Traditionally, most Americans worked until they were in their mid-sixties and then retired with a pension as well as their own savings. These days, pensions are not nearly as common as they once were. And increasingly, more Americans are interested in retiring early and don’t want to wait until age 65.
For many people, the idea of early retirement sounds wonderful but unrealistic. You may love the idea of retiring early and having more time to pursue hobbies and do the things you enjoy. But you also don’t see a realistic way to make this happen.
If you can relate to this sentiment, I have both good and bad news for you. The good news is, early retirement is much more possible than you may think. The bad news is, it takes a lot of planning and financial discipline to get there.
7 Steps to Retire Early
As with any goal in life, the best way to pursue early retirement is to develop a plan and begin taking action. If you want to retire early, here are seven steps you can take:
1. Define what it means to retire early
Early retirement is a somewhat vague concept and will mean different things to different people. To some people, “early retirement” may mean age 35, and to others, it may mean age 55.
Some people may want to stop working altogether, and other people may want to simply work less. The point is, you need to identify what your goals are right from the start.
Spend some time thinking about what your ideal retirement lifestyle would look like. Do you want to quit your job and travel full-time? Or are you hoping to quit your corporate job and find a side hustle that’s more fulfilling?
Once you’ve defined what it means to retire early, you can take stock of where you’re currently at. You should take some time to evaluate your net worth, your current spending levels, and how much debt you have.
2. Figure out your retirement number
Now that you know what your goals are and where you’re currently at financially, you need to come up with your retirement number. This is the amount of money you’ll need to have in savings in order to retire comfortably.
This number will be slightly different for everyone, but in general, it’s a good idea to save about 30 times as much as your annual expenses. From there, you can break this down into monthly savings goals.
Of course, there are a variety of factors that can affect your ideal retirement number. For instance, if a recession hits that will certainly affect your retirement accounts. And you’ll need to plan on the cost of inflation.
If you’re having trouble figuring out how much money you’ll need, it can be a good idea to work with a financial planner. They can help you figure out what you’ll need and how to get there.
3. Cut back on your expenses
It’s going to be very difficult for you to reach your retirement goals if you spend more than you earn. Once you know how much you need to save, you need to take a good look at your budget and identify any areas where you can cut back.
The areas that will give you the biggest bang for your buck are food, housing, and transportation. If you can eliminate your need for a vehicle, you could save yourself a lot of money in car payments, gas, and yearly maintenance.
You can save yourself a lot of money by skipping takeout and choosing to make your own food at home. And you can save money on housing costs by living below your means or paying off your mortgage early, which we’ll discuss in more detail below.
4. Diversify your income streams
At the end of the day, there’s only going to be so much you can cut from your budget. So one of the best ways to meet your savings goals faster is by finding additional ways to make money.
The options for making extra money with a side hustle are endless. And many people are able to grow their side hustles to the point where it exceeds the income they make from their full-time job.
And by diversifying your income streams, you protect yourself financially and give yourself more peace of mind. You’ll have more options if you suddenly get laid off or encounter financial difficulties.
5. Max out your retirement accounts
Everyone who retires early focuses on maxing out their retirement savings. One of the best ways to do this is through employer-sponsored retirement accounts, IRAs, and 401(k)s. However, there are limited to how much you can invest on a yearly basis.
Stocks, bonds, and real estate are also good retirement savings options. Utilizing micro-investing apps is a good way to regularly put away money here and there without even thinking about it. The point is, start investing immediately and put away as much money as you can.
6. Pay off debt
One of the best ways to lower your monthly expenses and have more money to save for retirement is by paying off your existing debt. It would be best if you got rid of any high-interest credit card debt as soon as possible.
It’s also a good idea to eliminate any auto loans or other types of consumer debt. Another strategy you can consider is paying off your mortgage early.
Financial experts are divided on whether this is the best strategy. But there’s no doubt life in retirement will be easier and less stressful if you don’t have a mortgage to worry about.
7. Come up with your Plan B
Hopefully, you’ll be able to quickly pay off your debt, cut your expenses, and be on the path to retire early. But once you reach early retirement, there’s a good chance that something won’t go entirely according to plan.
Perhaps you’ll have a health crisis that eats into your savings. Maybe the economy will sink into a recession and cut your retirement savings in half. Sometimes early retirees find that retiring early isn’t as fun as they imagined it would be.
Either way, you should have a backup plan for what you’ll do if things don’t go according to plan. Your financial livelihood is too important to risk skipping over this step.
With the right strategy and planning, the opportunity to retire early is a genuine possibility. Take the time to define your goals, figure out how much you need in savings, and then start taking action toward making it happen.
It’s a good idea to meet regularly with your financial planner. That person can hold you accountable and ensure you’re staying on track toward meeting your savings goals.
Obviously, the more money you save, the faster you’ll reach your retirement goals. But don’t forget to enjoy the process along the way.