How is it Possible to Retire so Early?


A couple weeks ago, on this blog, a commenter asked how it’s possible to save enough money in 10 to 20 years of working to be able to retire young. He suggested that luck must be part of the equation, since he was skeptical that anyone could really save enough in that little time to no longer need to work. There’s a very simple formula that will prepare anyone to retire: earn, spend, save and invest. The more one earns and the less they spend, the more they can save and the better it’s invested, the sooner they can retire. Let’s look at how this works.

Part one: Earn a high income. Not every job has the potential to earn a high income, and certain jobs offer different potential in different regions or times. I started out earning less than $40,000 as a financial advisor, but averaged a little over $100,000 over seven years, including business profits and ownership. It’s not only dentists and lawyers that make good money. Tradesmen in northern Alberta make good money supporting oil companies, commissioned salespeople have theoretically unlimited earning potential, and business owners in any industry can make good money if their company is successful. While earnings six figures isn’t necessary, it’s sure helpful.

Part two: You only keep what you don’t spend, including taxes. Spending is the largest variable that affects a person’s ability to retire. It has a double impact, because the amount spent reduces how much is left for savings, and it also dictates how much needs to be replaced to be able to retire. The less a person can live on, the sooner they can retire and also the faster they progress toward accumulating enough to be able to retire. How much I spend month to month seems to vary between $3000 and $4000 for my family of five. Not ridiculously frugal, but not extravagant by any stretch. This means I saved (toward debt repayment and investment) around 50% of my income, after paying taxes. And I paid very little taxes, by making RRSP contributions and other tax-deductible investments and by making my interest tax-deductible (investment loan).

Part three: Pay off debt. I don’t think anyone should retire with debt, which is probably a big part of the reason most people can’t see retiring before 55 (if that early). Buying a house at age 25 with a 30 year mortgage puts you at age 55 before being mortgage-free. It seems very common to either “move up” to a larger house or borrow against the home to renovate. But this all assumes a traditional mortgage. I have never had a closed, fixed rate mortgage. I took my mortgage as a line of credit, which allowed me to pay back as much as possible, as quickly as possible. I then borrowed back for investment, which made the interest on that portion tax-deductible. I was lucky to buy before the real estate boom, and had a large enough down payment that I expected to pay it off in eight years ($165,000 debt, if I recall). I ended up paying it off in seven years.

Part four: Invest for growth and for income. I was fortunate to have some money to invest during the market crash of 2008-2009. Because I worked as a financial advisor / stockbroker, I was already following some individual companies. When a company I knew well dropped from $3.50 to $1.50, I invested $15,000. I sold at $2.55 three months later and reinvested in another company, which produced similar gains. A year later, I had $50,000 in the account. Since then, I’ve saved and invested more. I’ve also borrowed money to invest, given that interest rates are near historic lows, and given that I plan to sell my house (which will cover all debts) before moving overseas in 3 to 5 years. I have invested in dividend-paying stocks, which produce enough income to cover my monthly expenses.

If applicable: Kids. I don’t think it’s a given that I need to provide for my kids’ post-secondary education costs. They may or may not choose to go to university and they can work part-time or summers to pay for it. Having said that, I’ve saved every Child Tax Benefit and Universal Child Care cheque inside an RESP. For three kids, over six years, that’s worth over $50,000, including the government grants (CESG) paid into the RESP. Twelve years from now, I think they’ll have enough to make it easier to attend university, probably $20,000 (in today’s dollars) each.

Not everyone is able to retire young. Not everyone is able to meet the prerequisites of a high salary or wise investments. But everyone can focus on saving some of their income and paying off their debts, then investing for the future. Some people are “luckier” than others, but it takes wisdom and courage to grab the opportunities we are given in life. What opportunities have you taken advantage of? Are you on track to retire young? Or is it impossible for you?

12 thoughts on “How is it Possible to Retire so Early?”

  1. Yup. A lot of it is luck, a lot of it is wise living, a lot of it is the times you live in, and a lot of it is having the right skills to earn a good salary.

    Wishing alone certainly won’t do it, as far too many people realize too late. Retirement early (or later) is not an entitlement, but a goal to be worked toward.

  2. Great post Robert, excellent summary… My wife and I didn’t have super high paying jobs(we averaged 50k each in the last 10 yrs of working) and we didn’t have “stock market luck”, but we still paid off a $190,000 mortgage in 4 years and retired at 40. “It’s not how much you make, it’s how much you keep.”

    To echo Banjo Steve’s comment, many people “wish” to retire early but most are unwilling to make the sacrifices required to get them there. Instead they end up sacrificing an additional 10 to 20 years of there life having to work.

  3. Hi, I’m French and read with great pleasure all the posts ans comments. Thanks very much. I think there are differences in France concerning the very high level of taxes and the low ROI related to the French RRSP. Yet we have the “life insurance system”. I totally agree with your vision and hope to stop working by the age of 46 years old.

  4. It is important to distinguish between pure dumb luck and generated luck. In the absence of dumb luck, 45 is an attainable retirement age for almost anyone in the middle class. Dumb luck simply allows one to accelerate your retirement date provided you follow the guidance that Robert has nicely set out.

  5. LBYM. No kids, no debts. Especially the “no kids” part. My annual wage income never exceeded $80k and averaged only in the low-$40s, so I was not getting rich on my pay but was doing well enough.

    But my piece of good fortune which accelerated my ER at age 45 was my company’s ESOP which I cashed out just before it crashed in late 2008. (It has since recovered its lost value and appreciated in value, I have learned.)

    I found a high-yield (not junk, just at or just below investment grade) bond fund which generates enough income to cover my expenses.

    As for individual health insurance (in the US, where it is costly), I recently switched to a hospital-only plan because a more typical plan became way too costly. This plan costs me $500 per month less and protects me mainly against long, costly hospital stays.

  6. Great outline on how to “get there”. My husband retired several years ago at 52, which is not 35 but not elderly either. I am retiring this year at 53. We pretty much followed the plan you describe … paid our house off in 10 years, never had debt other than our mortgage, took advantage of all employer and government supported savings plans, etc.

    We were not financially ready to retire at 35 but I don’t think we would have wanted to then, anyway. It feels good now to know we have that option now.

  7. I don’t expect many people would want to retire at 35. Even being able to retire at 55 is much younger than most people could manage, and anyone who is on track do that should be proud of their accomplishment. What really matters, though, is doing what’s right for you and your family.

  8. I am 27 years old and have just recently paid off my mortgage. Home is approximately worth $220,000. I don’t have any specific goal to early retirement as I currently like working, but rather am interested in working towards financial freedom in general. Since paying off the mortgage, I have beening seriously considering an investment loan against the equity in my home. Do you have any advice Robert for someone in my situation considering this sort of thing?

  9. Hi Paul, I would recommend against borrowing for an investment loan. Here is my reasoning. 1. Loans increase the risk. The value of the investment could fall, but you’ll still owe the entire amount. Right now, you can’t lose your house, so why sign it back over to the bank? 2. You stated that you have no plan to retire early. Borrowing money could accelerate your plan, but you don’t need that. 3. You should already have sufficient cash flow to invest. Since you don’t need to make a mortgage payment, take that entire amount (or whatever amount you can) and put it into an investment account. 4. Investing takes practice. If it’s not something you already have a working strategy for, practice with small amounts of money early on (your monthly savings), then you’ll have more to work with later. You wouldn’t want to make a mistake with a large amount.

    Having said all that, I used leverage to invest. I wanted to retire early so I could launch into a second (unrelated) career. Also, interest rates are currently low. My debt-to-equity ratio is around 30%, far lower than most people who own a house with a mortgage of 75% FMV (or more). Still, the first 3.5% that I earn on my investments (that are leveraged) goes straight to the bank and I only earn the excess. I also have a specific plan to pay off the debt in the near future. When I move to Hong Kong in 3-5 years, I’ll sell my house, pay off my investment loan (and then some) and pay rent from my earned income. If anyone were to consider an investment loan, I would highly recommend they address each of the points above, ie. not borrowing to their maximum; borrowing at a low interest rate; having a specific plan to pay off the debt that doesn’t rely on investment income or price.

  10. I had a really well-paying job for the latter part of my career and shared in the success of the company (having equity) for the last decade of my career. I suppose that could be seen as luck, some aren’t as lucky to land that situation.

    But I will tell you that I know many, many people in that situation (earning FAR more than I ever did) that have virtually nothing to show for it (well, except fancy cars and debt-encumbered houses), no real wealth to show for it. It seems like it would be easier to save for retirement if you made a bunch more money, but in reality, that doesn’t seem to be the difference between people that live below their means and those that do not. And those that do are simply able to achieve retirement faster.

  11. Robert, I very much appreciate the insight. I basically have the same views as you described as reasons not to take out a loan. However, I asked the question to you as I have read pros and cons about such loans and was interested to hear your thoughts as someone who has done/is doing it. Just to add a few more details, I have had some investing experience doing self directed TFSA and RRSP over the last 3-4 years which totals approximately $60k and have really enjoyed it. I also was not considering more than a $50k loan(less than 25% of my home value). I also have a good income and pay alot of tax and like the fact the loan interest is deductible. And lastly from the retirement standpoint, although I don’t have a “set age” that I want to retire, I like the fact of getting to the point of being able to do so if I chose to. So those are the reasons of my consideration of an investment loan. Thanks again for you thoughts!

  12. the question i hear is “um .. how did you do that?” and we try to fly beneath the radar, so only a few of our closest friends have figured out our situation enough to even ask!

    we did it exactly as you say .. we worked for ourselves – hard – and saved most of what we earned. we socked the money away, lived without debt (except mortgage), and retired in our early 40s.

    it is totally doable, and although making a lot of money is nice, it’s what you save that matters. if you are willing to live far below your means, anyone could do what we did. the same friends who urged us to “get real jobs” and “not work so hard” and “come on this trip with us” are still working and look to be working for the next 20 years. they seem older than their years – and so stressed! – and we feel 22. it’s a good life!

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