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
Last 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.
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.
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