How I’m Retiring in 5 years or Less, and How You Can Too

Why should everyone try to become financial independent?

Whenever I tell people that I will retire in a couple of years they get excited. But whenever I tell them how I do it. They think it is to extreme.

You know what I think is extreme?

To work at the same desk for 30 + years of our lifes. People are getting more stressed by their work than ever before.

If we have the slightest form of ambition in our lives, the “normal” way of showing that is often by:

1. Getting married
2. Work 45 + hours/week in a job with a ton of responsibility
3. Get a big house
4. Brand new car
5. Couple of kids
6. Get some kind of expensive and time consuming hobby

And when we do those six things. We tie ourselves up for that demanding job, because we have a mortgage and car payment to pay. By obtaining all this stuff, we are not going to have time for our kids or our spouse. The only time we do have time for the family is the mandatory vacation in the summer and the winter.

Is this the life we want to live? Or is it just because that it seems to be the ideal dream for everyone?

The divorce rate has never been higher than it is today. So being in a relationship where everybody is working their ass off. Doesn’t seem to be the way to go if we want to stay together with our spouse.

I don’t think the six steps above is the best solution.

Here is the solution.

How to become financial independent

The media like to present rich people as someone who is having a successful businesses. Working 16 hours a day, 365 days a year. Earning + 1.000.000 $/year.

That is one way of doing it. But there is a way easier method.

Simplicity is powerful but it can be very boring.

The traditional way of dealing with retirement is to:

1. Save 5-10 % of our pre tax salary
2. Work for 50 years
3. Enjoy the rest 15 years of our life when we are 70 years

Congratulation! We are now 70 years old and financial independent! (Not very admirable)

So what are we going to do instead?

Save a ton of money.

Saving + 50 % of our salary is the way to go if we want to achieve financial independence in the nearest future. By raising how much we save, also means that we can live on less. And will be able to be retire early faster.

The table below shows us how increasing our savings rate will cut off the time we have to work. Table credit: www.mrmoneymustache.com

Savings rate %	Years until retirement
5	66
10	51
15	43
20	37
25	32
30	28
35	25
40	22
45	19
50	17
55	14,5
60	12,5
65	10,5
70	8,5
75	7
80	5,5
85	4
90	under 3
95	under 2
100	Zero

But what are we going to do with all the money we have saved?

We invest it.

The table above is assuming that we get a 5 % annualized return on our investments. So we can invest in whatever that gives us that return.

What I suggest?

Stock index funds. As broadly diversified as possible.

If you ask me they are the most simple and easy way to invest our money.

Now you might thinking:

“But Loui, didn’t you write how to retire in less than 5 years?”

Yes I did. But I’m not going to tell you how to save 85 % of your take home pay. There is a solution for that as well. But I’m going to warn you. It will only be for the risky people who can stomach the stock market going up and down.

Early retirement on steroids

This is only for a few people. With a burning desire to give the corporate day the middle finger as soon as possible. And it will make a lot of sense if we are between the age of 20-30 years.

What is the “steroids” for investing?

Leverage.

Leverage is where we borrow money to invest. People do this everyday with their houses. Often 20:1. (This means we pay down 5 % of the house payment, and borrow the rest 95 %)

We can do this with stock investments to. So whenever we buy for 100 $ we borrow another 100 $ to invest for. We then end up with 200 $ investment.

If we save 50 – 75 % of our take home pay, and borrow the same amount. We have gone from retiring early in 7-17 years to retiring early in 4-9 years.

This method is not something I have invented myself. There is to Yale professors who had written a very informal book about this concept. It is called “Lifecycle Investing” . (Or visit them on there website for the book here, there is a lot of free videos on it)

Why leveraging short-term can make sense

Let’s say that we earn 4000 $/month and spend 1400$/month or 18000 $/annually on housing, food and transportation. And we decided that we wanted to quit our day job as fast as possible so we are aiming for an SWR of 7 %.

This means we need to hit:

18000 $ / 7 % = 260.000 $ 

And that we have a monthly savings rate of:

65 % 

If we are conservative and say that we will not have any ROI on the money we are investing, we will hit that 260.000$ in 8.5 year.

But the power of financial independence lays not in how much we are making, but in how much we are saving! And this is where the power of leverage comes into the picture. If we leverage 2:1 that means for every 1 $ we are investing, we borrowing another 1$ and invest that as well.

Now we have reduced our working period from 8.5 years at the desk, to 4.25 years. Without any form of return on our investment.

This means that if you read this post as a 21-year-old, you could be retired by your 25th birthday.

Why leveraging long-term can make sense

Let’s imagine that we have read the text above and decided leveraging is not for us. And we do it the traditional way and dollar-cost-average into the stock market. Doing this from a young age means that we have very little money in the market when we are young, and a lot of money in the market when we are old.

If we invest 10.000 $/year, and get 7 % ROI + 2 % inflation from age 25 to age 65, this is how our wealth will increase:

2 % of our wealth is created between the age of 25-34. And an astonishing 64 % of our wealth is created between age  55-65. This also means that we are super exposed late in life, where we don’t have the time to make up for a bad period.

People often talks about bad years. But bad decades occur too. From 2000-2009 the S&P 500 made nearly no return for investors. And how do you think your portfolio would look, if you are expecting to make 64 % of your wealth late in life, and you end up with a decade like that?

Let’s recap

If our take home pay is 4000 $/month, and we are able to save and invest the difference of 2600 $.

We are now saving 65 % of our salary. If we can borrow the same amount. Then we are saving 5200 $/month, and our retirement is 3-4 years away. 

This is a super extreme way to deal with early retirement. And dealing with leveraged investments is only for educated people. But if we are willing to study this, our corporate lifes has never been looking better (AKA shorter)