People claiming to beat the stock market will come and go. While I have dreams of early retirement, beating the indexes by picking individual stocks is not how I plan to get there. I plan to do three simple things:
- Reduce My Expenses
- Increase My Income
- Invest Aggressively
I often talk about my desire to increase my income, and especially doing this through passive investments, but an equally important aspect of early retirement is minimizing your expenses. In fact, it’s just as important as increasing your income because someone can increase their income and be further behind in their retirement goals if they spend more money than they earn. Having mandatory expenses that are high is one way to delay your retirement as you need more money to retire.
A great way to accomplish two of my three simple steps to early retirement is to buy a home. Home ownership is one of the best ways to build wealth and lower your future expenses. If you are debating between renting and owning a home (like I did a little while ago) and you’re determined to achieve early retirement, home ownership is the perfect tool to expedite the process.
Why Home Ownership Helps You Achieve Early Retirement
I know some of you are probably thinking something like, “How can going into debt help you retire early?” I know that was my first reaction. While on the surface it may seem to delay your retirement, it actually speeds it up. The first and most important reason that it helps you towards retirement is because you not only get a liability (mortgage) with buying a home, but you also get an asset – something that holds value. So, while you may have a loan, you also have an asset that is worth as much as, if not more than the mortgage. The trick to retiring early is accumulating assets and doing it fast.
In addition to obtaining something of value, it’s also something that will hold more value over time. As you pay your mortgage off, your net worth from your home increases. You owe less money and the value of the house either stays the same or increases with time. The best part is that you would have been spending almost as much in rent as you would on your mortgage. So, instead of throwing money away, you are investing it in your house.
Most importantly, owning a home is a great way to achieve early retirement because once you pay off your home, you significantly reduce your monthly expenses. Instead of paying X amount in rent or a mortgage, in your post-mortgage days, you have significantly less expenses. This means that you need less income each year and even more importantly, a smaller nest egg. For example, if you reduce your annual expenses by $12,000 each year (assuming a $1,000 mortgage), this means that you need $300,000 less in your nest egg (assuming a 4% withdrawal rate). That’s a pretty hefty chunk of change.
Ongoing Expenses with Home Ownership
While this will lower your housing expenses, it’s not to confuse home ownership with free housing in your retirement years. There are plenty of on-going expenses even after your mortgage:
- Maintenance – The thing that will cripple the financially unprepared will continue in your retirement years. Homes need regular upkeep. It’s as simple as that.
- Taxes – Unless you know someone or something that I don’t, you will still have to pay property taxes. Depending on where you live, this can be very marginal, but it’s still something to consider.
- Home Insurance – When you own your own home outright, house insurance is not something to skimp on. It can not only put you in a bad financial position, but may force you to go back to work.
While it’s not free, home ownership offers individuals and families a fast track to retirement. If you are considering buying your own home, think about how it will help you in retirement. It’s not the only part of the early retirement equation, but it’s an integral part.