Every week we bring you another article on saving money, making a budget, starting a side hustle, investing, lowering bills or similar. This week I’m going to talk about my early retirement strategy. Some may call it extreme early retirement. Regardless of you how label it, I’m out by 40 at the latest.
To retire early you must have a good mindset and the ability to adhere to set goals. More realistically, though, you need to be able to save a significant portion of your income. I write every week about saving money – X Y Z – to benefit our mutual journey to on time retirement or early retirement. Save money by switching to a no contract wireless carrier, start a blog or website, invest early, drink coffee at home, safely use credit card cashback bonuses.
Early Retirement Strategy
The crux of my retirement plan so far is that the more I save, the less I spend. This may be blatantly obvious, but the finer point is the less I spend. The less I spend, the less cash flow I need in retirement which means I need less capital to retire early. Woh! If you have $13,000 in expenses you would need $325,000 in capital assuming 4% withdrawal per year. On the other hand, if you spend $25,000 per year you need $625,000 in capital. $300,000 is significant to me so I aim to spend less.
I subscribe to an investing philosophy known as Dividend Growth Investing. There are a fantastic amount of bloggers who write about this subject. The bloggers I follow are in our blogroll. The basics are that we find stocks with good EPS growth potential (earnings growth) as well as dividend growth (distribution growth). For example KO, MCD, PM, XOM continue to increase earnings and dividend distributions. Good candidates are usually blue-chip stocks.
My dividend investments are kept in my taxable brokerage account (Sharebuilder). In this way I have full access to my investments at any time, including early retirement. Traditional retirement vehicles such as IRA and 401k have stringent withdrawal rules. Furthermore, I plan to collect dividends instead of selling 4% of my portfolio every year.
Early Retirement Planning
Currently I invest 18.5% of my gross (before tax) income in my brokerage account. I have run calculations at 7% and 8% average annual return and everything is favorable. My calculations do not include promotions or salary increases beyond 2.5-3% inflation adjustments. My calculations do not include any additional contributions from side hustles. My calculations do not include any money I put into savings which is earmarked as emergency/housing down payment.  Below is a graph at 8% annualized stock market return.
My current goal is to have approximately $1300 per month through dividends. This equates to ($1300×12 months)/(0.04) = capital required = approximately $390,000 in today’s dollars. Adjusting for inflation means we need more than $390,000. Approximately $390,000 x (1.03)^14 = $589,XXX in inflation adjusted dollars. As you can see I’m currently about $100,000 short at age 40 retirement to reach $589,000. If needed I can make up the majority of this by taking out ROTH IRA contributions[1, again] (14x $5,000 = $70,000) or divert more money from 401k or IRA into my stock account. Or I can get a raise or promotion. Or I can spend less and invest more! Or I can get a side hustle!
Whatever your retirement, early retirement or extreme early retirement strategy – start investing early!
 One notable exception is with a ROTH IRA where you can withdraw any contributions, but not gains, with absolutely no penalty. I.E. If you invest $5,000 after tax (ROTH) into your IRA for the next 20 years, you can withdraw $100,000 at any point you like. If you spend $16,000 a year, for example, you would be covered for 6 years! And that’s not counting any gains. Neat!
 Do some serious reading before you know what you’re getting into. The time horizon on dividend growth investing is long. It is extremely boring. You will yawn. Know when to purchase stocks and when to sell, etc. All investing carries risk and I am not a CPA/CFA or similar.
 http://money.msn.com/retirement/retirement-calculator.aspx Pretty handy tool.
 My apartment rent + utilities will be = 30 year mortgage + insurance + ulilities. Keep in mind that mortgage interest < stock market return! (This is good).
 Another 7.4 % goes into savings. Another 10% into 401k. Roth IRA contributions are not set in stone which is a 2014 goal. Bad idea not to use automatic withdrawal. In 2013 I contributed 50% of my net pay to savings which is my goal to do this with automatic withdrawals.
 3% inflation = 1.03. 14 years @ 3% inflation = (1.03) ^14 (to the power of 14) = 1.51 multiplier. E.G. in 14 years you will need $4.53 (3.00 x 1.51) to buy a gallon of milk costing $3/gallon today.