How to Retire Early

In the past, the majority of Americans would work until they reached their mid-sixties, at which point they would retire with a pension and personal savings. However, pensions are now much less common, and a growing number of Americans are interested in retiring early.

early retirement ahead sign

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

Retiring early is a somewhat vague concept and will mean different things to different people. To some people, “retire early” may mean age 35, and to others, it may mean age 55.

Many people are joining the FIRE movement, which stands for “financial independence, retire early.” It’s a lifestyle movement that has become popular recently. It’s all about frugality, aggressive savings, and investing. The goal of these adherents is to retire in their 30s, 40s, or 50s, to travel and pursue passion projects.

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. Estimate Your Retirement Expenses

Now that you know what your goals are and you’re ready to start your retirement planning, you need to come up with your retirement number. This is the amount of money you’ll need to have in savings to cover your expenses and 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 estimated annual expenses. From there, you can break this down into monthly savings goals.

Of course, there are various factors that can affect your ideal retirement number. For instance, if a recession hits that will certainly affect your retirement accounts. And you’ll have to plan on the cost of inflation.

You also must consider your options for health insurance since it will no longer be provided by your employer.

If you’re having trouble figuring out how much money you’ll need, it can be a good idea to work with a certified financial planner or financial advisor. 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 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

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 suitable retirement savings options. Utilizing micro-investing apps is a convenient way to regularly build your nest egg without even thinking about it. The point is, develop a solid investment strategy as soon as possible 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 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.

Bottom Line

With the right retirement 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.

How to Retire Early FAQs

What is the definition of “early retirement”?

Early retirement refers to the act of leaving the workforce before the typical retirement age, which is often 65.

How can I prepare for early retirement?

To prepare for financial independence and early retirement, it’s important to live below your means. You should start by creating a budget and saving as much as possible. You should also consider paying off any outstanding debts and building up your emergency fund.

The ultimate goal is to have enough passive income to cover your living expenses. This will enable you to pursue your goals and interests without the burden of having to work.

How can I generate passive income?

Passive income can come from a variety of sources. These include rental properties, dividends from stocks or mutual funds, or businesses that operate without the need for your constant involvement.

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.

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?

It is possible to retire while still paying off a mortgage or other debts, but it may require careful planning and budgeting. You may need to prioritize paying off your debts before retiring, or you may need to find ways to reduce your expenses to free up money for debt repayment.

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:

Pros:

  • 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 shown 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.

Cons:

  • 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.

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.

Jamie Johnson
Meet the author

Jamie Johnson is a freelance writer who has been featured in publications like InvestorPlace and GOBankingRates. She writes about various personal finance topics including student loans, credit cards, investing, building credit, and more.