In the past, the majority of Americans dedicated themselves tirelessly to their work for most of their lives. Retirement came in their mid-sixties after a lifetime of loyalty, careful savings, and some pension benefits. However, pensions have grown increasingly scarce, causing a growing number of Americans to ponder the possibility of early retirement.
The notion of early retirement may seem like a panacea for many, a chance to finally chase after their dreams and hobbies with wild abandon. However, for others, the idea may feel like an unattainable pipe dream. Though early retirement has its appeal, it’s often difficult to see a clear and practical way to make it happen.
If this resonates with you, then I’ve got both good news and bad news. On the bright side, early retirement is more achievable than you might initially believe, so long as you exercise discipline in your financial planning.
However, the downside is that attaining this goal will require some degree of diligence and sacrifice. Nevertheless, with the right outlook and a dash of grit, early retirement can be a real possibility and deeply fulfilling option for many.
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
The concept of early retirement can mean different things to different people, with some considering retiring early in their 30s, while others may aim for retirement in their 50s.
Joining the FIRE movement, which stands for “financial independence, retire early,” has become a popular lifestyle choice for many. This movement is centered around principles of frugality, aggressive savings, and investing, with the ultimate goal of retiring early to travel or pursue passions.
For some, retiring early might mean quitting work entirely, while for others, it might simply mean working less. What’s important is identifying your goals from the outset.
Take some time to envision your ideal retirement lifestyle. Would you like to travel full-time after quitting your job? Or would you prefer to leave your corporate job and pursue a more fulfilling side hustle?
Once you have a clear definition of what early retirement means to you, it’s time to take stock of your current financial situation. Evaluate your net worth, current spending habits, and outstanding debts. By assessing where you stand, you can create a plan to achieve your goals and retire on your terms.
2. Estimate Your Retirement Expenses
When it comes to retirement planning, determining your retirement number is a crucial step that can’t be overlooked. Your retirement number is the amount of money you’ll need to have saved up to ensure a comfortable retirement that covers all of your expenses.
While this number will vary from person to person, a good rule of thumb is to aim for saving around 30 times your estimated annual expenses. This can then be broken down into monthly savings goals to help you reach your target.
However, several factors can impact your ideal retirement number. A recession, for example, can significantly impact your retirement accounts, and you’ll also need to factor in the cost of inflation. Additionally, you need to account for the cost of health insurance since you’ll no longer be covered by your employer.
If you’re struggling to determine how much money you’ll have to save, seeking the assistance of a certified financial planner or advisor can be a good idea. They can help you figure out your retirement number and offer guidance on how to achieve your goals.
3. Cut Back on Your Expenses
Reaching your retirement goals can be tough if you spend more than you earn. After determining your necessary savings, it’s essential to comb through your budget and identify areas to trim expenses.
Food, housing, and transportation are the most impactful categories for cost-cutting. Eliminating your need for a vehicle can reduce car payments, gas, and maintenance costs considerably.
Making your own food at home instead of ordering takeout is a straightforward way to save money. Paying off your mortgage early or living below your means are both effective ways to reduce housing expenses.
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 part-time job or side hustle are endless. And many people are able to grow their side hustles to the point where it exceeds the annual 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
Most people who retire early focus 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.
In addition to tax-advantaged retirement accounts, investing in stocks, bonds, and real estate can help you build your savings. Micro-investing apps provide a convenient way to make regular contributions to your nest egg. The key is to develop a solid investment strategy early on and save as much as possible. Remember, every little bit helps.
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 retiring 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 retirement 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.
Retiring early can be a reality with proper retirement planning. Start by identifying your goals and calculating the amount of savings required to achieve them. Once you have a target in mind, it’s time to take action.
Meeting with a financial advisor on a regular basis is an excellent way to stay on course and ensure you’re making progress towards meeting your savings goals. Accountability is key.
The more money you save, the quicker you’ll reach your retirement objectives. However, it’s important to enjoy the journey and not become fixated solely on the end goal. Take pleasure in the steps you take toward achieving financial freedom.
How to Retire Early FAQs
What is the definition of “early retirement”?
Early retirement generally refers to retiring before the age of 65, which is the standard age for receiving full Social Security retirement benefits in the United States. However, the definition may vary depending on individual circumstances and goals.
How can I prepare for early retirement?
To prepare for financial independence and early retirement, it’s crucial to live within your means. Start by making a budget, saving as much as you can, paying off debts, and building up an emergency fund.
The ultimate goal is to generate enough passive income to cover your living expenses, freeing you to pursue your passions without the necessity of work.
How can I generate passive income?
To start generating passive income, you’ll need to identify potential income streams that don’t require your direct involvement on a regular basis. This could include rental property, dividend-paying stocks, interest-bearing accounts, or even an online business.
Once you’ve identified potential income streams, conduct research and assess their viability. This could involve looking at the historical performance of certain investments, analyzing market trends, or determining the potential profitability of a new business venture. By taking the time to research and evaluate different income-generating opportunities, you can make informed decisions and increase your chances of success.
How much money do I need to retire early?
The amount of money you need to retire early will depend on your individual financial situation, including your projected living expenses and the age at which you plan to retire. Some experts recommend having at least 25 times your annual expenses saved before you retire.
What is a good monthly retirement income?
Your ideal retirement income will depend on a variety of factors, such as where you live, how you like to spend your time, and your healthcare needs. A common rule of thumb is that you should aim to replace at least 70% to 80% of your pre-retirement income.
So, if you earned $60,000 a year before retiring, you might shoot for $3,500 to $4,000 a month. However, keep in mind that this is just a rough estimate, and your personal needs may be different.
Everyone’s retirement is unique, and your ideal income might be higher or lower depending on your individual circumstances. That’s why it’s essential to evaluate your expected expenses carefully and create a retirement plan tailored to your specific goals.
Can I retire early if I have a low income?
It won’t be easy to retire early on a low income, but it’s possible. It may require more careful planning and budgeting. You may have to save a higher percentage of your monthly income and make sacrifices in your day-to-day spending to build up a sufficient retirement fund.
Can I retire if I have a mortgage or other debts?
Yes, it’s possible to retire even if you have a mortgage or other debts. However, it’s important to take into account these outstanding debts when planning for retirement. You should create a plan to pay off your debts before retirement or have a strategy in place to manage them during retirement.
This may involve adjusting your lifestyle, finding additional sources of income, creating a retirement budget, or downsizing your living arrangements. Consulting with a financial advisor can help you develop a plan to retire comfortably while managing your debts.
What are the pros and cons of retiring early?
Retiring early can be a great opportunity for some people, but it is not right for everyone. Here are some pros and cons to consider:
- More time to pursue other interests: Being retired allows you to have more time to do the things you love, whether it’s traveling, volunteering, pursuing a hobby, or spending time with family and friends.
- Financial freedom: If you have saved enough money to retire early, you can have the freedom to live your life on your own terms, without the need to work for a traditional income.
- Improved health: Studies have suggested that people who retire earlier tend to live longer and have better overall health. This is because they have more time to take care of themselves and pursue healthy behaviors, such as exercising and eating well.
- Reduced income: You will have to rely on your savings, investments, and any other sources of income, such as Social Security or a pension. This may not be enough to support your desired lifestyle, especially if you retire at a younger age when you have more years of retirement to fund.
- Loss of work-related benefits: When you retire, you may lose access to employer-provided benefits such as health insurance, retirement plans, and professional development opportunities.
- Social isolation: Work can provide a sense of purpose and social connection. Retirement may result in a loss of these benefits, which can contribute to feelings of isolation and loneliness.
What are Social Security benefits?
Social Security benefits are a form of financial assistance provided by the Social Security Administration (SSA) to people who are eligible. The SSA is a government agency that administers a variety of programs, including Social Security retirement benefits, disability benefits, and survivor benefits.
Most people are familiar with Social Security retirement benefits. However, the SSA also provides disability benefits to those who are unable to work due to a qualifying medical condition. Additionally, survivor benefits are for eligible family members of deceased workers.
The amount of Social Security benefits you can receive depend on a range of factors, including your work history, age, and income. To apply for Social Security benefits you must complete an application and submit it to the SSA, either online or in person.
Are there any risks associated with retiring early?
Retiring early carries risks such as depleting savings, losing access to healthcare and other benefits, and encountering unexpected expenses. Consider these risks and plan carefully before deciding to retire early. But, also remember that you can come out of retirement if you really need to.