Trading as a Means to Early Retirement

What is the meaning of life, and what is the point of it all?

Two questions posed by author Tim Ferris in The 4-Hr Work Week.

The answer; it doesn’t really matter. We’d be better off asking what do you want to achieve in your life, and what kind of lifestyle do you want to live?

If asked what we are each working towards, most would respond with “retirement.” But how do we get there without slaving away in a job we don’t like living 30+ years of our life in misery?

Let’s start by defining “retirement.”

Two Very Different Outlooks on Life

Depending on your generation, your viewpoint on retirement may vary greatly.

If you ask someone born pre 1980 they will likely see retirement as the last stage in life in the far off, distant future. This will be a time when they can actually start living the life they want and doing the things they enjoy.

If you ask someone born post 1980 (currently in their 20s or 30s) their outlook on retirement will likely be much different. At 26, I’m in this category. “We” realize that the likelihood of programs such as pensions and social security are a thing of the past and have decided to take measures into our own hands.

This starts with taking control of our finances and structuring our own path to financial freedom. It also means that we don’t want to work in a career we hate and save it all till the end.

Instead, we wish to spread “traditional” retirement type experiences throughout our lives, working smart, instead of just hard.

It’s all about having a work/life balance and starts with working in a career we enjoy. I exercise the saying, “Do what you love because you’ll be better at it.” Working smart, creating passive income streams and taking control of our own retirement are some of the ideals that makes up this new age generation.

Begin With the End in Mind

The career of a post college graduate of the 20th century looks nothing like that of the past 50 years. More and more people are taking the plunge and starting their own businesses. As a trader you fall into this category.

Trading is not the end in itself. It is simply a means for generating an income. The difference between trading and working a typical 9-5 job is that you can leverage your assets to do more with less. It’s an opportunity like none other.

3 Questions to Get Yourself on the Right Track

Maybe you’re a manager at a large corporation with a wife and kids at home with a brokerage account, trading stocks like Apple and Google around earnings looking for a quick pop. Perhaps you work in IT as an engineer and are enthralled with the technical aspects of day trading. Either way, ask yourself the following 3 questions…

  • Can I handle being wrong and losing money in the short term in order to make money in the long term?
  • Can I adhere to a routine and accept that I will make mistakes?
  • Can I handle rejection and criticism; go against the grain, and ignore the opinions of others?

We all play the game to make money, that’s for certain. Those who succeed can handle these aspects that are incorporated in everyday trading decisions. Let’s now look at how trading fits into the bigger picture.

What’s Your #?

If your goal is to live off your assets via passive income how much do you need? Start by taking your yearly expenses x 25. This number would allow for a 4% withdrawal rate per year. If you’d like a more conservative estimate take your yearly expenses x 33 for a 3% w/d rate per year.

Now that you have that number you can do two things, increase your income or decrease your expenses, or both.

Tips for Decreasing Your Expenses

Take a good look at what you spend your money on each month. As the saying goes, “what you track gets measured,” so if you don’t currently do so, track your spending. There are a lot of tools out there such as or using the online tools through your bank, but I just setup a simple excel spreadsheet.

The more you can shrink your monthly expenses the smaller your total asset base needs to be to live off of. Look at it this way; to fund a $50/month expense you would need to amass a sum of $15,000 to be able to pay for that passively for the rest of your life.

Is that cable TV + movie package really worth it? Could you cancel cable and just get Netflix? Not only does reducing your monthly expense lower your total dollar figure on which you can live off passively, but if you’re income remains the same you can save more and reach retirement sooner.

If you are trading full-time (or are thinking about making the switch) not having a huge stack of bills to each month reduces the psychological stress and pressure of forcing yourself to make trades and having to make money to pay the bills.

Become Your Own Hedge Fund Manager

As a trader, consider yourself a private money manager. You’re in charge of your own little hedge fund and the sole investor is you.

Make your goal in trading to be as consistent as possible. You want to be able to depend on your trading for income, not hope that XYZ stock that you just bought before earnings spikes just so you can pay your mortgage this month.

Break your assets up into chunks and always keep your trading account separate from you’re your retirement accounts. Each account serves a purpose so determine a goal for each.

Assuming you already work some sort of part or full-time job in addition to trading, it’s likely you do not need to pay the bills just yet from your trading account.

That being said, try to cut your expenses by 10% next month, and by 10% the month after that. Do so until your monthly expenses are equal to half of your monthly income (trust me it can be done). Just look at people like Jacob from Early Retirement Extreme, or Mr. Money Mustache for example.

Living Off Your Trading Income

Once you have your expenses under control you’ll have plenty of extra savings to contribute towards investments. It’s important to keep your trading size small enough where you can manage your positions with a clear and objective mind and sleep comfortably at night (as your total net worth grows this will become easier to do).

Next, narrow your focus to one strategy and market. Master one thing at a time before moving on. Set risk measures before you even place a trade. Know how much you are willing to risk losing per day and per week.

As time goes on you will become more confident in your abilities and you can begin to increase your size to the point where your monthly trading profits equal and exceed that of your monthly expenses.

Trading is a fantastic teacher of life’s greatest lessons. Allow the trading process to integrate into your current lifestyle, and then make small changes towards the lifestyle you want to live. Work to apply the principles learned from trading to all aspects of your life.

Some of the lessons trading has taught me are how to assess risk/reward of an idea, how to detach myself from the emotions of winning and losing money, and most important how to spot good opportunities when they arise.

Design Your Own “Retirement”

You have the power to design your own path to retirement. As Tim Ferris puts it, “People don’t want to be millionaires they want to experience what they feel millions can buy.” I add to that, that financial freedom does not need to be a long and distant dream. I bet your # is smaller than you think.

There are many opportunities for us to decrease our spending on useless products that will end up on our closet shelves while at the same time putting our mind to good use and earning a few extra dollars each month.

Start by putting yourself in the right frame of mind. Don’t look at trading as a way to make a quick buck. Invest in your future and commit to be a student of your craft for life.

Trading can be a great way to generate additional income. However, if you do as the majority does, you can expect to end up with average results. You must think like the minority in order to succeed.

To quote Jacob from the Early Retirement Extreme blog, “I think going forward we will no longer be dividing people into “the young ones who work” and “the old ones who are retired.” We will be dividing people into “those who are financially independent and who choose whether to work” and “those who are not financially independent and who must work.”

Concentrate on the larger goal, to build an asset base to live off of. In this way trading is simply a means to early retirement.

by Tim Racette of