How to Join the Early Retirement Stampede

There is a new social movement taking place which you probably haven’t heard about.

Increasing numbers of people, especially Millennials, are engineering their personal finances to make early retirement possible. I’m not talking about hanging it up at 60, 55, or even 50. I’m talking extreme early retirement, like 45, 40, or even 30!

I stumbled across a free app the other day at NerdWallet and started playing around with a compound interest calculator to see just how much you had to save on a monthly basis to make such incredible early retirements possible. What I discovered was amazing. To check it out, please click here. 
And here is the big revelation. Assuming that you started saving at the age of 20, you only need to bank $2,150 a month to reach $1 million in retirement savings by the age of 40. If you earn the country’s average wage of $60,000 a year, and you’re paying $1,000 a month in taxes, that means you only have $1,850 a month left to handle housing, health care, education, transportation, and food.

Key to becoming a savings hog is to get off the consumer spending treadmill we have all been trained to plod since birth. You don’t have to endlessly upgrade to ever larger McMansions, especially now that the SALT deductions are gone.

You don’t have to buy a new $50,000 car every three years either. Just buy a junk heap for $5,000 and run it forever. It’s amazing how much gas, insurance, maintenance, and interest payments can add up. I recommend a Toyota Corolla. They last forever.

And what is the most expensive luxury of all? Kids. Raising a child today cost a minimum of $250,000, and that assumes they don’t go to an ivy league college. I know because I have five. A lot of Millennials are downsizing to one child, or none at all, and putting that quarter-million towards their early retirement fund.

If you live here in the San Francisco Bay area, this would mean living in a cardboard box under a freeway overpass. However, an increasing number of Millennials are engaging in what I call “income/expense” arbitrage.

Earn your income in an expensive city, like San Francisco, San Jose, or New York, but live in a cheap place like Reno, NV, Charlotte, NC, or Cedar Rapids, IA. In that case, banking your $2,150 a month is a piece of cake.

Those who work online, about 25% of the bay area population now, have a particular advantage here. With a decent broadband connection, you can work anywhere.

Companies are going out of their way to facilitate this trend, requiring office attendance only on Tuesday to Thursday and permitting telecommuting on Monday and Friday. That enables distant, even interstate commutes. I have a Bay Area dentist who commutes from Santa Barbara 300 miles away every week on this schedule.

You can even do this at an international level. A couple can live like a king in Budapest, Hungary for $1,000 a month, and in a beachfront home in Albania for $500. With that kind of overhead, early retirement becomes a realistic short-term objective.

Once you retire, you will have to live on $60,000 a year, or $5,000 a month, eminently doable in most of the country, not including your social security payments or taxes. And with national health care in the US likely over the next 20 years, healthcare costs are about to fall dramatically.

Provided you don’t pursue expensive hobbies like my retired friends, such collecting vintage cars, racing horses, joining expensive golf clubs, or flying around in private jets, you should be able to live within these modest means. How about camping? That almost free!

Of course, you can’t live on the coasts for $60,000 a year. But you can do so easily in the heartland. That explains why California and New York home prices have been dead in the water for the last two years, while the Midwest is seeing a renaissance in regional home prices at one third the cost.

You don’t have to completely retire either. Instead, you could abandon the pressure cooker that is high tech today and downgrade to a small business, open a restaurant, or turn a hobby into a full-time job. (A laid-off FedEx worker I met became a fly-fishing guide and helped me catch that 24-inch trout in Nevada).

It goes without saying that if this trend continues, there are major consequences for the economy, markets, and society that boggle the mind. Greatly higher savings rates will drive prices up and yields down on all investments.

The US birthrate is already well below the replacement rate at 2.1 per couple. Drive it lower and we could get trapped in the Japan quicksand of an ever-shrinking population. That means fewer consumers and economic stagnation. Reducing working lives from 47 to only 20 years will inevitably create worker shortages, driving up wages and inflation.

There are a few problems with the ultra-early retirement strategy. The 6% return available today with relatively low-risk investments may not be available in a year or two. That would be the result of global quantitative easing that is taking interest rates down to zero everywhere.

This is crushing the investment returns for new retirees. As a result, instead of needing $1 million to generate a $60,000 annual income, you might need $2 million or more. I have been watching this happen to retirees in Japan for nearly 30 years, where interest rates have been near zero since the 1990s.

How much do you need to save each month if you want to retire at 30? Better start banking $6,050 a month. It may be time to upgrade your sleeping bag.