Guest Post: northSaver’s Story part 3

This is a guest post (3 of 5) from a member of the retirejapan community. You can find northSaver on the forum.

Part 1: What is Early Retirement? 
Part 2: Laying the Foundation

In the second article I wrote about what we did to prepare for normal retirement, and in this one I’ll write about how we’re planning to achieve early retirement. Just to recap, early retirement for me means having to work only two or three days a week until normal retirement age, by which time pensions and additional savings will allow us to stop working completely (if we want to).

The idea of early retirement was first brought to my attention by Ben, the owner of this blog. On his teaching blog, he mentioned a great book he’d read called “Millionaire Teacher”, by Andrew Hallam, so my wife and I read it too. The seed was planted. Then, in a later post, he recommended a blog written by a Canadian early-retiree, now living in the US, called “Mr Money Mustache”. I’ve since read most of Mr Money Mustache’s posts from start to finish and I entirely agree with Ben about how inspirational this blog is. It’s nothing short of life-changing!

The principles of early retirement are simple:

1. Estimate how much money your monthly living expenses will be in retirement (and be realistic – if you plan on travelling a lot when you retire, for instance, then include those costs too) – e.g. ¥330,000.
2. Calculate how much money you will need to save in order to meet these costs (assume that you can safely withdraw 4% of your savings each year without lowering them) – e.g. ¥330,000 x 12 = ¥3,960,000 per year; ¥3,960,000 / 0.04 = approx ¥100,000,000).
3. Save the money and then retire.

Wait a minute! ¥100,000,000 (ichi oku en), which is about one million US dollars, is a huge amount of money! Do you really need to save a million dollars in order to retire? Well, the good news is that you’ll only need to save a huge stash like this if you meet all of the following conditions:

a) you don’t expect to receive any state or company pensions at normal retirement age
b) you don’t expect to receive any income from your retirement activities
c) you don’t expect to receive any other kind of income, such as inheritance money
d) you don’t want to invest in things which might earn more than 4% after inflation, such as property
e) you don’t want to lower your expenses for some of your retirement by living in a cheaper country
f) you want to leave the entire $1,000,000 to your children when you pass away

If you are willing to bend some of these requirements then the amount of money you’ll need to save will be lower… possibly much lower. Go ahead and calculate how much you’ll need to save for your retirement scenario.

I personally won’t be saving a million dollars before I retire. I can’t wait that long! But if you do want to satisfy all of the above conditions and save a million dollars, won’t this be impossible for anyone on a normal salary? Not at all! It will probably take a long time, depending on your income level, and you will need to make some spending sacrifices which could be painful at first, but which will ultimately enrich your life. But the method is simple:

1. Reduce your monthly living expenses as much as you can (this will automatically increase your monthly savings).
2. Eliminate high-interest debt as fast as you can. 
3. Invest your savings wisely.

In the next article we’ll examine these points in closer detail and I’ll explain what I’m doing to achieve them here in Japan.