For so long, the default retirement age was when you reached your mid-to-late 60s, and for the most part, it’s still the norm. It may be ideal for some, but a lot of people wish they could retire earlier. Retiring younger will give you more time to enjoy yourself and pursue your life’s goals, without the health issues that generally come with getting older.
You don’t really have to wait until you are 65 years old or later to retire. In fact, you can do it in your 50s, 40s, and some are even achieving it in their late 30s. With very careful planning, complete focus, and the willingness to sacrifice today for total freedom tomorrow, you can turn early retirement from a pipe dream into a reality.
The FIRE Movement
When talking about early retirement, it’s impossible not to mention the FIRE movement. FIRE is an acronym for “Financial Independence, Retire Early.” Proponents of FIRE aren’t waiting to turn 60 to retire. They do so by the time they’re 50, 40, or even earlier.
The key is to gain financial independence as early as possible. In this case, financial independence is defined as your money-making enough money that you no longer need to hold down a job.
Does this sound like something you’d like to achieve? Consider the following 11 steps towards early retirement.
8 Actionable Steps Towards Retiring Early
Before you start, it’s important to have the right mindset. Being able to retire early, with enough money to be secure for the rest of your life, takes years of very hard work. You have to be ready to restrict leisure expenses, live way below your means, and save every cent possible.
If you think you can sustain that lifestyle, follow these tips to get closer to early retirement:
- Take a goals-based approach to saving.
Instead of starting with a particular age (such as 50 years old), early retirees start their journey by establishing how much money they need in order to retire.
Begin by taking stock of your current expenses. How much do you currently spend every month? Since you won’t be working anymore, subtract job-related expenses such as transportation. Be as detailed as possible.
- Factor in the cost of healthcare.
As you’re building your retirement budget, add health care to your list of savings priorities. Retiring early, for instance at the age of 50, means you still have 15 years to go before you can apply for Medicare.
One way to do this is to have health insurance. Aside from check-ups and emergencies, try to find one that also covers extended care such as staying in a skilled nursing facility or home nursing care.
- Calculate how much you need.
In general, retirees can withdraw 4% annually for 30 years without draining their portfolio. However, note that life expectancy is higher nowadays, so you may need to plan for longer than 30 years. In order to adjust, many early retirees use a 3% or 2% withdrawal rate.
Compute your target amount by taking your anticipated retirement expenses for every year. Divide it by 2%, 3%, 4%, or whatever your target withdrawal rate may be. This will give you the total amount you need to retire early.
- Save aggressively.
Your savings are what make early retirement possible. You can’t take it slow— you need to save as if your life depends on it, which is true because your future basic needs are hanging in the balance.
Consider maxing out your contributions to workplace plans, health savings accounts, individual retirement accounts, and any retirement plans available to you. Go for auto increases as well. Save a minimum of 50% of your income, and direct any spare money you have to your savings. The bigger your nest egg, the earlier you can retire.
- Minimize your expenses.
To maximize your savings, you need to keep your expenses low. This means living way below your means, and making hard choices today to lay down the foundations of a comfortable retirement.
For instance, wear down your clothes instead of buying new ones every season. Create strict meal plans to cut down on grocery bills, and avoid eating out. Take the most basic cell phone plan without add-ons. Look for free entertainment options like free streaming channels, going to the library instead of concerts and movies, looking for free events in your city, and more. Many early retirees also choose to live in less expensive areas and cheaper homes to keep rent low.
Aside from saving, investing is critical for financial independence. The returns alone can eventually replace your entire paycheck. For early retirees, focusing on these investment categories work well: cash or cash equivalents, stocks and other long-term investments, or income-producing investments like bonds and real estate. The key is to invest in growth— consider working with a financial advisor to create a strong investment strategy.
- Increase your income.
Cutting costs and saving can only get you so far. To build your retirement funds more, seek other ways to increase your income. Think small side business, having a second job, or a hobby with products you can sell. Tired of trying to make more money? Always remember that all the hard work you do today is setting you up for a comfortable retirement where you don’t have to work anymore.
- Plan how you’ll spend your retirement.
Once you’ve retired, what now? That’s a question that many retirees struggle with, and one you should think about in advance. A lot of people get their sense of purpose from their work, and the lack of it can lead to depression and feelings of aimlessness.
To combat this and enjoy the fruits of your labor, draw up a list of how you’d like to spend your retirement. Where do you want to travel? What dream hobbies would you like to take up? Would you like to devote your time to charities or non-profit organizations? Knowing how you want to spend your retirement doesn’t just give you a sense of purpose – it allows you to maintain control over your spending because you have a clear idea of where you want your money to go.
The steps to retiring early are not going to be easy, but it will be worth it. No need to wait— start now and begin your journey towards early financial freedom and independence.
Tycoono Media Inc. and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial and accounting advisors before engaging in any transaction. Please refer to our disclaimer for more information.