How to Retire in 5 Years

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Have you ever thought about retiring? I bet you have! Heck, I’m only 26 and I know I’ve thought about it. Every time you go on vacation you think, “Wow, why can’t life be like this all the time. Do I really have to go back to work in 2 days…?” Well, if you really do want to retire, why not make a plan to do it in 5 years? Anyone can do it!

In order for someone to retire in their 60s, the typical method is to stock small amounts of money away for a long period of time. In order to retire in 5 years, we’d obviously have to ramp up these deposits!

Let’s say you spend an average of $3,700 per month, leaving you with about $300 to put into your retirement savings.

  • Mortgage = $1,000
  • Home Insurance = $50
  • Property Taxes = $200
  • Car Payments (2 cars) = $500
  • Gas = $500
  • Car Insurance = $200
  • Food = $400
  • Personal Essentials = $100
  • Phones = $200
  • Internet = $55
  • Gas/Electric/Water = $150-$400
  • Clothing = $200

 Cut Spending

In order to retire in 5 years, you must severely cut your spending so that you can ramp up your retirement savings. You were previously spending $3,700 each month (which isn’t overly crazy – there are plenty of people in this world that spend much more than that in a month)  and only saving $300.

What would you say if I told you that you could cut your spending to $600 a month? I know I know, I’m crazy. It could never happen…. Just hear me out and take a look at the numbers!

The Breakdown

Mortgage – you don’t need one. Sell your home and use the equity to buy a modest home for cash (preferably near your work). It may only be a one bedroom condo, but it will be yours free and clear with no mortgage.

Cars – sell your cars and get used to your bicycles (which is why I said you should live close to work). This move is going to save you a ton of money. Sure, it may be inconvenient at times, but some sacrifices need to be made if you’re going to retire in only 5 years time.

Food – You remember your favorite expensive restaurant? Well say goodbye for a while. Cooking within your home is much cheaper, and quite often more healthy!

Phones – Let’s face it. You don’t really need the data plans on you cell phone. In fact, you don’t really need a cell phone. How about a tracfone? Use a phone only when you truly need to call someone. This can reduce your monthly bill tremendously.

Internet – No need for the internet at home. Just take a strole over to the library and use theirs for free! I did it for a while and I survived! 🙂

Gas/Electric/Water – remember our first method to saving money? We purchased a small condo for cash. That is going to reduce your utility expenses. Most likely, your bills will be cut in half!

Clothing – Yep, we still need clothes, but there are plenty of good buys at Goodwill or the consignment shops.

With the above adjustments, here’s your new budget:

  • Mortgage = $0
  • Home Insurance = $20 (cheaper place = cheaper insurance)
  • Property Taxes = $50 (again, cheaper place)
  • Car Payments (2 cars) = $0 (no more cars, just bicycles)
  • Gas = $0
  • Car Insurance = $0
  • Food = $200
  • Personal Essentials = $70 (bring your coupons!)
  • Phones = $40
  • Internet = $0
  • Gas/Electric/Water = $75-$200
  • Clothing = $80

Do You Realize How Much Money You Can Bank?

With this new budget, you can live off only $600 a month, or $7,200 a year. Since (in the next 5 years), you still earn an income of $4,000 a month (after tax), this means that you can put $3,400 away for retirement each month! That’s $40,800 each year, which equates to $204,000 after 5 years.

Living Off The Interest

By investing your $204,000 savings into a Treasury Bond (or some other “safe” investment – P.S. Don’t just put your money in one place, this is just a simple example), you’ll earn 4.5% interest, which means that you could earn $9,180 each year on the interest without even touching the principle of the account! And, take note that you’re now earning $2,000 more than you needed in those 5 years of saving for retirement. Vacation anyone?

This plan works. You’ll never be rich, but you’ll be able to live life without the restriction of work, and sometimes, that’s worth more than a large corporate paycheck each week.

What do you think of this plan. Would you ever like to try it?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

32 Comments

    • If you had kids, I still consider this plan to be doable. It would make for close quarters, but it’s not impossible! As for the debt, this plan would still work, just as long as the debt-load wasn’t more than $50k or so. Then you might have to put in a couple more years of work.

      • When I retire I don’t plan on sitting back and relaxing. I’d like to use the money I have invested to either fund missions or participate in local/overseas missions. I think I would find sitting idly by to be quite boring after awhile…
        Jon — Free Money Wisdom recently posted..Index Funds, Yay or Nay?

        • Sounds very admirable Jon! I always love your input. I don’t think I could sit back and do nothing either, but some people look forward to it! For them, here is their plan to get there in a very short time-frame.

  1. Good plan. Over and above what cashflowmantra said, wont work so good if your home has negative equity you cant cover. Would have been good to mention investing in passive income opportunities also.

    Example – Locsl guy in Scotland, mortgage 750 p/m, negative equity 30k, max rental 600 p/m. Downsizes property to exact needs (2 bed flat/ apartment) at 350 p/m rental, rents out his house at 600 p/m and covers the remaining 150 mortgage payment himself. Savings per month £100. He saves that for a year and uses it to down pay on a hot roll/ sandwhich bar lease generating 100 per week after costs. Not a hell of a lot but an extra 5200 per annum without having to ‘work’ in it. Just a thought.

    Whatever situation your in, be positive, be confident, enjoy the little things and genuinely, good luck.

    • Yep, I had thought about upside-down mortgages when I was writing the post, but if people have been reading my site regularly, they would not be caught in this situation, so I dismissed it. However, if the mortgage did cost more than what the house could be sold for, this plan is still doable. You’d still sell your house, find a cheaper, smaller one. Downside the lifestyle and then dump all the extra money toward the debt!

      After that, you save save save! And then you’d maybe retire in 7 years instead of 5. Still works! 🙂

  2. As tempting as it sounds, I would rather live in a decent place and enjoy life.. Even though you would have the rest of your life free, there are other ways to retire in 5 years. Those are the things I am working towards!!
    20’s Finances recently posted..How an ATM Fee Saved me $32

    • I hear ya 20’s Finances. This plan would most certainly not be the most fun, but if you really hated your job and just wanted to live life without the constraints of work, then this would be the plan for you. Thanks for commenting! 🙂

    • @20’s Finances, I am with you on this one. It doesn’t sound like it’s any fun during the 5 yrs you are trying to save nor the after retirement with only $204 000 in stashed. I much rather work a bit longer and enjoy a more balance life and retirement.

  3. I think it would be doable, but at this point I’ve paid a lot of what Dave Ramsey calls “Stupid Tax” and am trying to get rid of that. 🙂 I will definitely be thinking about this all day while I’m working. 🙂

    • I like Dave Ramsey as well. Keep avoiding that stupid tax and you’ll be just fine! 🙂

  4. I love thinking about this type of stuff and dig the “plan”, but as a recovering fee-based financial advisor, I don’t think it would work.

    There are a few reasons, but the biggest is this: inflation will eat into the value of your investment, making it difficult to “stay retired.” Second, there’s so little margin for error with a $204,000 nest egg that you’d need to really make sure the overpass you’re living under is really stable to maximize the chances that nothing wrong ever occurs to break the budget.

    I know that’s not your point. “Sacrificing some today for a better tomorrow means that your goal is probably closer than most people think” seems to be your real direction here. I love that.

    I also love some of the things you list here that we take for granted, especially: why drive to work if you could walk? Why own a car at all in this scenario? I have a good friend who lives in Chicago who doesn’t own a car and has a six figure job. She lives in a sweet loft apartment near downtown and uses public transportation or walks. She’s in great shape and saves tons of money (cash that I’m sure she uses to afford the apartment).

    I have to admit that I decided to stop driving once. Taking the bus lasted a total of ONE DAY and I biked to work ONE DAY. Both days were awesome, but I fell off the wagon. I have to not be so lazy in the future. The car was much easier for my fat butt.

    …now where did I put that doughnut?

    Another great topic! Have a good weekend. – Joe
    AverageJoeMoney recently posted..There’s Something Wrong With The Car

    • Yep, I agree with many of your points. $204,000 is a pretty slim account to be drawing from, and it could be pretty unstable. But, it IS doable. Plus, after you do this, if the money isn’t enough, you could always work from home at your passion. An extra $10,000 a year would be huge!

  5. Living off less than 10k/year is not a life anyone should want to lead. The concept of retirement is to enjoy life. On this kind of money, sure you’re not working, but it’s removing all the fun out of life.

    I would never consider this.

    I would focus more on finding a job that is fulfilling so that every day is rewarding.
    Funancials recently posted..Rick Perry Forgets His Own Talking Points. Oops.

    • That is one way to go FUnancials. To each his own. Honestly, I’m not pursuing this method of retirement either, but if someone absolutely dispises working, this is one way to get out of it! 🙂

        • It sure is! I want to see someone do it though. Would you like to sign up for the challenge? Lol!

  6. Most people an not or will not make the necessary changes to reach that goal. You need a really compelling reason to sustain that kind of sacrifice. What is interesting is immigrants or visa workers will do exactly that kind of sacrifice. Maybe it is because they never were used to the better existence.
    krantcents recently posted..Stay Late or Go Home?

    • You’re right. This is basically the method of many immigrants. Except, they don’t ever stop working and naturally become millionaires! 😉

  7. I think this is my favorite post! I remember a family of 5 who lived in a cramped rv for two years while they saved the money to buy land and a double-wide. I didn’t envy them but I admired the plan they had..and it worked! Great concise list..love it!
    Brenda recently posted..Getting Your Toddler to Sleep

    • I’m glad it’s your favorite! I had a fun time writing it! I love your real-life example of the family in their RV. It might have been uncomfortable for them, but like you said, they saved up the money they needed and now they own their property! 🙂

    • It wouldn’t be easy, but not impossible. If I were willing, I could buy a cheap place that’s less than a quarter-mile away from my work. I could sell my house and pay cash for it no problem.

  8. No.
    Well, generally no.
    If you transfer from a traditional to a Roth, you will pay tax on the whole amount (unless you made any after-tax non-deductible contributions to the traditional). That will take a big bite out of your retirement money. Converting from traditional to Roth is only recommended for folks that have enough time before retirement to make up the amount that went for taxes.
    The main difference between the two:
    –In a traditional IRA, you made contributions that were deductible from your income (so they are considered “pre-tax” money). When you take money out of the traditional, you will pay your income taxes on the distributions. The idea was, your income is lower in retirement, and you have some control over how much you take out of the IRA, so you can minimize the tax consequences.
    –Roth IRA contributions aren’t deductible (so they are “after-tax” money). But when you meet the requirements of age and account ownership (have to have the account for 5 years), then all distributions from the Roth are tax free. You can continue contributing to them to a later age (if you have earned income).
    Apple recently posted..Ten Frequently Missed Tax Deductions for Arizona Taxpayers (Part 1 of 2)

    • Did you read my article? Just curious…

  9. Easier to just make $4,000 more a month!

    • Ha! I think you’re probably right.

      • My goal is to earn that $12,000/month after taxes from passive and online income regularly a month by the time I retire as I wrote in my Dream Big post on Y.

        I donno about any treasury bond yielding a safe 4.5% interest rate. That would be nice though!

        • I guess I should have said treasury rates… My work matches these rates through our Cash Balance (Retirement) Fund.

        • By the way, I love the goal of $12,000 a month! Maybe that will be my goal in 2013! 🙂

  10. This is definitely a doable plan but I am sure many would find it ambitious. For some reason, being debt free is scary to many. They don’t know how to function within their means. This is definitely thought provoking.

    • I don’t understand why many people think it’s scary to be debt-free. I’m scared not to be debt-free!!!


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