"Chesire Puss," she began, rather timidly, ... "Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I don't much care where -" said Alice
"Then it doesn't matter which way you go," said the Cat.
"- so long as I get somewhere," Alice added as an explanation.
"Oh, you're sure to do that," said the Cat, "if you only walk long enough."
Fortunately, I did have a goal and knew where I was going. However, I did not have a single bullet-proof plan from the very beginning, that was executed flawlessly to enable me to retire in my forties. In fact, the plans were fuzzy in the beginning, refined over time, changed course as needed and took advantage of fortuitous opportunities as they arose. The only thing that didn't change was that I wanted to be financially secure enough so that I could retire. Here's my story:
Original Goal - Save enough to live off interest. Right after graduating from college and starting work, I began to estimate how much I needed to "retire." I always knew that I didn't want to work forever. The idea of living off interest income was very appealing to me. I quickly figured that I needed 25 times my salary at 4% interest in a savings account. While experts will quickly point out that I didn't account for inflation, it didn't matter. 25 times one's current income is a very big number, especially is one is just starting to work.
Lesson learned: Having a good, while not perfect, goal got me started in the right direction.
Plan A - Save enough from my salary and company retirement plan. Needless to say, the early years were tough. I had a student loan, and soon afterward took out a car loan and a home mortgage. Even so I managed to save about 10% of my salary each year. And my company was contributing 5-20% (depending on years of service) of my salary to a retirement plan. Unfortunately, at this contribution rate and 4% interest, it was going to take about 45 years to achieve 25 times my salary.
Lesson learned: Even though my initial goal wasn't exactly right, it was close enough to show how challenging it was to achieve financial self sufficiency. Keeping track of the progress and estimating what was needed clearly showed I needed to do something different.
Plan B - Create additional sources of income I quickly figured out I might need additional sources of income to achieve a savings goal of 25 times my salary. I considered the stock market and rental property as two viable options. While both options yielded positive returns, they were never as reliable or as high as my wage income. However, they served to augment my savings contributions.
Lesson learned: My additional sources of income took committed effort to create and maintain, but were insufficient to close the gap.
Revised Plan A - Get more income from my job. In my early years, I wasn't reaching my potential in my career. While I had advanced one level, some peers had advanced two levels, and one had advanced three levels. During those years, I typically worked about 40-50 hours per week, keeping a good work life balance.
I consciously put more time and commitment in my job, including taking on some high risk, high profile projects. My work hours increased to averaging 60-80 hours per week. During this time period, I was promoted two levels, almost tripling my compensation. While part of the increases raised our lifestyle, most of it was put into savings. It was during this time that our retirement savings grew the fastest.
There was tremendous personal sacrifice during this time. However, there was also significant payout towards our savings goal, which made it worth the sacrifice.
Lesson learned: For me, retiring early required exceptional hard work and personal sacrifice.
Revised Goal - Live off investment income. Four years ago, I hired a professional advisor who showed me living off investment income was a better approach than living off interest income. By including stock investments in the equation, I would be better able to account for inflation and maintain our lifestyle. His strategies and track record have given me confidence to retire, even though we are in our forties.
Lesson learned: Good professional advisors have access to better information and tools that I do.
Here's the series:
- Our Childhood Preparation
- The Value Of Higher Education
- Making The Most Of My Job
- Lifestyle and Spending Choices
- Setting Goals, Developing Plans and Tracking Process
- Staying The Course
- How Luck Played A Role
- My Personal Finance Mind Tricks
- The Professionals We Used
- When Preparation Met Opportunity
For more on Reaping the Rewards, check back every Friday for a new segment.
Photo Credit: Wikipedia
This is not financial advice. Please consult a professional advisor.
Copyright © 2007 Achievement Catalyst, LLC