How I plan to (be able to) retire at 35

Hi there! Some years ago, I was listening to an old interview with Agostinho da Silva, a Portuguese philosopher who died 30 years ago, and he said something that has been in my mind ever since: “The Man is not born to work, the Man is born to create”.

This goes contrary to the current belief in developed countries, which says that the life of a Man must be dedicated to his work for most of his years.

Who wouldn’t like to spend more time on himself and his hobbies instead of working? However, in the current days, with the age of retirement increasing and the pension system more and more fragile, it seems that one is doomed to spend his time working to maintain his quality of life.

In this post, I’ll explain how I plan to be able to retire at 35, and how to have a plan for your financial life.

Why should I be worried about my retirement?

With the increase in the retirement age and a growing elderly population in most developed countries, the pension system of most developed countries is under big pressure. With the planned decrease of the real value of pensions in most countries, it seems certain that if someone wants to keep their quality of life after retirement, they must save money by their means. Besides, a retirement plan also allows you to plan an early retirement, or at least to reach financial independence.

An early retirement means you can retire before retirement age and live off the return of your investments, doing minimal work. It means to focus on what you want, without being tied to a job. It means to do whatever you want without money holding you back. Do you want to spend a year traveling? You can do it. Do you want to spend a year doing a course? Do you want to learn an instrument? Or spend more time with your family? You can have time to do all that once you are financially independent.

If you like your job and want to keep working, that’s also not a problem. Just because you’ve reached financial independence, it does not mean that you must stop working.

Setting your goal

To reach financial independence, the first step is to define your goal. It is different for everyone, and everyone has a different number. But a rule of thumb is that you can retire when you have invested 25x the value of your annual expenses. This value assumes that your investments return on average 4% by year, a rather conservative return rate. For example, if you spend 10.000€ each year, you can retire when you have invested 250.000€ and live off of the investment returns.

The 4% return is based on some assumptions. For example, you’ll live approximately 30 years past your retirement date, you have a portfolio of 50% stock and 50% bonds, and you are not including taxes or investment fees. For a more in-depth discussion about it, check out this Vanguard analysis or this updated study. We will stick to 4% for the rest of the discussion, however it may vary slightly depending on your investment profile.

After defining your goal, you must define the steps to achieve it.

Where to invest

You want your investment to have some characteristics:

• It must have an equal to or higher return than the market. You don’t want to invest most of your money in a savings account or on most of the capital-guaranteed products.
• You want your investment to have low fees, to avoid the return of your investment being mostly used to cover the investment fees.
• You want your investment to be diversified so that you don’t have to worry about losing all your money because a single company or market is down; in this way, you are reducing volatility.
• You want your investments to be simple to understand so you can do it easily and consistently.

In the FIRE (Financial Independence, Retire Early) community, one of the most popular strategies for investing in the long-term is Passive ETFs. ETFs (Exchange-Traded Funds) are funds structured to track a group of securities - a group of stocks, for example. When an ETF tracks different markets, with many companies of different industries, diversification is achieved. Being passive means that no portfolio manager makes the decisions on when to buy and when to sell. It usually means lower fees than active funds.

In some studies, it’s also shown that most simple investment strategies yield better results than complex ones. In 2007, Warren Buffet bet a million dollars that over a decade, a simple S&P500 Index Fund (a fund that tracks the biggest 500 companies in the USA market) would outperform a basket of hand-picked active managed funds. Ten years later, the S&P500 index would gain 125.8%, while the other five chosen funds had gains of 21.7%, 42.3%, 87.7%, 2.8% and 27.0%.

A passive strategy usually has better results because of the lower fees. Besides, most funds, even though they are managed by highly skilled analysts, do not beat the market. If they do not beat the market, the odds are that you will also not beat the market. So instead of choosing individual stocks to beat the market, FIRE long-term investors focus on investing in the market, which is what ETFs track, at low cost.

Some of the most popular ETFs are ETFs that track the S&P500 index (eg. SPY, VUAA, SXR8), ETFs that track the world economy (eg. VWCE, IUSQ), ETFs that track developed markets (eg. IWDA, SWRD, VGVF), or ETFs that track emerging markets (EMIM, IEMA, VFEA).

Focus on the savings rate

After knowing where to invest, it’s time to optimize your life for your investments. The savings rate is the percentage of money you can save every month from your income. It’s probably the most important number to focus on. You want it to be as high as possible so that you can invest as much as possible from your income.

As a rule of thumb, you can know when you will reach your financial independence number by looking at your savings rate:

where x is the number of years that will take you to reach your financial independence number (assuming it’s 4% of your annual expenses).

If you have a savings rate of 40%, it will take 23 years to reach financial independence. However, if your savings rate is 60%, it will take just 12 years. It’s important to invest as much and as early as possible because, as investment interest compounds, it can make a big difference in a few years.

To increase the savings rate, there are two things you can do:

• Increase income - this does not come as a surprise, but increasing income is probably the best way to increase the savings rate. Unlike reducing expenses, there is no upper limit to how much we can increase our income. Reevaluate your job situation and the market. Can you increase your income by switching jobs? Can you ask for a raise from your boss?
• Reduce expenses - reducing expenses is not about depriving yourself and living a depressing life, but instead focusing on what is important and reducing the superfluous waste. You want to make conscious choices to live efficiently, knowing that you are investing for a better future. This often includes renegotiation of energy/water/gas contracts, canceling unnecessary subscriptions, and avoiding unnecessary spending.

Changing your mindset

When reducing expenses, we are confronted with some crossroads and difficult decisions. Should we sell our car and use public transportation? Should we reduce our vacation spending and focus on cheaper alternatives? Should we move to a smaller house to save on the rent? Those are very personal decisions and there is no one-size-fits-all solution. What you need to understand is that you define your priorities. You can calculate how much you will save by selling your car or moving to a smaller house, and then calculate how much time that decision will save you in reaching financial independence.

The key to reducing your expenses consistently is to find a balance between your present and future well-being. Discover your priorities and use the money accordingly. Such a mindset is called valuist - someone who discovers what they intrinsically value, and creates more of that. For a valuist, the money to upgrade your car or move into a larger house, can be invested and grow over time, and it can have much more value a few years from now. A valuist will only spend that money if he believes that the use of the money now will be better than in a few years (that can be multiplied by 2 or 3).

As someone who focuses on experiences, a valuist mindset is similar to a minimalist or a frugalist. A minimalist mindset focuses on finding freedom by owning only what adds value to someone’s life, and doing that, focusing on experiences and making more deliberate decisions. A frugalist mindset focuses on paying less for what you need.

As you can see, these three mindsets complement each other and make it easier to live a happy and fulfilling life while keeping your expenses low and helping you reach financial independence.

There are still many misconceptions about the idea of retiring early

• “I don’t invest because I don’t have time to always be looking for the stock prices”

If you are investing in the long-term, probably you shouldn’t be always watching the stock prices, because you are not focused on short-term results. When you invest in the long-term, the returns can take some time.

In 2014, a study was conducted by Fidelity on its client accounts. The study tried to identify the best investors by reviewing account returns. They discovered that the best investors were already dead or had forgotten to log on to their accounts for a long time. This only shows that most of the time, the best you can do to your investment is to do nothing.

Reevaluate your investments every 3 or 6 months, but remind yourself that the biggest mistake every investor makes is to sell the investments too early.

• “I need to learn a lot before I start investing”

If you follow a simple investment plan, like I suggested above, the knowledge you need to start investing is minimal. There is no need to know how to analyze a balance sheet or an annual report. Many people overrate the need to learn everything about investing, but like many other things, investing is mostly learned on the go. If you wait to learn everything before investing, chances are you will never do it. If you feel you lack some knowledge, you can spend some time learning, but do it within a defined time-frame, 3 months or so. When that time-frame has passed, you know it’s time to start investing. Time is a crucial part of investing, and studies show that you should start as early as possible, so don’t waste time (and money) and start as soon as possible.

• “I am going to lose all my money if I start investing”

A lot of people are afraid of losing all their money if they start investing. That’s understandable, given the stories they heard from their parents and friends. However, investing does not need to be so risky. In reality, when following a diversified strategy as suggested above and focusing on the long-term, history suggests that it’s uncommon to lose money at all when the years go by. Even more, the probability of higher returns only increases with time. So time is your best ally.

Moreover, most passive ETFs are capitalization-weighted, which means that the weight of every company is determined by its market value. If a company goes bankrupt or its stock crashes, its impact on the ETF is reduced because its weight in the ETF decreases over time. On the other hand, if another company is growing, its weight in the ETF will increase over time. By investing in a capitalization-weighted ETF, you are protecting yourself from the impact that a single company can have on your portfolio.

• “If I stop working, I don’t know what to do and I will get depressed”

This is a real problem for many of the people that retire early. From an early age, we were trained to live to work. This mindset is deeply in our minds, so much so that we connect our identity with our work - what we do is what we are, it’s our purpose. When you retire, you lose your purpose, which can have a very negative impact on your identity and your mental health. Many early retirees feel anxious or depressed months after their retirement date. Some studies even relate an early retirement to a decline in health.

While stopping work can be a big change for someone who from their early years always had their days occupied, there are some techniques that you can try to get used to this new chapter of life.

• Before you fully commit to early retirement, try to imagine how your life will be. How will you fill your days? What will be your day-to-day routine?
• Have some hobbies that you like to spend time doing. Maybe you like to practice sports, gardening, or volunteering. This can be a great way to keep yourself active and happy with your life while having a healthier lifestyle.
• Create a bucket list of things to do. What did you always want to do that you never have the time? Learn a new language? Learn a new musical instrument? Travel the world? Now it’s the time to do it!

Yes, life after early retirement can be a challenge, at least in the beginning. It’s an adaptation to a whole new life pace, where you get to call all the shots on your next step. However, if planned correctly, it can also be a second life where you have the time and the knowledge to be who you want to be, without any financial burden holding you back.

Will I actually retire early?

I’m planning so that I can reach financial independence as soon as possible. I’m currently 25% through it, and by my estimates, I plan to reach it when I’m 35.

I don’t know yet if I will want to retire early. However, I would like to have the option. Reaching financial independence is a superpower that allows you to have bigger freedom, to live on your own terms, and to have an extra piece of mind.

Thanks for reading!

DISCLAIMER: I am not a financial advisor. The content of this post is for educational purposes only and merely cites my personal opinions. To make the best financial decision that suits your own needs, you must conduct your own research. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won’t experience any loss when investing.