I like my job. I really do. But I think I’d like being an independently-wealthy man of leisure quite a bit more. Relaxed days of sweet nothingness sound pretty appealing. That’s the dream, anyway.
All joking aside, I won’t be joining the ranks of the retired any time soon. I think it’s important that I teach my kids by example, so even were I to win the lottery tomorrow, I would still trudge to the office every morning. They need to see their dad working rather than watching TV with a growing pile of crushed beer cans beside him on the couch.
But we all like to have options, and there is a certain peace of mind of mind that comes with being able to retire early. It’s a lot easier to take pleasure in your work when you have the financial freedom to walk away. At that point, it becomes a choice, not an obligation.
So with that in mind, today I’m going to offer three steps to get you on the path to early retirement. Any of these actions taken alone will certainly get you on your way. But taken together, they make those lazy afternoons in a beach chair a lot more achievable.
Step 1: Win The Lottery
If you want to make your early retirement happen today, stop by a convenience store on your way home from work and buy a lottery ticket.
I’m joking, of course. I can proudly say that I’ve never bought a lottery ticket in my life. There’s something about them that reeks a little of desperation. But there are principles here that we can definitely put to work.
Think about the risk/return tradeoff of a lottery ticket. You risk a dollar or two for the possibility of winning millions. Some of the very best traders employ the very same mentality. They look for opportunities with massive upside and only limited downside.
Need some examples? Nassim Taleb, author of Fooled by Randomness and the Black Swan, was an options trader before he became, in his own words, a flâneur.
Taleb had a peculiar trading strategy that drove his managers crazy. He would consistently lose small amounts of money. At the risk of oversimplifying, Taleb was buying cheap options that would expire worthless barring a major market move. Those moves don’t happen often, so Taleb lost money month after month…right up until he didn’t. Taleb made enough money during the 1987 market crash to walk away from the game and spend the rest of his life writing snarky books and articles.
I’m not suggesting you trade options like Taleb. But I am suggesting that you look for opportunities with similar characteristics: limited downside, unlimited upside. Or as legendary value investor Mohnish Pabrai puts it, “Heads, you win. Tails, you don’t lose too much.”
And those opportunities don’t have to be in the stock market. You might stumble across a great small business opportunity that offers the same asymmetric payoff.
Step 2: Marry a Wealthy Person
The quickest way to early retirement is to marry a rich person.
Again, I’m joking, of course. There are a finite number of wealthy and available people, and society tends to frown on gold diggers.
And the benefits are not always guaranteed. As an example, dirty old men in Brazil got some devastating news this year. Up until this year, surviving spouses were entitled to their deceased spouse’s pension for the remainder of their lives…even if they remarried. A 20-year-old woman could marry a man old enough to be her grandfather and then be set for life once he croaked. Unfortunately for Brazil’s would-be sugar daddies, under reformed rules surviving spouses under the age of 44 will only be entitled to three years of pension payments.
But while marrying for money is not as easy as it used to be, marriage is still a critical factor in long-term wealth accumulation. Two people living together will have lower living expenses than two people living apart. All else equal, this means more cash available to save for early retirement.
Of course, on the flip side, divorce is ridiculously expensive and can set back your retirement plans by decades. So, if you want to retire early, get married…and stay married.
There are also lifestyle considerations. Two working spouses will make a substantially higher income than just one. Having a parent stay at home to raise the kids might be a priority for you, but it comes at a real financial cost. That’s something you have to consider.
As a practical piece of advice, whether you have a one-income or two-income household, try to live on just one salary. That way, if one spouse takes time off to raise the kids, you have less of an adjustment financially. And when your spouse eventually returns to work, you can sock back their entire salary in retirement savings.
Hey, it’s not as quick as marrying a millionaire. But it will still get you to early retirement.
Step 3: Stiff the IRS
You want to retire early? Quit paying income taxes.
Again, joking. Evading taxes with get you an “early retirement” of sorts, but it might be spent in federal prison.
All the same, legally lowering your taxable footprint is one of the smartest and easiest things you can do to get on the path to early retirement. Every dollar in taxes avoided is a dollar saved to get you one step closer to that beach chair in the sand.
Let’s pick the low hanging fruit first. If your employer offers a 401(k) plan, you can save $18,000 per year. If you’re 50 or older you can bump that up by $6,000 to $24,000. If your employer is generous and matches, that might be worth another $6,000 or so. That gets you to $30,000. And if your spouse works and contributes to their own 401(k) plan, you can double that amount to $60,000 per year…shielded from taxes.
If you are self-employed or work as a 1099 contractor, it gets even better. You can put as much as $53,000 per person into a solo 401(k) or SEP IRA if you meet the income requirements.
Even better, let’s say that you’re lucky and you have income both from an employer and from an unrelated side business. You could hypothetically max out your employer’s 401(k) plan and max out your SEP IRA for your side business. Contributions to one do not affect the limits for the other.
Again, every dollar saved in taxes is a dollar that gets you closer to early retirement, so why not take advantage of every opportunity the government allows us?
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
Photo Credits: John Carlton, eliz.avery, Chris Goldberg