How to Retire Early: Reach Early Retirement in 7 Simple Steps
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What if you could go to work tomorrow, give your boss two weeks’ notice, and then never work a job again after that?
It may seem farfetched, like a scene out of a movie. The good news is that it’s not. More and more people are learning how to retire early every day.
In fact, there is a huge movement called FIRE — Financial Independence, Retire Early. People are quitting their jobs as young as their 30s, and some are using early retirement to travel the world, start new businesses, or take up new, fun hobbies.
If early retirement is a goal of yours, here are seven steps you can take to get there.
7 Simple Steps to Retire Early
There’s no one way to get to early retirement. However, there are a few steps that will increase your chances of making it to the finish line.
First and foremost, get clear on why you want to retire early. What will it allow you to do? How will retiring early change your life? Your “why” is what will keep you motivated to stick to your plan when things get tough.
Next, decide on the lifestyle you want in retirement, then calculate the number you need to make it happen. Finally, evaluate your current budget and finalize your early retirement plan.
Related: How Much Money Do I Need to Retire?
1. Answer the question “Why?”
Retiring early is not for everyone. Although the FIRE movement has definitely grown in recent years, those who are in it are still in the minority. Most people still believe you have to work at a job for 30+ years, save throughout your life, and retire in your 60s.
If you want to find real ways to retire early, you have to have a strong “why.” You’re going against the grain and doing something different from what society expects. That being said, you have to have a lot of conviction about your choice to pursue early retirement.
The very first step to retiring early is to create a vision. You can even create a vision board or a document with all of your dreams for your future on it. Write down every reason why you want to retire early, why it’s important, and why you want to succeed.
That way, if an unexpected emergency comes up and you have to push back your retirement date, you always have something to refer to so you can remember why you’re on the journey to begin with.
Maybe you hate your job. You want more time with your kids while they’re younger. Maybe you just had a friend or family member pass away too young, and you want to make sure you get to enjoy your life more. Whatever it is, you have to have a strong reason to propel you when things get hard along the way.
Retiring early isn’t easy, but it is possible. Defining your “why” will help keep your motivation high during difficult times.
2. Decide on your retirement lifestyle
Once you have a strong, compelling reason for retiring early, it’s time to envision what those early retirement years will look like. Do you want to live out a frugal retirement dream? Would you rather live out your retirement years in luxury? Do you want to travel all the time? Would you be okay living in an RV, or is flying first class more your speed?
For the record, there isn’t one best way to retire early. Each and every person gets to decide how they want their retirement years to look, what they want to do in retirement, and how much they want to spend.
Keep in mind that retirement doesn’t necessarily have to mean never working again. You might be able to supplement your savings by working part time, which could allow you to leave your job sooner.
Also, many people in the FIRE movement work part time not because they have to, but because some companies offer health insurance to their part-time workers. Thinking outside the box is also a great way to ensure you have the money and insurance you need when you leave your main job.
3. Calculate your retirement number
Once you’ve decided on the type of lifestyle you want in retirement, it’s time to calculate your retirement number — the amount you need in order to really quit your job and consider yourself an early retiree.
This might seem obvious, but the more you want to spend in retirement, the more you have to save. Below are a few different calculators to help you determine your retirement number.
A good rule of thumb when using a retirement calculator is to overestimate what you think you will need in retirement.
For example, if you think you will only spend $60,000 a year in retirement, try plugging in $80,000 a year into the calculator. It’s good to give yourself a little bit of wiggle room to make sure you’re on the right track.
Many of the calculators do take inflation into account, but it’s also a good idea to understand inflation and how it might affect your nest egg in the future.
The 4% rule
Part of calculating your retirement number is understanding your preferred withdrawal rate. This is the percentage of your nest egg that you will withdraw your first year of retirement. Every year after that, you’ll adjust for inflation to determine your withdrawal amount.
In order to calculate your retirement number using the 4% rule, divide your preferred annual income in retirement by 4%. For example, if you need $80,000 per year to live comfortably in retirement, your calculation would be:
$80,000 ÷ .04 = $2,000,000
Based on this rule, you’ll want to aim for $2 million in your portfolio in order to retire.
These days, with people living much longer, some financial advisors even advise a 3% withdrawal rate. The argument for a 3% withdrawal rate is to lessen the chances of retirees running out of money (although this is always a possibility).
The 3% withdrawal rate also helps insulate investors just in case they experience significant market downturns and need time for their portfolio to recover. Still, many people might not be able to live on a 3% withdrawal rate, especially if they don’t have a huge nest egg. That’s why it’s so important to learn how to budget as early as possible in case you need to live on less at some point during your early retirement.
4. Evaluate your current budget
If you’ve never had a budget before, now is a great time to start.
There’s nothing like the goal of early retirement to encourage you to sit down and really look at your numbers. The vast majority of people who retire early are excellent with money and budgeting, so this is a skill you should aim to master.
If you primarily use debit and credit cards for your spending, you can use spending trackers and budgeting apps like You Need a Budget and Personal Capital. Many people also love using the Mint app. If you’re more of a cash envelopes type of person, that’s great too. Just make sure to keep excellent records and upload your numbers to your computer so you can refer to them often.
Of course, knowing where your money is going is only part of the equation. It’s also important to analyze your expenses, especially those that take up the largest part of your paycheck. Do you live in an affordable home? Does your car take up a hefty portion of your paycheck? Do you eat out every day of the week?
For the record, having a nice home, a nice car, and going out to eat aren’t bad things, especially if you can afford them with room to spare. However, if your goal is early retirement, these are the categories where many people cut back in order to make their dreams of retiring early a reality.
If your large mortgage payment is preventing you from quitting your job, it might be time to consider downsizing. If your car payment is $500 a month, it might make sense to shop around for a less expensive car.
When it comes to retiring, the fewer expenses you have, the better. If you can make a plan to pay off your debt, reduce your bills, and live more simply prior to retiring, you can get to your dream of early retirement a lot quicker.
5. Avoid lifestyle inflation
Lifestyle inflation is the natural human tendency to spend more money as income increases. You get a bonus, so you buy a new pair of shoes. You land a new job and can finally afford a bigger apartment.
There’s nothing wrong with buying quality or luxury items. However, if you’re reading this because you want to quit your job as early as possible, then be mindful not to let lifestyle inflation eat away at your retirement savings.
When it comes down to it, there’s really no price on having autonomy in your life. There’s no house or car that’s better than getting to decide what you do all day every day.
Even if you can afford the finer things in life and you still have money left over, take the time to evaluate what you really want anyway. You might find that buying less and saving more of what you earn is the key to retiring as early as you hope.
6. Invest wisely
There are many different ways to invest. If you’re new to it all, the information that’s available about investing can get confusing.
For example, you might see someone who retired early because they own 10 cash-generating income properties and think that’s the best way to retire early. Someone else might have built a business and sold it for half a million dollars, resulting in early retirement.
Then there are those who simply invested in conservative index funds for many, many years, lived frugally, and paid off their house, which allowed them to retire early and live on smaller savings.
The truth is, there are many ways to invest wisely, and you have to find what works for you. Generally, investing is about the long game. Therefore, you should be wary of any company or person who promises you quick investing income.
Many financial experts also frown upon owning lots of individual stocks. Instead, famous investors like Warren Buffett recommend buying low-cost index funds, like an S&P 500 fund, as the preferred way to reach your retirement goals.
Diversification is important too. For example, you could have a mixture of cash, bonds, index funds, and real estate in your retirement portfolio. What you might want to avoid is an entire retirement portfolio made up of only tech stocks.
Essentially, find a balance between riskier investments and more conservative ones. The closer you get to retirement, the more conservative you might want to be.
7. Be prepared for failures
There are many multi-millionaires and billionaires who add to their fortune by owning equity in various companies, investing in startups, buying sports teams, and more. Anything is possible when it comes to investing. After all, Mark Cuban started out as normal as the rest of us. However, each and every famous investor has also lost money investing in companies that failed.
I’ve known friends who have invested in restaurants and failed with millions in debt. I even know people personally who invested hundreds of thousands of dollars in themselves by going to medical school. After graduating, they weren’t able to secure a residency due to failed board exam scores.
At the end of the day, the most straightforward way to invest wisely in your future is to learn as much as you can about investing. Then make an educated choice to decide how you want to invest your own money. You can also seek the advice of a financial advisor. If you go this route, be sure to understand the fees involved and how they might impact your retirement goals.
It’s also important to educate yourself about the different types of retirement accounts, taxes, and more, so you can make sure to keep as much of your own money as possible before and during retirement.
If, somewhere along the way, you want to diversify by investing in a company, starting a business yourself, or doing something out of the ordinary, make sure you have a solid nest egg just in case things go south.
Bonus tip: Have a backup plan
Life doesn’t always go according to plan. Things happen that we can’t always control. It’s good to prepare for those moments financially and to know things could come up that will delay or prevent you from retiring early.
To give an example, my family experienced Hurricane Katrina firsthand. My parents had a business they’d built from the ground up for 20 years. The aftermath of the storm meant huge business losses, and Katrina came the same week I started college.
Almost 14 years later, my parents have (mostly) recovered, but the storm derailed many of the lifelong plans and dreams for their business and their future, including the home they thought they’d retire in.
For the record, it’s good to look at the world with a positive, abundant mindset. I’m not advocating that people hoard their money in fear of what’s to come. However, it is important to be realistic.
Experiencing Katrina showed me that I needed to save more money. My projections for the future need to have space for bumps along the way. I have no idea if one of my children will become ill or if they will have a child someday that will require financial help. It’s hard to predict what will happen, so be open and flexible to a change of plans.
You could retire and then ten years later decide to go back to work or pick up a part-time job. You might decide to go back to school, or your spouse may decide to start a new business that would require significant financial backing.
Part of planning, dreaming, and budgeting for early retirement is keeping in mind that a change of plans could happen. You have to be comfortable, yet prepared, for the unknown.
Reaching Early Retirement Takes Work
If early retirement were easily achievable, there would be a lot of 40-year-olds picking up their kids from school at 2:30 pm because they don’t have to work anymore. Unfortunately, retiring early isn’t that simple.
The hardest part about retiring early isn’t necessarily the math, the budgeting, or calculating your withdrawal rate. The challenging part is going against societal norms, having to listen to people say you’re crazy, and trying to explain your plans to friends and family who don’t think another way to live is really possible.
When you’re constantly faced with backlash or doubt, it can be hard to stick to your plans. However, the great news is that the FIRE community is growing and full of people who have accomplished this goal and willingly share their advice.
If retiring early is something you want to do, start with the steps above. Tackle them one at a time. Be confident in your plan, and work hard to achieve it. The road to early retirement is full of unexpected twists and turns, but it might just be the greatest decision you ever make.