It is a good idea to have an estimate of how much you need for a comfortable retirement. So when you finish this post, use the retirement calculator here. It is likely you may conclude, "no way do I have that much." Here are your options to answer your question of how to retire early.
Three ways- how to retire early or with less money
Make Money on Home Equity
The first way is to reduce your expenses. For most people, their single biggest expenses their housing cost. Even if you have a house with no mortgage, you still have significant housing costs. Here’s how to think about this.
Let’s say you have a house worth $500,000 that’s all paid off. How much does that $500,000 earn you? It earns you nothing.
Let’s say you decide to sell that home and you get $500,000. You move to another place where the real estate is less expensive and you are able to buy a home that you like just as well for $200,000. You now have $300,000 left over to invest. Say you can invest at 5% and that will earn you $15,000 per year. It’s like manna from heaven. That’s $15,000 that seems to come out of nowhere.
Therefore, moving can be one of the biggest contributors to answer your concern of how to retire early or helping retire with less money when you free up home equity. Alternatively, you may not have much equity in your home or maybe you rent. The question to ask yourself is can you move to a less expensive area? Do not discount moving out of the US. While this may seem like a crazy idea to you, millions of retirees do it.
I don’t know how much you travel but you may have some misconceptions about living abroad. Some people in the US picture every place else a Third World country. That’s certainly not the case. A few factors make living abroad easy.
Most anywhere you go in the world, everyone under 30-years-old speaks English. Therefore, you don’t need to learn another language. My wife lived in France for year and had a hairdresser from Australia who had lived in France or six years. She did not speak a word of French and had no problem living easily. Europe however would not be an inexpensive place to live. In general, Spanish-speaking countries are most affordable. Think Mexico, Central America, South America, Puerto Rico (a US commonwealth) or a Canadian favorite, Dominican Republic. How does a condo overlooking the ocean sound for $109,000?
Your biggest concern might be healthcare and we cover that in a separate post. The issue with healthcare is that Medicare does not cover you outside of the US.
Two more ideas about home equity.
You may want to live at your current address permanently. if you are over age 62, you can get a reverse mortgage and turn the equity at your current address into income.
Alternatively, you want to remain in the same local area. Consider selling your $500,000 single family home for a 4-unit apartment building. You live in one unit and get income from the other three units (the income will likely grow over time). In many areas, the value of a single family home is roughly equal to such a small apartment building.
Reduce Discretionary Expenses
Next, let’s discuss cutting discretionary expenses. Until you start keeping detailed track of your expenses, you are likely to underestimate them. As an example, you likely spend more dining out or taking out then you think. You likely spend more on giving gifts than you think. You likely spend more buying things you don’t really need. Take a look in your garage and see if that’s true. You get the idea.
It’s not uncommon that once you start being much more diligent in tracking expenses, you can recover $5,000 or $10,000 annually that can be a big addition to your retirement income. And if you’re not yet age 65, remember that you will enjoy a big savings in your healthcare costs when Medicare kicks in.
Increase Return on Existing Assets
Your third alternative to address how to retire early or with less dollars is to increase the return on your current assets. We started this post with one way to do that which is to turn an asset, the equity in your home, which earns 0%, into an interest earning investment. What other assets do you have that earn less than they could?
Here are a couple of examples. You may own a rental home from which you get rent. If you divide your net profit after all expenses by the value of the property you may find you're earning 4%. As an example, you have a rental home worth $200,000. You get rent of $1200 monthly. After you deduct maintenance, property tax, insurance and other expenses, you have $800 net monthly income.
Annual income 12 x $800 = $9600/ $200,000 asset value = 4.8%.
However, if you took your equity and lent it as a hard money loan secured by real estate, you could earn in excess of 8% even during these times of low-interest rates. So by changing the focus of your investments from appreciating assets to income-earning assets, you can put more cash in your pocket. That's another way to solve your dilemma of how to retire early.
Other examples of the same concept are converting growth mutual funds into bonds or preferred stocks which pay more current income. Maybe you inherited some raw land that earns you exactly zero. Now, it may be time to harvest the equity and convert it to income-generating assets. Maybe you have a tax-deferred annuity that’s been growing. You could annuitize that and begin receiving a monthly income. Maybe you don’t know any better and you keep a lot of money at the bank at 1%. That’s not a great idea as you can safely invest in AA rated bonds which are very safe and get 5%.
Let’s summarize. You have three answers for how to retire early or retire with less money:
- release home equity to invest for fresh income
- reduce and eliminate nonessential expenses
- convert low-interest generating assets or non-income generating assets into high income generating assets
A combination of these three can make a distant retirement dream today’s reality.