Re-posted from MSN.COM
You’ve seen the stories, touting the the hard-won feat of early retirement: “Self-made millionaire retires early in his 30s,” “Millennial retires early after seven years of work.”
Many can’t help but wonder: How did they do it? And more importantly, can that nest egg really last a whole lifetime?
Saving enough money to retire early involves diligence, planning, strategy, and usually a few lifestyle changes. After all, $1 million isn’t what it used to be – or what it will become. In 2016, Time magazine estimated that with a 3% inflation rate, $1 million in savings in 40 years would have the same spending power as $306,000 today.
How much money you need to retire early depends on two things.
Your cost of living
It makes sense that location will play a role in determining early retirement savings. The cost of living in a place like New York City or Los Angeles is a lot higher than somewhere in the midwest, like Wichita, Kansas, or in the south, like Birmingham, Alabama.
Living in a place with a lower cost of living means that it’s easier to live below your means. Chris Reining, a self-made millionaire who retired at age 37, draws only 2% from his investment accounts a year (half of the recommended 4% one should expect to draw when financially independent) – but that’s because he’s able to live frugally in Madison, Wisconsin. Location also plays a role in taxes, depending on what kind of accounts you have money in.
“If all your money is in IRAs and 401(k)s, not only will you pay state and federal income tax when you take it out to pay your bills – after all , it has never been taxed – but you may also pay a 10% penalty for premature withdrawals (under age 59 and a half),” Mari Adam, a certified financial planner based in Florida who founded Adam Financial Associates, told Business Insider.
Keep in mind, nine states don’t have state income taxes.
Adam recommends keeping an even balance between savings in retirement accounts like IRAs and 401(k)s, tax-free growth accounts like Roths, and already-been-taxed accounts like individual brokerage accounts.
The potential for investment growth and passive income
Just because you’ve retired early doesn’t mean you’ll never see cash flow again. You can save enough knowing there’s still room for your savings to grow through investments and lucrative hobbies.
Justin McCurry, who retired early at 33 with an investment portfolio $1.3 million, brings in some monthly income through his blog, Root of Good. Coupled with strategic investments, his portfolio has since grown to more than $1.7 million over five years.
McCurry is not the only early retiree to earn money from a blog after leaving the corporate world. J.P. Livingston, who retired early at age 28 with a nest egg of more than $2 million, was surprised to learn she could still bring in income after retiring early.
She runs the personal-finance blog The Money Habit; after its first year, it made more than $62,000 in passive income through affiliate commissions and ads.
“I ended up getting active again with different hobbies and projects,” she previously told Business Insider. “Eventually, one or more of those projects yielded income. It’s hard to be awake for 60-plus hours a week and not find a single enjoyable way to earn some money.”