In 2002, veteran Doug Nordman reached a crossroads that would redefine the way he viewed work, life, and early retirement. After serving 20 years in the U.S. Navy’s submarine force, he faced the possibility of starting a brand new career at age 41. Needless to say, he wasn’t thrilled at the prospect.
It wasn’t that Nordman didn’t want to continue working. Quite the contrary, really. As Nordman tells it, veterans, in general, have a burning desire to continue working long after their military service has ended. Whether it’s to continue helping others, to continue serving, or simply to feel relevant, the drive to be a productive member of society is deeply ingrained in most veteran’s psyche.
But Nordman had a problem. Although he wanted to continue working in some capacity, the “regular jobs” he was considering weren’t all that appealing.
“I was curious about a civilian career, but not enthusiastic about any particular field,” explained Nordman. “I really wanted to avoid rush-hour commutes, meetings, office attire, and the other “dissatisfiers” of the workplace.”
Faced with an uncertain future, Nordman continued mulling over his options until, one day, his father asked a life-changing question that made him rethink everything – including his plans for the future.
“Why do you want to keep on working after you retire from the military?” his father asked. “Did you save enough money to live on?”
Nordman had, in fact, saved and invested enough money for his family to live on, although he didn’t realized it at the time. Not only did he have a military pension waiting, but he and his wife had a lifetime of saving and investing under their belts, often to the tune of 50% of their income.
Once Nordman ran the numbers, he realized that another option existed outside of the dreaded 9-5 civilian working world. He could retire. And when that lightbulb went off, there was no turning back.
“I stopped looking for a job and started building my new life,” he says.
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Becoming an Accidental Retiree
In a world where the vast majority of the population is woefully unprepared for retirement, it may be hard to relate to an “accidental retiree.” Still, it isn’t all that improbable.
According to Nordman, he and his wife’s most important financial move was saving 50% of their income at times, and sometimes more. No matter how you cut it, that’s a lot – even enough to allow for some mistakes, as Nordman’s story shows.
“We were not brilliant investors,” admitted Nordman. “We chased the hot actively-managed mutual funds, we paid 1980s sales charges of 2%, and we traded too frequently.”
But his family’s high savings rate was enough to make up for his investing shortfalls, he says. And even accounting for some waste, when you invest heavily and add in the magic of compound interest over twenty years or so, almost anyone can become an accidental retiree.
Still, as well as Nordman did and continues to do, he thinks you can do better. In hindsight, he and his wife realize that if they had taken more time to learn about investing when they were younger, they could have a lot more money stashed away – and enjoyed even more security because of it.
“Reducing our investment expense ratios by a percentage point would have accelerated our financial independence by at least a year,” says Nordman.
Hindsight is always 20/20, but you can’t change what you don’t know or understand. Years ago, investment ratios and trading fees weren’t always as easy-to-find as they are today. Financial education was lacking, and the treasure trove of educational data now housed on the internet was still being built.
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How to Put Your Early Retirement Dreams on Steroids
But now that all the information you could ever want or need is available at your fingertips, it’s still not enough. If you want to truly get ahead, you have to learn as much as you can and harness that knowledge. Based on advice from Nordman and financial experts, these steps are a good place to start:
Step 1: Drastically Cut Your Spending
Part of achieving early retirement relies on spending less than you earn. And if you want to retire earlier than most, you’ll probably have to spend less than most. But how?
“The best way to do this is to track your spending for a few months, cut out the wasted spending on the things you don’t care about, and spend your money only on the things that are important to you,” says Nordman. “By practicing this focus, you’ll soon find ways to spend on your values and boost your savings rate.”
Step 2: Save a Large Percentage of Your Income
But saving that money isn’t enough. To get the most out of your savings, you have to invest heavily – and invest smart. And the higher you can get your savings rate to climb, the better. The math is shockingly simple.
A family making $100,000 per year for twenty years who saves 20% of their pre-tax income will have approximately $877,304 in retirement if they earn 7% across their portfolio. Meanwhile, a family with the same income who saves 40% will wind up with more than $1.75 million. Want more money in retirement? Saving more and investing as much as you can in pre-tax accounts is one of the easiest ways to get there.
Step 3: Know Your Expense Ratios
Although investing in anything over the long haul will likely beat the result of not investing at all, choosing investments with low expense ratios can drastically improve your returns over the course of your working years.
The good news is, no matter who you invest with, you can find out this vital information for free and without risk. By linking all of your accounts to Personal Capital, you can gain access to our free retirement fee analyzer. The Fee Analyzer “helps you uncover what you are really paying in fees, calculates the impact on your retirement, and helps you make informed decisions on how to invest for retirement.” If you want to know where you stand, Personal Capital can help you find your next steps.
Step 4: Build Passive Income Streams
Along with a healthy savings rate, the Nordmans did something else right; they socked some money away in rental and investment property early on, and built a few somewhat passive income streams along the way. And his military pension didn’t hurt either.
Whatever your situation, building several passive income streams is a smart way to further improve your chances of reaching- and staying in- early retirement. Whether your passive income stream comes from rental real estate, a portfolio of dividend-producing stocks, royalties from an invention or book, or something else, reaching early retirement will be made that much easier by its existence.
Step 5: Stay the Course
It’s easy to get caught up in the hype of active investing, but the DIY route doesn’t always pay off. And that’s one of the biggest regrets Nordman experienced during his journey towards “accidental retirement.” By choosing the active management route, the Nordmans forked over far too much of their earnings in fees. And those fees, while seemingly insignificant at the time, ate away at their returns in a big way over time.
One way to stay the course is to choose passive index investing, only taking the time to rebalance once or twice per year. Another strategy: choosing a low cost online personal financial advisory firm such as Personal Capital. Either “set-it-and-forget-it” method can drastically cut down on the time you spend investing, while also paving the way to greater returns over time.
As with most things, sometimes the most obvious strategy is the best one. So choose a long-term investment plan you can live with and stick with it.
Early Retirement May Be More Attainable Than You Think
If you based all of your views on retirement on what you see on the nightly news or read in newspapers, you would think retirement is some dream scenario only experienced by the ultra-rich. But take a look at Nordman and others like him and you know that that couldn’t be further than the truth.
The real truth is this: Having a high savings rate and the discipline to invest those extra dollars every month is sometimes all it takes to set yourself up for life. Anyone who says otherwise simply isn’t saving or investing enough, and they’re projecting their shortcomings onto you. Don’t let them.
Ignore the statistics. Shrug your shoulders at the naysayers. Yawn and roll your eyes at anyone who says retirement is a lost cause and an impossible feat. They’ve got it all wrong.
Early retirement isn’t something for trust fund babies or the top 1%. In fact, it’s more attainable than most people realize. And if you follow the steps outlined above, you may get there before you know what hit you – and maybe even on accident.