How important is it for people to have a written retirement plan, in your opinion?
It doesn’t matter to me if it’s written, verbal or mental. But I do encourage people to open their minds to how real and possible an early retirement can be. It isn’t a vague, fluffy concept like, “someday,” “never” or “when I’m 65.” Retirement (or financial independence) simply means that you have your living expenses covered by nonwork income. In the worst case, this requires 25 to 30 times your annual spending, socked away into investments. If you’re eligible for a pension or Social Security, it’s even easier.
Do you work with a financial planner or manage your finances on your own?
I have always enjoyed managing my own finances. On the blog, I maintain a good-natured battle with the financial-planning industry in general, because they focus too much on retiring at a very old age with many millions in savings — just so you can continue to spend $100,000 a year until you die. It is much more efficient to get a handle on your materialism and spending so you can live more happily on a fraction of that amount, which can shave 20 years or more from the time you need to keep commuting in to that office.
How crucial is it, in your opinion, for people to have a monthly or annual spending plan or budget?
This really depends on your personality type. I’ve never had a spending plan or a budget at any point in my own life. Instead, it was a simple set of values to apply just before I make any purchase or commit to any expense: “Is this the best possible use for this chunk of money, if my goal is creating lifelong happiness for myself?”
Since I valued freedom and financial strength, this automatically ruled out quite a few purchases. For example, as a young man I was a major car enthusiast. But I didn’t run out to borrow money to buy an Acura NSX, because I valued having that money for other things more than I valued a fancy car. Nowadays I can finally afford a car like that without even borrowing, but I am happy to discover that the desire has disappeared.
Some people might think so much cost-cutting is akin to living like Scrooge and not having any fun. How would you respond to that?
If you tell yourself that is how it will be, then you will create your own truth and life will not be fun. But if you understand the fundamentals of what it means to be a happy person, you realize that buying more stuff for yourself has no relationship at all to how happy you are. These fundamentals include things like close relationships with other people, health, rewarding work, a chance to be creative and help others.
Work on those things and you’ll start living a much better life immediately, and soon wonder where the odd compulsion to own a yacht with a submarine came from in your old self.
Surveys suggest there are a lot of people out there who are worried about retiring, who don’t have enough money saved, who feel like they may never retire. Can you offer people in that situation any words of advice in terms of how to turn their situation around?
The quickest way to turn things around is to realize that you are in much more control than you realize. The time to reach retirement depends on only one thing: your savings rate as a percentage of your take-home pay. And this depends entirely on how much you spend. So the moment you can learn to live a less expensive life, suddenly the clouds clear up and the financial picture brightens considerably.
Andrea Coombes is a personal-finance writer and editor in San Francisco. She's on Twitter @andreacoombes. This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2014 Dow Jones & Co. Inc. All rights reserved.