Are you looking for how to retire early? Welcome to the financial independence, retire early (or FIRE) movement!
When it comes time for your early retirement, there is no better feeling than knowing that all of your hard work has paid off, and now it’s time to relax and enjoy life!
This guide will help you get your retirement plans on track so that you can retire earlier than the standard retirement age. We’ll show you how to make the most of your financial situation and give you tips on how to save more than ever before.
How To Retire Early
Table of Contents
Step 1: Define YOUR Retirement
It’s essential to define your goals and decide what early retirement looks like for you.
- What are your dreams and aspirations?
- At what age do you want to retire?
- What do you want to do with your free time?
Don’t let the traditional views of retirement be the only options you consider. If you don’t want to travel the country in an RV or move to Florida and golf all day, you don’t have to!
You could settle down in Italy and make wine for fun or move near family to spend more time with your loved ones.
You can even keep your lifestyle pretty much the same, just without 40 (or more) hours of work per week! Retirement will give you more time for your hobbies and personal relationships.
Once you have a clear vision of what life after work looks like, it will be easier to prepare for personal finance.
Step 2: Figure Out Your Finances
It’s essential to take stock of where you are financially right now, so you can chart a path to financial independence and create a financial plan to have everything on track for retirement.
First, figure out your net worth and how far away you are from your goal. Your net worth is composed of your assets minus your liabilities.
Assets are things like cars, houses, and investments. Liabilities are things like credit card debt, student loans, and mortgages.
It’s also helpful to calculate your annual income and expenses, create a budget, and find your savings rate (the percentage of your income you save each year).
Knowing what your expenses are now is key for figuring out your expenses in your retired years. Financial projections may seem complicated, but a few products track your budget and calculate your net worth quickly.
- Personal Capital is a great financial product for tracking your investments and net worth- it’s essentially an online financial advisor.
- Quicken is a budget software that can create detailed reports. It’s a product that’s been around since 1983, ranking as one of the best software you can buy!
Now that you know where you stand financially, you can figure out how much you need later.
Step 3: How Much Money?
The next step is to crunch the numbers and see how big your retirement nest egg must be. A clear picture of what you’ll spend during retirement is important for your financial decisions now.
This begins with knowing your annual expenses during retirement, and how long you plan to be retired. You will also need to consider inflation when deciding how much money you should save!
In personal finance circles, you may hear the terms “Lean FIRE” or “Fat FIRE” to describe how large someone’s retirement savings are.
Standard FIRE devotees often cite the 4% rule of thumb when deciding how much to save for early retirement, by suggesting you multiply your expected annual expenses by 25 to determine your investment savings target.
Taking inflation into account, 4% is the amount of your invested retirement savings you can safely withdraw without decreasing your nest egg.
A more conservative approach would be to calculate a 3% withdrawal rate so your principal investments are still safe even when your investment returns are lower or inflation is higher.
Another important factor to consider is how much you will be receiving from social security. You can estimate your future benefits by visiting the Social Security Administration website and entering your name, birth date, and social security number into the Retirement Benefits Estimator.
Step 4: Create A Plan
Now that you have a better idea of what your financial reality is, it’s time to create an early retirement plan! Check out financial tools like cFIREsim to find out what your retirement date looks like based on different saving and investing habits.
If you are far away from your retirement savings goal, you may be able to retire sooner if you adjust your spending habits and save more each year. Or you may want to take more risk in your investment accounts!
Your plan should also include what types of investments you will make and when you will start to withdraw money.
The other major consideration for most people is what health coverage will cost. Health insurance is an expense that can throw a wrench into early retirees’ plans if it is underestimated or forgotten.
You can visit the Affordable Care Act marketplace at healthcare.gov to estimate your future health care expenses, but remember that costs may change. If you have a pre-existing condition you will also want to look into the costs for private insurance and factor that into your budget.
Step 5: Consider Meeting A Financial Advisor
If you feel like you need help creating a plan to retire early, then you should consider meeting with a financial advisor. This is also a good idea if you want to learn more about investing.
Not all advisors are the same, so it’s important to interview them and find out what they can do for you. A certified financial planner (CFP) is legally obligated by fiduciary responsibility to give you investment advice that is in your best interest.
Not all financial advisors are CFPs, so be aware of that distinction when you are finding someone to work with. And always ask questions to make sure you understand the recommendations your advisor is giving you.
Step 6: Invest ASAP
However you decide to go about it, putting aside money in retirement accounts is extremely important if you want to retire early!
Don’t procrastinate when it comes to investing – invest your first $1,000 now and watch your investments get better with age! The longer you wait to start investing, the fewer years your investment has to compound.
The best thing that you can do is educate yourself on your investment options. You should diversify your portfolio to protect it from volatility in the stock market.
You can invest in tax-advantaged accounts such as a 401 k, Roth IRA, or traditional IRA to get a tax deduction so you can invest more. A 401 k is typically offered through an employer and you can open your own IRA.
Use the Acorns app to automatically invest in your IRA, it’s great for hands-off investing and can invest in small increments rather than big money!
When you’ve maxed out tax-advantaged retirement accounts, you can invest in a taxable brokerage account. We recommend investing in low-cost index funds so you don’t lose money to fees.
Here are some places you can use for smart investing:
- WeBull is an investing platform that will give you a free stock to get started.
- Betterment is a robo-advisor that will help you make smart investment choices.
- M1 Finance is a more advanced platform with no fees.
Step 7: Frugal Living
Retiring early requires being frugal in order to reach financial freedom.
In order to get ahead financially and save up over time, you’ll need to learn how to be frugal and wise with money. If you’re strategic about your spending habits, it can lead you towards a better future.
Simplifying your finances (and simplifying your life) can reduce stress too! Look at what you spend your money on each month and question whether or not you can live without a few things.
Do you eat out every day because it’s easier than cooking for yourself? Can you get rid of cable or other media subscriptions that are just wasting money month after month?
Living frugally isn’t about depriving yourself of things that you want, it’s about spending wisely. You should always ask yourself if an item is necessary before buying it.
You can also use the Honey extension when shopping online to automatically apply coupons for effortless savings. Plus earn cash back at the grocery store with the Ibotta app on your phone.
Step 8: Spend Less- No Lifestyle Inflation!
When you start making more money, it’s easy to get caught up in lifestyle inflation, and buying the things that you couldn’t before.
Instead of spending more as you earn more, save more money as you earn more!!
One way to avoid lifestyle inflation is to pretend as if your income hasn’t increased at all. If you could live comfortably on the salary that you had before the raise, then there’s no need to spend more money once you have it.
Another way to keep your spending under control is to create a budget and stick to it. Mint is a great free tool for creating and following a budget.
When you have a set budget, you are less likely to overspend on things that you don’t need. It can be hard at first, but it gets easier with time.
Step 9: Generate Passive Income
Building up passive income from your investment portfolio or other sources is how you can eventually retire. The faster you do this, the earlier you can start retirement!
Earned income is money you trade your time for, including pay from your job and side hustle. Passive income is automatic and doesn’t require any of your time beyond a small initial investment.
Getting a part-time job or starting a side hustle is a great way to earn extra income so you can save money. However, this is not always sustainable because there are only so many hours in a day that you can work and still focus on your well-being!
In order to save enough to retire early, you should focus on building up passive income streams. This is money that keeps coming in whether or not you work a traditional job.
Some income streams take time initially, but over time you don’t need to put in hours to make money. You can also sell printables or stickers, online courses, or even start a blog! But the best way to do this is through investing.
Real estate investing is a popular passive income stream for people who want to retire early. Your renters pay the mortgage and also provide you with retirement income.
Step 10: Stick To It, But Be Flexible
Sticking to your plan is important, but you also have to be flexible. Things don’t always go as planned, and that’s okay.
If something changes in your income or investments, you need to be able to adjust your plan so it still works. This might mean delaying retirement, reducing expenses so you can save more, or finding a higher-paying job.
Planning for retirement takes time and is an ongoing process that needs to be monitored frequently. You should schedule regular check-ins to make sure you are on track to reach your goals.
Retirement planning is an ongoing process, and it’s important to be flexible and adapt as your needs change.
Final Thoughts
Take personal finance and retirement into your own hands and you can be retired well before the standard retirement age of 65!
Retiring early is a goal that many people strive for, but few achieve. The key to reaching this goal is being strategic about your spending habits and building up your savings and passive income streams.
Having a plan will keep you on track as you work towards early retirement! This requires setting a budget and sticking to it, as well as making wise investment choices. Plus, make sure to avoid common retirement mistakes.
Retiring early can be intimidating because you are responsible for your own money and your future. But if you plan carefully and use the right tools, you can live frugally and retire early without sacrificing the things that make life worth living.