy a bigger vehicle, spend more on food, and plan for 3x college expenses. Our cost of living would have increased significantly and the early retirement equation wouldn’t have worked out as smoothly.

9. No bad habits that can derail your life

Do you have a bad habit that can derail your life? If you have one, you probably know it. Here is my list of vices to avoid.

  • Drugs, tobacco, and other addicting substances.
  • Using prescription drugs for nonmedical reasons.
  • Overindulging in alcohol.
  • Unhealthy eating – overeating, mindless eating, junk food, fast food, too much processed food, eating out too often, etc…
  • The house always wins in the long term so don’t waste your time gambling.
  • It will catch up to you and screw up your family life.
  • Too much pride. This can lead to keeping up with the Jones and more.
  • Not wearing your seat belt.
  • Not exercising. You can get by without exercise when you’re young, but it will catch up to you later.

Building a good life is about avoiding mistakes as much as making good decisions. Just one of two of these bad habits can ruin your life. Did I miss any bad habits here?

Give yourself a point if you don’t have any bad habits that can screw up your life.

10. Have FIRE plan

This one is the most important. The first 5 goals were all about numbers, but you don’t need to hit 100% on all these to retire early. I retired from my career way before our FI ratio hit 100%. Over the first couple of years, we relied on these to cover our cost of living.

It took a few years, but now we can cover our expenses with just our passive income and my online income. If things go well, we’ll be able to fund our early retirement with only the passive income in 2-4 years.

You can read more about my early retirement withdrawal strategy here.

The point is this – you need a FIRE plan. BTW, FIRE stands for Financial Independence and Retire Early. How will you build enough wealth to fund early retirement? Life doesn’t always follow the plan, but you still need one to guide your way.

Oh, it’s not all about the finance either. The hardest part of early retirement isn’t about money at all. A lot of people feel lost and anxious after retirement. You need to figure you want to do after retirement. It can be hard to live an unstructured lifestyle after a long time in the workforce. What’s your plan for life after early retirement? You can’t just focus on leisure activities because you’ll get bored eventually. You need a purpose or at least some way to keep busy.

I’m not a good data point for this one because the retirement transition was very easy for me. I became a stay-at-home-dad and that kept me super busy for a few years. Blogging filled up the rest of my day so I never had time to get bored.

What’s your score?

Whew, this one went a bit longer than I planned. I hope you kept track of your points because here is how you scored.

  • 1-4 points: Spectator. You’re not serious about early retirement yet. You have a lot of catching up to do if you want to retire in 10 years.
  • 5-7 points: Amateur. Not bad, but you’re still behind. You might be able to pull it off in 10 years if you give it your all.
  • 8-10 points: Professional. You’re in good shape and can probably retire in 5-10 years.
  • 10+ points: Elite. Wow, you’re awesome. You probably can retire in just a few years. Keep at it!


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

Here is another early retirement quiz if you’re really bored in your cubicle today – How serious are you about early retirement. 😉

Let me know what you think about this quiz in the comment section. How did you score and where are you in life?

We got 11 points. I’m 44 and I’m a stay-at-home-dad/blogger. Mrs. RB40 is still working full time, but plans to retire early soon. We have one kid.

Photo by Samuel Zeller and Jacques Perreault

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