I funded my retirement with a gap year: 12 solid months without fine dining, socializing, or vacationing, during which I focused only on accumulating a solid base of retirement cash. 

By Colette Coleman
May 10, 2021
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I've always believed in ripping off a Band-Aid quickly, in one clean motion. In all areas of life, I find that short-term pain is preferable to longer-lasting discomfort, even if it's less severe. That's why I opted to fund my retirement with a post-college savings gap year, financed by 12 solid months without fine dining, socializing, or vacationing—focused only on accumulating a solid base of cash for my retirement

Soon after I graduated from college, I moved cross-country to Los Angeles. Although I was earning an entry-level teacher's salary, which wasn't much, I set myself up in a beachside bungalow. I reasoned that there was no point of moving to a place with 300 days of sunshine if I didn't have a beach as my backyard. I bought a car (because how else would I get around?) and went out often (as a new transplant, I needed to socialize and make friends, I rationalized). With this lifestyle, my days were full, but my bank account was empty. 

"Do you even have a savings account?" one of my older colleagues asked me one day as we chatted about money. He already knew the answer, but wanted to make a point. 

"You should really put away as much as you can for retirement now, while you're young. It's a lot harder when you start later," another elder chimed in. 

At the time, my financial IQ was close to zero, but I knew that they were probably right. Although I wasn't willing to move inland, sell my car, or live like a hermit, I knew that I didn't want to end up having to work throughout my golden years in order to financially survive. 

I also knew peers who were not much older than me had savings, and even assets. If they could do it, why couldn't I? 

Of course, some of my same-aged friends were financially set because of luck; they had trust funds or inheritances to supplement their meager savings and earnings. But others had already placed themselves on the path to a very comfortable retirement through their own hard work and sacrifice. They brown-bagged their lunches, only bought drinks at happy hour, and—perhaps most important of all—they moved back in with their parents.  

In Los Angeles, the median price of a one-bedroom apartment is $1,960. This means that retreating back to Mom and Dad's could mean nearly $25K in savings a year. Though returning to a childhood bedroom and its tiny twin bed didn't sound like the most fun time, to me, it did sound smart—at least as a temporary measure. I envied friends who had this option. 

I couldn't move back home. But I was still dead-set on finding a way to get comparable savings in a year's time. My solution? A new job. It wouldn't pay tens of thousands of dollars more than my gig at the time—but it would still net me that much savings overall. That's because it was an all-expenses-paid, low-tax teaching position abroad.  

When I was leaving high school, taking a gap year before college wasn't as common as it is today. But now, post-college, I felt that I was getting a second chance at one. And those 12 months abroad—as an adult—wouldn't only open my mind to a new part of the world and way of life; they would also give me a strong savings start. 

My new job, at an international school in Indonesia, paid very well by local standards and modestly by American ones. But I didn't owe federal taxes, and my housing and transportation were paid for. My only expenses were food and entertainment, both of which were about a tenth of the price of what I was used to in L.A. 

My savings gap year was everything that I had hoped for and more. Budget airlines and bunkbeds in hostels allowed me even to travel around Southeast Asia and still save massively. As my paychecks came in, I invested them in index funds. Financially savvy friends had recommended Vanguard options because of their low fees; others warned me about getting into the stock market, spouting scary 2008 financial crisis anecdotes. But I knew I needed to invest in something, so that inflation didn't eat away at the value of my fast-accumulating cash.

The beauty of investing, and especially in your 20s, is compound interest. This principle translates to consistent investments, even of small sums, that over long periods of time transform into surprisingly large lots. "Compound interest is the eighth wonder of the world," Albert Einstein reportedly said. "He who understands it, earns it; he who doesn't, pays it."  

Given that I didn't want a slow-Band-Aid-peel-style savings experience of feeling the pain of sacrificing dinners out and prime real estate throughout decades of work, the savings gap year made sense for me. By starting my retirement savings journey with a five-figure investment, thanks to my 12 months of super-saving, I was able to contribute less each month after that—and still be on track for a million-dollar-plus retirement lump sum in my 60s.  

If a 20-something starts with nothing, and then invests $600 a month and gets a 7 percent annual return for 40 years, they should have about $1.4 million dollars at retirement age. That's a great plan if you can financially (and mentally) spare the six Benjamins and what they could buy. Alternatively, if you rip the Band-Aid off and sacrifice an entire year (or two) living frugally abroad—or on a budget at home with your parents—you might be able to then start with an initial investment of $45,000. Then you would only have to contribute half as much each month ($300) for the same amount of time to get to that same $1.4 million place.   

$1.4 million is just an example, though. Depending on your current salary, desired retirement lifestyle, and expected supplemental income, such as real estate investments or Social Security, the goal that you need to hit might be higher or lower. Knowing how much you'll need is crucial to determining how long your gap "year" should be—and how much you'll need to contribute each month after it. If you aspire to retire young, the FIRE movement's approach of extended austerity for quicker financial independence might be right for you. 

It has been a while since my year of saving, and I can already see the fruits of my labor. The market rose about 14 percent over the past decade, and my investments are up. But this is a long game. There's still a portion of my pay that I never see; it goes straight to my retirement. Luckily, though, thanks to my gap-year savings head start, it's an amount that's small enough, I don't even miss it.