How Millennials Can Actually Retire

A realistic guide for ditching 9–5, winning your freedom, and living the life of your dreams…

Photo by Holly Mandarich on Unsplash

I just read an article the other day that said that many young people (and a few older ones) were counting on receiving an inheritance to be able to retire.

Ouch.

As a Millennial, I know that there’s lots of excuses at my disposal: I could complain that I graduated during one of the worst years to find a job ever. I could shake my fist in frustration as I lecture you about stagnating middle class wages. I could blame everything on Trump. Or Obama. Or Bush. Or the baby boomers. Or whoever.

But I’m not going to do any of that. I’m going to continue getting my act together, amass a huge stash of cash, retire on my own terms, and then — once I am in control over my time and money — enjoy some extended travels with my family.

Sound Too Good to Be True?

That’s a pretty rosy picture I just painted, how can I actually believe that I can pull it off?

The answer is because the principles behind it are simple. They might not be easy, but with some focused determination you would be shocked at what you can accomplish.

Before we break things down a little deeper, here’s the high-level overview. Everything you kneed to know in less than ten words:

Spend less than you earn, invest the difference.

Now at this point, one of several objections might be floating through your head:

1. Thanks captain obvious, but it’s easier said than done
2. Waaaaaaaaay to general bro. Give me some specifics
3. Dang, I was actually hoping it would be a bit more complicated and more of a secret, something that not everyone knows.

Don’t worry, we’ll get more specific, way more practical, and we’ll dive into some finer points that most people miss.

And while there’s no way to make this “easy,” we’ll focus on the easiest methods at our disposal to maximize our chances of success.

Let’s go.

Spend Less

I’m sorry we have to go here because I know nobody — and I mean nobody — likes to be told they need to spend less.

Don’t worry though, this will be the most painless approach to cutting your spending you can ever ask for.

“Track” Your Spending

The first step in spending less is knowing how much you spend. Kind of hard to spend “less” without a reference point.

There’s lots of ways to do this. The classic ways are:

• Save your receipts (I’ve tried this, it was awful)
• Keep a journal of every purchase you make (haven’t tried it. Sounds agonizing)
• Use an “envelope system” where you put cash in envelopes for different categories and see how much is left at the end of the month (haven’t tried it, sounds awful).

The easier way is to just let an automated service like Mint or Personal Capital track your spending for you. I’ve used both and they are amazing. I started with Mint but right now I’m on the Personal Capital bandwagon. Either one is going to be way easier than tracking things yourself.

Look For “Set it and Forget it” Savings

The problem with most attempts to cut your spending is that they make you rely on an extremely limited resource: your willpower.

You can only fight the good fight for so long before you cave and go on a budget-blowing spending binge that unleashes a torrent of guilt and a crushing sense of inadequacy.

I’ve been there.

Before you bring your saving efforts into the real world, start in the comfort of your home behind the cozy glow of a laptop.

Pull up your Mint or Personal Capital dashboard and take some time to identify all of your recurring bills. These are things that you pay for without really thinking about, so they are opportunities to save without really thinking about it.

For each bill, ask yourself these questions:

• Do I really need to be paying for this? Should I cancel?
• Could I downgrade the service to the next lowest level without really noticing?
• Could I save money by switching to a competitor?
• If I call them, would they give me a discount?

That last question doesn’t always work, but it’s totally worth it when it does. There have been multiple times over the years where I have called my internet company asking for a discount and gotten $10 off my bill for the next 12 months. Not bad for a 5 minute phone call.

Certain expenses — *ahem, cable!* — lend themselves toward the “cancel” option, others work better with some of the other strategies.

For your phone bill, you might consider switching to a lower-cost provider like Cricket, Straight Talk, or Republic Wireless (I’m team Cricket baby!).

For something like car insurance, a combination of shopping around and getting rid of some unnecessary services might be the right approach.

It’s a little bit annoying to research insurance and a little uncomfortable to figure out what the right level of insurance is (hint: you almost always need less than you think you do. Remember, insurance is designed to make money for the insurance companies, not to save you money), but an afternoon spent researching your needs is well worth it.

For car insurance, liability coverage is required by law and is a good idea anyway. Anything else should be scrutinized extremely carefully. There’s little point , for instance, in having collision coverage if you drive a beater.

Take a weekend devoted just to trimming your expenses and see how much money you can save in 48 hours that will require ZERO ongoing effort on your part.

Cut All Spending That Doesn’t Make You Happy

We’re looking for the low-hanging fruit of frugality here. Spending that you can eliminate from your life without feeling like you’re pulling teeth.

Fortunately, if you are anything like everyone else, you engage in an enormous amount of spending that can be safely slashed without making you any less happy.

In fact, in many cases, cutting your spending can actually make you more happy.

That’s right, I said MORE happy.

I wrote a detailed post on how this works, complete with very snazzy graphs and charts. It’s well worth a read:

The Ultimate Guide to Money and Happiness

The key is to experiment with your spending and see what you can cut without really noticing.

There’s an absurd debate in Personal Finance that could be called the “latte debate.” It goes something like this: one group says that if you would just stop drinking lattes and invest the money, you could become rich. The other group says to forget the lattes and focus on big wins. Both make a valuable point.

Here’s the point that they both miss: some people really care about their lattes and some don’t.

If you regularly drink lattes but they aren’t making you happier, either cut them out entirely or cut back dramatically. If your morning trip to Starbucks is your favorite part of your day and giving it up would be about as easy as giving up your puppy, you should probably look somewhere else to save a few bucks.

Here’s the deal, once you are done with these three steps — tracking your spending, cutting your bills, and slashing spending on the things that don’t make you happy — you’ve graduated from Frugality University.

If you stumble across some great money-saving tips in the future, you can feel free to implement them, but for the most part you are going to start running into diminishing returns.

Your main focus should be switching to growing your income, and you should only devote as much time and energy to frugality as you need to maintain your newfound thrifty ways.

Earn More

Frugality has diminishing returns, but income generation can lead to exponential gains.

If you work your way to a huge promotion this year, your cost of living raise will be higher next year, and so will the one after that and the one after that…

Unlike spending less, there is no cap on earning more. While it’s unlikely that you’ll start making $50 million a year, it’s at least possible. If you’re currently spending $40,000 a year, the most you could ever save in a year by cutting your spending is $40,000.

Invest Your Time

They say that time is money, but the truth is time and money have a much more complicated relationship.

You start with lots of time and no money, so you use time to make money. But from a broader perspective, time is actually more valuable than money, so you start using money to free up time. This can be something as small as paying someone to mow your lawn, but the ultimate example is retirement.

And of course, we have to deal with the inconvenient fact that you can stash your cash, but the time passes continually, no matter what.

Surprisingly, the best way to use your time is to do the same thing with it that people are always telling you to do with your money: invest it.

Investing your time means using it with a view to the future. Instead of being only concerned with the immediate benefits of your actions, you have the discipline to look for potential ongoing future benefits.

Spending time at work setting yourself up for a possible promotion is an example of investing your time, but we’re going to talk about an example that I like much better.

Creating Something to Sell Besides Time

The only way to make money is to sell something. Most people end up selling their time: they trade hours for dollars.

This approach can be quite lucrative if you work your way up to a high hourly (or yearly) rate, but the problem is that once you trade the hour away it’s gone forever and you get no ongoing benefit.

One of the core ideas of my book on personal finance is that a strategy that everyone should be thinking about is how to invest their time into creating something they can sell besides time.

The internet has opened up lots of opportunities to do this and my book goes into them in depth, but it should also be noted that the book itself is an example of me creating something that I can sell instead of time.

I just release the book earlier this month and haven’t yet recouped the cost of producing it. Of course, the point of the book wasn’t to make a bunch of money right away. The point of the book is that it would help people while making me money month after month.

I’m much more concerned with how many copies I will have sold by 2040 than I am with how many I sold this month.

This is the concept sometimes known as passive income or residual income. The idea is that you do the work once, but continue to get paid long after it is completed.

With passive income, you almost always make little to no money up front, but the results accrue over time.

My YouTube videos are still getting views every day and making money and I haven’t done anything on YouTube in months.

The Dual Retirement Benefits of Residual Income

The beautiful thing is that creating additional sources of income gives you more money to invest, which will help you get to retirement faster than you otherwise would have.

But it also reduces the amount you need to save. If you need to spend $3,000 a month in retirement, then the thinking goes that you need to save enough to support $3,000 a month in income from your investments. But what if you’re also making $1,000 a month in residual income? Now your investments only need to be able to support $2,000 a month.

Residual income is not a get-rich-quick scheme. It is enormously difficult to get the ball rolling and takes some serious commitment and dedication.

But if you are thinking about retirement, you are already highly future-oriented and have a good chance of being able to overcome the short-term difficulties in pursuit of the long-term payoff.

Invest the Difference

So now you’re a lean mean spending machine and your income is increasing. You’re creating a wonderful positive gap between what you spend and what you earn.

We could call this gap your savings. Saving by itself is great, but to take it to the next level, you have to do something with your savings.

An emergency fund is always a good place to start. The classical personal finance wisdom is to have 3–6 months of living expenses stashed away in a savings account (I recommend using an online bank like Ally that will pay much higher interest than a traditional bank).

Once you are secure with a solid emergency fund, it’s time to do with your money what you are doing with your time: investing.

Kill Your Debt

If you are unfortunate enough to have debt, paying it off as quickly as possible counts as an investment. The idea with investing is for your money to make money for you through interest. With debt, interest is working against you. The earlier you pay off your debt, the less interest you pay.

For instance, when I signed my mortgage (the only debt I’ve ever had), I was agreeing to pay over $57,000 in interest if I made my payments on schedule.

Instead of paying on schedule, I’ve been paying extra each month and am on pace to only pay $32,000 in interest by the time I pay off the loan. That $25,000 savings is my return on investment for the extra mortgage payments.

The Simplest Investing Strategy You’ll Ever Hear

There are three primary was to build enormous wealth: starting a business, real estate, and the stock market.

Of the three, the stock market is the most passive. If your investment strategy is simple enough, this can nearly be a “set it and forget it” situation.

But aren’t stocks risky? You might be thinking, and anyway, I don’t know how to pick winning stocks.

Those are valid concerns, but they don’t apply to our investing strategy. The stock market is fraught with risk in the short-term, but we’ll be looking at the long term, and over the long term, the market always goes up.

You also don’t need to pick stocks. Not only is picking stocks risky, it’s a waste of our time. We want a simple strategy that just works. So here it is:

Buy the whole dang market.

Wait, what?! I hear you exclaim, That sounds kind of complicated and I definitely don’t have enough money to buy everything!

Don’t worry, there is a magical solution that is almost too good to be true, and it’s called an index fund.

Here’s the idea: there is a kind of fund called a mutual fund where investors pool their money in order to be able to diversify their investments. I might only have enough money to buy a few shares of stock, but if you and I and hundreds of other people pool our money, we have enough to buy lots of shares of lots of stocks, and we’ll each own a portion of the fund.

Index funds are are form of mutual funds, but they aren’t just any mutual fund, they’re like a mutual fund on steroids.

You see, most mutual funds are actively managed, meaning that there is a real person making lots of trades with the fund’s money trying to make money for the investors. Nearly all fund managers fail to beat the returns of the market in the long run, and their active management comes at a high cost.

You never seethe costs of your investment, they are just deducted from your earnings on a regular basis.

In investing, the saying goes, you get what you don’t pay for. The less money you pay to invest, the more money stays invested.

Index funds simply track a market index like the S&P 500. When people talk about “the market” going up or down, they are usually looking at an index that stands as a proxy for the market as a whole.

When you are buying stock in an index fund, you are buying a small share of the largest businesses in America — and you are doing it for the lowest possible price.

Different Account Types

Okay, great! I’m going to invest my money in index funds and let it grow over time — how exactly do I do that?

You’re going to start at work. Chances are that at your job you have a 401(k) plan or an equivalent like a 403(b). If you’re lucky, your company will match your contributions up to a certain % of your salary. So some companies might say that if you put 5% of each paycheck into your 401(k), they will match that amount.

Your first order of business is to make sure you are getting the full employer match. This is the savviest investment you can make. You don’t have to pay taxes on the money you contribute to a 401(k) and if your employer matches your contribution your investment instantly doubles. An instantly doubling investment is an impossibly good deal.

You’ll have different investment options, but you’ll want to check for one of these if you’re lucky enough to have your employer offer them:

• VTSAX — Vanguard Total Market Index Fund (Admiral Shares)
• VTSMX — Vanguard Total Market Index Fund (Investor Shares)
• VFIAX — Vanguard S&P 500 Index Fund (Admiral Shares)
• VFINX — Vanguard S&P 500 (Investor Shares)

Vanguard is the name of the company founded by the creator of the index fund, John C. Bogle (aka Jack Bogle). It is owned by the investors and has rock-bottom fees on its funds.

The difference between “admiral shares” and “investor shares” is usually that the admiral shares have a higher minimum investment and lower expenses. Choose that one if you can.

The “total market” is a fund of every publicly traded company, the S&P 500 is the 500 largest (which make up more than 70% of what is found in the total market fund). My preference is for the total market, but my company only offers the S&P 500, so that is what I have in my 401(k).

If you don’t have these funds available, search for the words “index” as well as either “S&P 500,” “Total Market,” or “Total Stock Market,” and choose the one with the lowest expense ratio.

If all else fails, you can choose a “Target Date” retirement fund.

Once you are contributing the maximum, I recommend opening a Roth IRA with Vanguard. IRA stands for “individual retirement arrangement” and any time you see “Roth” it means the money you contribute is taxable, but the money you withdraw (under certain conditions) is not.

Look for the same four funds mentioned above and pick one of them.

If you hit the annual contribution limits on your 401(k), you can open a regular taxable account with Vanguard. You might also consider a taxable account if you are planning on retiring early, although there are ways to make the tax advantaged accounts like the 401(k) and IRA work for that as well.

Summing it All Up

So here is your strategy:

• Contribute enough to your 401(k) to get the employer match
• After you hit the match, start contributing to a Roth IRA or taxable account
• Invest in one of these four funds if you can: VTSAX, VTSMX, VFIAX, or VFINX
• If you can’t, invest in a total stock market or S&P 500 index fund with the lowest expense ratio that you can find
• Let your money grow 💲 💲 💲 😄

That’s it? What about asset allocation and re-balancing and all that stuff I hear about?

Well, you can worry about that stuff if you want to. Choosing an asset allocation beyond 100% stocks can help give you a smoother ride. Sometimes the stock market will take a huge dip and it will look like you lost a lot of money (you don’t actually lose any money unless you sell). If you have some of your money in another asset class such as bonds, you won’t get hit as hard (in theory anyway— in practice you may not get hit as hard, you may get hit harder, or it might be roughly the same).

Personally, I’m going to go with 100% stocks until I actually start taking money out — then I’ll look to do a 75/25 split between stocks and bonds or something similar.

No need to spend extra time and mental energy on something that has very uncertain benefits during the wealth-building phase.

Having Enough to Retire

There’s a rule called the 4% rule, which says that you can safely live off of 4% of the amount you have invested.

It is derived from a study called the Trinity Study, which you can read more about in this awesome post from my buddy Gonzalo Ziadi:

So You Want To Retire Early? Here’s How Much You Need To Have Saved

In other words, when your investments are 25x the amount you will need to spend per year, you can retire (25x is the reciprocal of 4%).

Of course, if you are following the blueprint laid out in this post, you can theoretically retire even earlier.

Remember, I’m advocating increasing your income by creating streams of residual income that will continue to pay you in the future. If you’ve got $1,000 a month coming in from a combination of various residual income streams, the amount that you need to retire is $300,000 less ($1,000 a month times 12 Months a year times our 25x multiplier).

Retirement Alternatives

If you are committed to the blueprint laid out here, you can retire and even retire early. But what if “early” still isn’t early enough?

After all, you’re only young once right? What if you want to travel and live the retirement lifestyle sooner rather than later?

I completely relate to this position. I have no problem delaying gratification, but I’m very acutely aware of the fact that my kids are growing up fast and I really want to take an extended trip with them before they leave the house.

So while I’m thinking about early retirement, I’m also thinking about some creative alternatives.

The Mini-Retirement

This idea was made popular by Tim Ferriss in his bestselling book The 4-Hour Work Week.

The idea is that instead of waiting until retirement, you enjoy a few extended vacations (think several months or longer) during your working career that act as a “reset button” of sorts and help you enjoy life as you’re living it.

The idea is to save up for a mini-retirement instead of buying a new car or something like that, but depending on what you do for your mini-retirement, you can actually come out ahead financially (e.g. living abroad is often cheaper than living in the U.S.)

The Pseudo Retirement

My current goal is to never “retire” but to switch over into a permanent “pseudo retirement.” At some point during my pseudo retirement I plan to become financially independent and not need to work, but I’ll still do work that I enjoy.

The hope would be to build up enough savings and start making enough residual income that I can free myself from the rat race and take a mini-retirement with my family, even before my official retirement. This would be partly funded by work that I would do on my laptop on the trip itself.

Kind of like retirement. Kind of like working. It would be a pseudo retirement with freedom of location and freedom from traditional employment.

My goal is to get there by the time my kids are in their early teenage years.

Your Goals

The first step in getting what you want is defining exactly what it is you want. I recommend a simple, powerful exercise called “The 10 Year Plan for a Remarkable Life”:

Your 10 Year Plan for a Remarkable Life

Almost none of your dreams are going to come true overnight, but many can come true over time with consistent effort.

Even if your dreams and desires change, the blueprint laid out in this article gives you the freedom and flexibility to pivot.

If you aren’t tied down by debt and crippling levels of spending and have residual income and a huge stack of cash, your options are pretty wide open.

Mastering your money = winning your freedom.

Building the life of your dreams is a tough slog, but if you have the courage to take action and the persistence to stay the course, it will all be well worth the effort.

If You Liked This Post…

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Personal Finance That Works For You: How to Build Wealth, Design Your Future, and Make Money While…

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