Manage Money Like a Pro – Early Retirement Edition

By on Jul 22, 2013 | Retirement Planning | 12 comments

Manage Money Like a Pro – Early Retirement Edition

Welcome to the second edition of Manage Money Like a Pro – a series that features interviews with the leading financial experts and professionals. In my recent interview with Joe Udo, founder of a popular finance and early retirement blog Retire By 40, we discussed the ins and outs of planning for an early retirement.

Joe shared many tips and strategies that he has successfully used to retire before turning 40. I hope that his story and advice motivate you to begin planning for your own early retirement.

Meet Joe Udo

Joe Udo - Early Retirement ExpertLast year Joe left his 16-year corporate career in the field of computer engineering to become a stay at home dad and blogger. He has been trying to transform how people think about retirement since 2010 by sharing his views on the Retire By 40 blog.

Joe believes that early retirement does not necessarily mean you stop working completely. It means that you have the freedom to pursue whatever it is you want out of life.

Making Early Retirement a Reality

Without further ado, let’s jump right into my interview with Joe:

Early retirement is a much sought-after goal, but very few reach financial freedom early in life. If you could give only one piece of advice for making early retirement possible, what would it be?

Live below your means. If you spend less than you make, you will be able to save and invest the difference.

My income is rather limited and I already live a very frugal lifestyle. I save as much as I can, but it doesn’t seem to be enough. Is there anything else I can do?

In that situation, I would figure out how to make more money. If your career can benefit from more education, see if you can get additional degrees or certifications. You can also try to make money on the side. It won’t be easy to work full time and have a side gig at the same time, but maybe you will find a lucrative way of making more money.

Investing Strategies

Retirement accounts (IRAs, 401(k) plans) have early withdrawal penalties. If I want to retire before turning 60, should I even bother with these? Which accounts should I use for my retirement savings?

Think of it as different stages of retirement. The money you save in your retirement accounts is for when you are in your 60s and older. Everyone should invest in a Roth IRA because of the tremendous tax advantages. If your employer offers matching 401(k) contributions, you should take advantage of that as well.

Once you are able to save & invest more, you can contribute to a taxable investment account to create a diverse basket of assets.

What should I invest in? I know that index funds are great, but will their return be enough to afford an early retirement?

This one is difficult because everyone has a different risk tolerance. I hold index funds in my retirement accounts because it is easy to set up automatic contributions and use dollar cost averaging to invest in them each month.

In my taxable account I prefer to hold dividend stocks. You can reinvest the dividends and keep building up your dividend income. Once you retire, you can use that income to pay for your cost of living. I particularly like companies that have a good track record of increasing their dividend payout. These are often called dividend growth stocks.

But everyone should try different investments and choose the ones that they are most comfortable with. Some people like rental properties, while others prefer I Bonds or peer to peer lending (through services like Prosper or Lending Club). You will have to figure our what works best for you.

Retirement Planning and Debt

If I have outstanding debt (let’s say some student loans, a car loan and 2 credit cards), should I focus on paying it off first, or should I put money in my retirement portfolio and pay off debt at the same time?

I would pay off the high interest consumer debt first. Credit cards have high interest rates and you will be paying a ton of interest every month. The only case when you should invest in a retirement account first is if your employer matches your 401(k) contributions. That is a guaranteed 100% return, so I would prioritize it, but otherwise you should pay off your debt first.

Student loans can be treated a little differently – if their interest rates are low, you can probably pay them off a little at a time.

What about my mortgage? Is it better to pay if off before retirement, or plan for enough retirement income to cover my mortgage payments?

You should pay off your mortgage before your full retirement. If you have a mortgage, you will need more retirement income to cover the payments. You may also have to pay more taxes because you may be in a higher income tax bracket.

Looking Back

You were able to retire before turning 40, which is absolutely great. If you could go back in time, are there any things you would have done differently (perhaps to retire even earlier or have more retirement income)?

I started planning for my early retirement a bit too late. I was 36 when I realized that I wanted to quit working for other people. If I knew this in my 20s, I would have had more time to prepare. Luckily, I have always been frugal and by then had a large investment portfolio. But everything is going well now, so I can’t complain.

I would like to give a big shout-out to Joe for taking the time to answer my questions. I invite you to visit his website – Retire By 40, for more information, tips and strategies for taking control of your finances and making early retirement possible.

Do you have aspirations to retire early? What steps have you taken to ensure you reach your goals?

Image source: Casa Velas Hotel


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12 Comments on “Manage Money Like a Pro – Early Retirement Edition”

  1. SavvyFinancialLatina

    Joe is so awesome. I started reading his blog about 2 years ago when I was 21 years old. I have learned so much from him in those 2 years.

    • Anton Ivanov

      He has been an inspiration for me as well. Thanks for stopping by and leaving a comment!

  2. Joe

    Thanks for giving me the opportunity to share my views here. Cheers!

    • Anton Ivanov

      It was my pleasure, Joe!

  3. Derek @

    I wish I had run across Joe’s blog 15 years ago! Yikes, I’d probably be setting on the back porch right now drinking lemonade!

    • Anton Ivanov

      It’s better late than ever, though, my friend!

  4. Rory

    I feel like the author somewhat dismissed 401(k) investments for the prospective early-retiree. I know my personal plan is to save around $750k in 401(k) and Traditional IRAs before calling myself officially retired. Due to SEPP withdrawals, I can pull out almost 4% per year, nearly the ‘safe withdraw’ rate.

    When I combine that with the fact that I will be paying effectively $0 tax on those SEPP withdrawals in ‘pre-tirement’ while I save 25% on the contributions now, it seems like something I shouldn’t pass up in order to invest in taxable investment account.

    • Anton Ivanov

      Hi Rory! You bring up a great point and I agree that 401k’s and IRA’s shouldn’t be ignored even by those who plan to retire early. You can use the SEPP withdrawals you mentioned or Roth IRA contribution withdrawals to tap into your retirement accounts before turning 59 1/2.

      Depending on when exactly you want to retire, however, your retirement accounts may not be enough to support your lifestyle and that’s what Joe was talking about in answering my questions. You will most likely still need to have a taxable brokerage account or other investments like real estate or peer to peer loans.

  5. Shobir | Find Some Money

    This looks like an awesome blog, retiring by 40 is something we all want to do and having examples like Joe makes it seem possible. Can’t wait until I retire.

    • Anton Ivanov

      Ya, Joe is an inspiration to many of us!

  6. Nick | Millionaires Giving Money

    What a great blog, I wish I stumbled across this when I was in my teens, I would probably be retired by now. Instead, I was sold the conventional wisdom of working hard and retiring at 64. I’m now 31 and I feel like I wasted so much time.

    • Anton Ivanov

      While it definitely can feel this way, I don’t think that you should look at it like you’ve wasted all this time. We all learn from our experiences and our mistakes should only make us smarter!

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