Retiring early is simple but not easy
| Updated: |(Disclosure: Some of the links below may be affiliate links)
Many say I make FIRE and early retirement look too simple. And many people are falling into the trap of believing that retiring early is easy.
I want to delve into that critical subject. For me, retiring early is simple. There is no doubt. However, it is not easy! The difference is fundamental. And there are no secrets to getting to FIRE. You need to focus your efforts on that goal. And how much effort you put into it will shape how fast you can retire.
So, we should see why FIRE and early retirement are simple concepts but not easy to reach.
Retiring early is simple
The math between early retirement is extremely simple: you withdraw X% of your portfolio yearly, and you can sustain your lifestyle for enough years. X will be your withdrawal rate.
For instance, if you submit the famous 4% rule, you will withdraw 4% of your portfolio every year, adjust that amount for inflation and pay all your expenses with this money.
You will need your money invested in the stock market in a healthy mix of bonds and stocks during that time.
I do not think we can do much simpler than that! The most complicated part is choosing an asset allocation and a withdrawal rate. But many guides and calculators are available to help you with this task.
Retiring early is not easy
It is essential to come to the second part of this article: retiring early is not easy! Simple means that it is not complicated and easy to understand. On the other hand, easy means you can achieve it without effort.
And anybody telling you it is easy to retire early is lying to you. And unfortunately, there are too many such claims online.
So, why is it not easy? It requires dedication. It will require you to keep your expenses in check. And it will mean you must save significantly more money than the average household. For some people, this is easier than for others, but this does not come naturally for most people.
You can estimate how long it will take to retire early Using your savings rate. Your savings rate will define how many years you will need for a given withdrawal rate.
Most Swiss households barely save 10% of their income. And in fact, when your factor vacations into the mix, most households save less than that. With a 10% savings rate, retiring will take more than 50 years. It means you can forget about retiring early. And even with a 20% savings rate, you will still wait 36 years before retiring. If you start in your 20s, this could still qualify for early retirement.
But in general, if you want to achieve early retirement, you will need at least a 30% savings rate. If you want to retire in the next 20% years, you will need to save 50% of your income.
This is not easy to achieve and not common.
There are no secrets to retiring early
I am sure you have already seen such claims on the internet: I retired at 35 with these five simple money principles
The claims are always the same: just follow a few rules, and you will be on your to retiring early:
- Set a strong goal
- Invest your assets
- Eliminate debt
- Automate your money
And while these rules are important (except maybe for automation) and will help you, just following these rules will not be enough to retire early. If you have a great goal but have no positive cash flow, you will go nowhere for a long time.
The truth of the matter is that to retire early. You will need to save a large portion of your income. And for that, you can either:
- Spend very little money
- Earn a ton of money
This is the only way you will retire very early. If you have a 5000 CHF salary, you will not be able to retire in 5 years unless you live in the woods. And if you spend 10’000 CHF per month, you will not be able to retire very early unless you earn a huge income (talking 20’000 CHF per month).
And just saving on your 5 dollars coffee will not make you rich. In fact, for the immense majority of people, it will not make a significant difference. No one thing will make you retire extra early.
I am not saying it is impossible to retire early on a low income. It is. But it will require either more years to reach your goal or to spend very little money. This is just simple math. There is no way around it.
The road to FIRE is paved with inequalities
Looking at early retirees, we can see a few important points that come often.
First, most early retirees do not have kids. While it is up to them to have kids, the important point is that not having kids helps your expenses. If you do not have kids, you spend less and can travel more outside school time. Of course, there are some early retirees with kids. It is just more difficult.
Second, many early retirees are software engineers. There is nothing wrong with that. I am a software engineer myself. But the fact is that we earn more money than average. Earning more money makes saving a larger part of our income easier.
Finally, many early retirees are spending well below average. Some people live in an RV while others live almost in autarky in nowhere. It is important because not everybody can spend that little.
Again, there is nothing wrong with any of that. But it makes retiring early easier for some people than for other people. That does not mean it is impossible to retire early if you have kids, are not a software engineer, and live a normal life. But it means it will be less easy for you than it was for some people.
The best way to retire earlier is to increase your income. But, again, this is nowhere near easy. But there quickly comes the point where you can’t spend less money, and many people still do not save much when they reach this point. So, they should try to earn more.
Read between the lines
The main problem is that many media try to make retiring look easy when it is not.
The reason is simple: it is much simpler to sell easy things than to sell hard things. For instance, which article do you think will work better:
- I retired at 32 by doing these five simple things, so you can you!
- I retired at 32 with a very large income and living with my mom!
Hint: Number 1 will be read many more times. People want easy things. So the media is trying to sell them easy things. It is as simple as that.
So, when you read all these success stories online, you must read between the lines to find out what happened.
For instance, some people retired in 5 years in the best bull market, having 20% yearly returns. On average, you will get much less than that. And if you start your journey before a bear market hits, your journey will take longer.
Another important thing you need to consider is that most FIRE bloggers are getting significant income from their blogs. This income makes two differences:
- The extra income is helping them to retire.
- The additional income makes them not entirely retired.
I have to say that I am making some money from this blog, which is not very significant compared to my main income. But this will help me on my way to retirement, no doubt about it.
Finally, do not believe having a budget and optimizing your expenses will be enough to retire in a few years.
For the immense majority of people, this will not be enough. If you are not among the high-income earners or very frugal people, it will take you many years and tons of dedication (not easy!) to retire early.
Conclusion
You are looking for financial independence or just achieved it, or living it?
Make the most of each phase with support from Dror, a certified professional coach (having been through all the phases).
I do not want to discourage anyone from retiring early! On the contrary, I still believe that most people can achieve that goal. But it will not be easy. I do not think my journey to early retirement will be easy. But I think it is worth trying for me.
My main point with this article is that I do not want you to believe that retiring early is easy because it is not. It is pretty simple, but it is not easy. There are no secrets to early retirement! You need to put in the work.
It is also important to realize that while the math behind early retirement works for everybody, it will favor high-income earners and frugal people. This is a simple truth.
I wish that there was more transparency online and less clickbait content. However, you need to be aware that most examples are exceptional examples. They should not be used as validation of the lie that retiring early is easy.
If you want to learn more, you can read the basics of early retirement.
I was motivated to write this article after reading this excellent article from Nick Maggiuli.
What do you think? Do you think retiring early is simple?
Download this e-book and optimize your finances and save money by using the best financial services available in Switzerland!
Download The FREE e-book
Dear Poor Swiss,
Thanks for your precious post.
However, I don’t agree with something you wrote here and you had stressed also in previous articles: to eliminate debt.
Actually, according to Modigliani-Miller theorem, debt can generate added value thanks to negative interest tax deductions, as long as you’re growth rate is higher than your debt interest rate.
This is the reason why I invested in IB with a margin account: as long as my annual return is higher than the 1.75% I have to pay to IB then I am actually multiplying my return thanks to tax deductions.
I might agree that lease your car might not be good cause if you factor into the interest rate all leasing side costs, the actual interest rate becomes quite huge.
However cheap debt is very healthy.
My fellow Italian Mr. Franco Modigliani won a Nobel Prize for this.
Sources: Wikipedia – and my Master degree in finance ;)
Thanks
Sorry for misspelling you’re instead of your
And by growth rate I mean return
Hi RDM,
Actually, I only mentioned debt once in this article and this is only in relations to what people are saying when they claim everybody can retire simply.
I agree with the fact that cheap debt can be interesting, but the risks should be taken into account. Having more debts means more risk.
Also, things such as credit card debt will never be a good thing. But I have a mortgage and do not plan to repay it, it’s just not efficient.
You make a good point, the concept to retire early is simple but actually getting there is harder since life happens.
That’s a good way of putting it!
Hi there,
If someone would be ready to retire now, independently of the age (40-50-whatever), would it be scary looking ahead on the possible inflation/market crash that the most accredited finance guru are talking about?
If most of the money is invested in one or more ETFs and in couple of month they go down 30-40% how can they survive if the recover will be slow (and not fast as the after corona virus crash)?
Hi Wavemotion,
Yes, I think it would be a scary time to start retirement. That could be a good time to delay retirement until some extra margin of safety (for instance 110% FI or an extra year of cash, or something like that).
In case this is too volatile, some money could be moved to bonds (before the crisis) to have a more conservative
Money should not be moved out of the stock market now though since we have no idea what will happen.
I am not too worried about inflation, I think it’s just a consequence of the corona-crisis and it will resolve itself, but that’s just a guess, so basically worthless :)
The other hard thing about retiring early is that some of us found work to be fascinating and fun. I did retire slightly early but for most of my career work was one of my favorite hobbies. Does Roger Federer dream of retiring as early as possible? Of course not and neither does anyone else that is world class at their profession.
Hi Steveark,
That’s entirely true. But I do no think that makes retiring early harder, it just makes it less interesting. I like software development and even after retiring, I am going to develop software.
Not everyone is made for retirement :) People that are already living their dream life while working are perfectly fine without retiring :)
Thanks for this honest article.
I definitely will retire early. Also, after retirement I still would like to keep investing in my portfolios. FIRE number is one thing but I also plan to work on something something that I love to do (not being employed). FIRE without doing thing to me is useless and boring. When I can do things that I like to do and generate income at the same time to me it is also called retirement. Planning to live in Thailand on my island part of the years also will reduce spending. Just to point out that I am foresee me doing something during retirement that made my compound return goes wild rather than withdrawn them.
Hi Sikarin,
A lot of people will still do something indeed. People often retire from doing something they do not like to do something they like better instead.
And indeed, having some income may still be considered as retirement. But all this is naming :) THe important point is to be happy!
In Switzerland retiring early is not easy because of the AHV bill that early retirees have to pay.
Thanks again for a great post as always.
The AHV Bill is a huge deal. I just did some quick reading[1] and it seems you need to pay ~50k CHF per year in AHV if you are married and have a combined net assets of 1 million CHF.
According to the AHV PDF, each spouse has to pay AHV and marital property is divided into half. So in our example each spouse will be seen to have assets of 500,000 CHF. AHV is calculated by multiplying this by 20 and then looking up the table on page 6. 20 x 500,000 CHF = 10 million francs. The top AHV contribution of ~25k CHF is reached at ~8.5 million francs.
50k a year is a huge chunk out of your budget – so early retirement only seems possible if, for retirement, we change residency to be outside of Switzerland (which has its own set of complications).
[1] https://www.ahv-iv.ch/p/2.03.e
Hi PParth,
Fortunately for us, you made a mistake in your computations :)
You have to multiply your pension income and THEN add your assets. You do not have to multiply your assets by 20 :)
So, if you do the math for one million CHF assets and an annual pension income of 30000, this gives you a total of 1.6 million in the table. This would give you 3’286 CHF per year.
It’s not negligible of course, but it’s not too bad either :)
Ah, thank you for your reply. Sorry I didn’t get any notification that my comment had gone past moderation or that you had replied so I didn’t see this until now.
Re-reading the document I see I had read “Assets and annual pension income multiplied by 20” = (assets + pension income) x 20. However it is actually = assets + (pension income * 20). That’s a relief! Specially now I see that investment income is not considered pension income as per “What does pension income consist of?” and “What does not form part of pension income?” on page 5.
Page 12 and 15 (“Early retirement” and “Divorced woman with part-time job”) actually have two concrete examples that confirms what you’re saying:
“The man’s actual pension income for the year is multiplied by 20
and added to his assets amounting to 250 000 francs to arrive at
the amount to be used as the basis for calculating his contributions.
250 000 francs + (4 000 francs × 10 × 20) = 1 050 000 francs
According to the contribution table (see Section 8), this corresponds
to an annual contribution of 2 120 francs.”
“The woman’s actual pension income [(3 × 1 500 francs) + (9 × 1 000
francs) = 13 500 francs] is multiplied by 20 and added to her assets
(1 million francs) to arrive at the asset total to be used as the basis for
calculating her contributions.
According to the contribution table (see Section 8), 1 million francs +
(13 500 francs × 20) = 1.27 million francs corresponds to an annual
non-employed contribution of 2 544 francs.”
Appreciate you clearing it up :)
I also see that pillar 2 & 3 are not considered part of the “assets” so there is an incentive here to maximize pillar 3 before early retirement (you can move the vested benefits to something like valuepension and continue to invest) and only keep enough assets until normal retirement age is reached. This is another way you can reduce your AHV burden in case of early retirement.
Yes, it’s a good point. The money in pillar 2 and 3 is not subject to wealth tax and exempted from first pillar payments as well.
I think it’s just the pension income that hat to be multiplied with 20, not the assets.
It’s true that you have to pay for the first pillar even without income. But it’s only a few thousand per year. It’s not a huge deal to account for that in FIRE planning. But yes, wealth is taxed unfavorably in Switzerland compared to other countries.