A fair number of people, it seems, believe that "early retirement" is an unachievable financial goal for most Americans, or that it isn't worth doing because retirement is akin to having no purpose in life.
That was the gist of some emails and comments written by MarketWatch readers in response to my recent column about Mr. Money Mustache, a blogger in Colorado who retired at age 30.
Focus on retirement
Mr. Money Mustache is still in the early years of his retirement. But he is by no means alone in his achievement of financial independence via strategic spending and saving.
Meet Billy and Akaisha Kaderli. They're both 61 years old, and they retired when they were 38 — more than two decades ago. Ever since, they've been traveling the world, visiting places as far-flung as Laos, Thailand, Guatemala and Belize.
Yes, they earned above-average incomes before retiring — Billy was a broker and investment manager and Akaisha managed their restaurant in Santa Cruz, Calif. — but a big part of their retirement success revolves around cutting spending, monitoring expenditures, and being smart investors.
Plus, they were both willing to try something new, ignore the negative reactions of relatives and friends who said it wouldn't work, and adopt a simpler, less-consumption-oriented lifestyle.
Their story of cutting costs to ramp up savings is similar to Mr. Money Mustache's.
They live on less than $30,000 a year — that includes medical costs, airfares to distant locales, and housing and living expenses, the Kaderlis said in a recent interview.
"We're not alone," said Billy. "There's a whole group of us running around the world out there, doing this." (For simplicity's sake, I'll refer to the Kaderlis by their first names.)
They're adventurous even in their lodging choices: they often housesit, or they might take a long-term rental or stay in a hotel room with a kitchenette. They visit the U.S. once or twice a year. Currently they live in Panajachel, a town on Guatemala's Lake Atitlan.
"It's one of the most beautiful places in the world," Billy said. "A big volcanic lake that's just stunning."
With their website, RetireEarlyLifestyle.com , and e-books, the Kaderlis have created a road map for others to follow. "It's just a matter of prioritizing your savings," Billy said. If you want to attain financial independence, he added, "Create that goal and plaster it on your refrigerator and don't lose sight of it."
Change of plans
Early retirement was Billy's idea. They were 36 years old and working 60- to 80-hour workweeks.
"When he decided we could retire early, I thought it was a crazy idea," Akaisha said. "It wasn't in my plans [but] he showed me it could work."
They continued to work for two years, but started tracking spending and living on less. Ultimately, they sold everything and moved to Nevis, a tiny island in the Caribbean. From there, their travel adventures began. Their total savings? About $500,000.
For some interested in following the Kaderlis' path, selling the house may be key. "It's a leap for people to sell everything like we did, but that's maybe their biggest source of equity," Billy said. "Once they free that up and invest it in the equity markets, then they have more choices."
In their 2011 book "Your Retirement Dream Is Possible," the Kaderlis describe a 7-step process behind their plan for early retirement. Here's a rough guide to their strategy:
1. Assess your finances
To gauge your ability to retire, you'll need to figure your net worth, the Kaderlis said.
If you own a house, estimate its value via Zillow.com, Trulia.com or a similar site, and then subtract your mortgage debt.
Add in the value of your retirement, investment, savings and any other financial accounts, plus the value of your cars, jewelry, furnishings and other items. Subtract any other debt.
Hold on to this figure — you'll see why below.
2. Track your spending
Start writing down (or entering into a computer) every dollar you spend.
"It is imperative to know how much you are spending, not only per year, but also per day," the Kaderlis write in their book.
"After a month or two, you will discover where to reduce expenses. Within a year, you'll be in control of future spending," they said. "This simple routine will start you on your way to financial freedom."
The Kaderlis employ a couple of systems to track spending. First, they make note of each expenditure. Then, each morning, they enter the previous day's spending into a running total in their spreadsheet (or, if they're without a computer, into a notebook), and divide that total by the day of the year. For example, on Jan. 1 they divide by 1, on Jan. 2 by 2, etc. That gives them a daily average.
They also keep a running total that includes the previous year, such that Jan. 1 of the second year is day number 366 (so they divide the day's total by 366). That gives them a second daily average. "The 'year +' figures are always more stable, because they contain more data," they write. "This is exactly the point: that stability helps to relieve stress."
The combination of knowing their net worth and daily spending inspires confidence in their finances: Every day, they track the percentage of their spending to their net worth. That way, they can quickly see whether they need to cut back.
They follow the 4% rule: spending about 4% of their portfolio each year, with adjustments as needed.
"We spend what we want to, and then we track it to see what percentage we're spending," Billy said.
Also, every couple of weeks or so, the Kaderlis enter their expenditure data into a computer program that allows them to categorize each expense — a task that takes about an hour — so they can easily see whether, say, their restaurant outlays have gotten out of whack.
"The longer you keep track of current consumption," they write, "the more confident you'll become of your future spending habits."
3. Save, and then save more
Once you've started to take control of your spending, it should be easier to see how to reduce outlays and add to savings. A general rule of thumb is to save 10% to 15% of your gross income each year, but the precise figure will vary depending on your age, current savings and goals.
One guideline: Saving 25 times your annual spending should be enough for your investments to generate the income you'll need. Check out this Money Mustache blog for more.
Don't forget that your expenses change when you retire. Holding down a job can add many costs to a family's budget, including commuting costs, car maintenance, new clothes, lunches out, dry cleaning costs and more.
Also, don't forget that eventually Social Security will provide some monthly income.
4. Invest wisely
The Kaderlis invest in the stock market via index mutual funds. Even through the financial crisis, they were able to collect retirement income from their investments — though they did go over their 4% rule at times.
"Our portfolio took a hit, no doubt, like everybody else's did," Billy said. Still, "based on our spending habits and history, it didn't affect our lifestyle."
During the downturn, they shifted their portfolio into exchange-traded funds and out of traditional index funds, so they could trade in real time — a boon for people living off their investments.
"We're big believers in index investing," Billy said. And in the power of the stock market: "The S&P 500 (.SPX) has averaged over 8% a year plus dividends. That's through the dot-com bubble, the Great Recession, the housing bubble — and it's still performed 8%."
5. Put peer pressure into perspective
Early retirees have to resist pressure to spend. They also will face naysayers. "A lot of the people who said it can't be done, they want everything secure, everything guaranteed," Akaisha said.
Naysayers will include in their budgets a replacement car, roof repairs, long-term-care costs, she said. "These people are just so afraid. They need to have every single guarantee — or people like us are liars," she said. "It's actually very doable."
Relatives may exert some pressure, too. Akaisha's mother, for instance, felt like she would never see her daughter — but those feelings soon changed. One reason: With their newly flexible schedule, Akaisha and Billy were able to visit for longer periods.
"We can spend a month with our families, not just a dinner," Billy said. Plus, Akaisha was able to provide end-of-life care for both her parents.
6. Choose simplicity
Both the Kaderlis and Mr. Money Mustache make the point that their low-cost lifestyles are not about denying themselves things. Instead, they find happiness in experiences.
"Stuff, which ultimately gives little meaning to life, is a sinkhole on your road to financial independence," the Kaderlis write. They offer some resources for living simply on their website .
7. Keep your eye on the prize
"Every time you get sidetracked by spending a little bit more, succumbing to peer pressure or choosing not to put extra money into your retirement funds, you're literally delaying your retirement date by weeks, months or perhaps even years," the Kaderlis said.
8. Health insurance
For years, the Kaderlis bought insurance through a U.S. provider. "But we did so much international travel — you can't fly back for every little thing that goes wrong — so we found ourselves using medical tourism as a matter of course," Akaisha said.
As a result, they dropped their U.S. policy about two years ago. Now, when they travel to the U.S., they purchase a traveler's insurance policy, available for a specific period of days or weeks, to cover catastrophic care. Everything else, they pay out of pocket in whichever country they find themselves.
What about the possibility of needing long-term care? "In a foreign country, you can have nurses and doctors come in to see you. You can hire someone to do your shopping. We don't have to spend $70,000 a year," Akaisha said. "In Mexico, there are lots of places you can live in with Wi-Fi, maid service, your meals included, laundry — for $1,500 or $2,000 a month. That's reasonable."