The road to retiring early isn’t easy. It takes time and incredible discipline to earn, save, and invest as much as you possibly can.
That said, early retirement comes in various shapes and sizes and what it looks like to you will determine exactly what you need to do to get there. In general, here are the steps you can take:
How to retire early
Retiring early doesn’t have to mean never earning a paycheck again — unless you want it to. Many early retirees define it as not having to work to live — i.e. financial independence — but maybe you want to leave your corporate job for something more creative where you can make your own hours. Or perhaps you’d like to focus only on non-income producing hobbies, or work in spurts and travel in between.
The first step on the path to early retirement is figuring out exactly what that phrase means to you. Establishing your ideal day-to-day will make it easier to plan for — but just so you know, it will probably evolve over time.
After outlining your version of early retirement, it’s time to establish how much money you need to make it a reality.
Early retiree and self-made millionaire Grant Sabatier suggests having between 25 and 30 times your expected annual expenses saved or invested, plus a year’s worth of expenses in cash. In his book “Financial Freedom: A Proven Path to All the Money You Will Ever Need,” Sabatier shares the formula he used to calculate his “target number,” which he then broke down into monthly, weekly, and even daily savings goals.
This part may be difficult to calculate on your own, especially when there are multiple scenarios to consider, like how a possible recession would affect your investments. A good financial planner (SmartAsset’s free tool can help find one) can help you crunch the numbers and send you home with an actionable plan to achieve your goal — and even hold you accountable, if you want.
It’s very difficult to build substantial, long-term wealth if you spend more than you earn. When you’re working toward early retirement, it’s imperative to live below your means as it’s the only way to save and invest aggressively.
Focusing on reducing your biggest expenses, which are probably housing, transportation, and food, can go a long way in the effort to increase your savings rate.
It’s crucial to keep your spending in check, but you can only cut costs to a certain degree, says certified financial planner Eric Roberge. You can make an even bigger difference by increasing your income, he and his wife Kali explained on an episode of their podcast “Beyond Finances.” Cutting your expenses and daily spending takes continued effort — it’s a short-term solution — whereas increasing your positive cash flow is a long-term solution, they said.
Sabatier encourages taking up a side hustle to diversify your income streams. The most lucrative side hustles are those that generate passive income, such as real estate, he wrote in his book. Building a passive income business that generates a minimum amount of money to cover your monthly expenses “gives you more flexibility and potentially the opportunity to reach financial independence very quickly,” he wrote.
There’s at least one common strategy present in nearly every story about financial independence and early retirement: early and frequent savings. Oftentimes the best way optimize your savings is through retirement accounts.
Employer-sponsored retirement plans and IRAs provide unparalleled tax advantages and investment growth. In 2019, you can contribute up to $19,000 pretax to a 401(k) and $6,000 to a traditional IRA for which you can get a tax deduction on your current year’s tax return.
The only caveat to stuffing your retirement accounts to the brim when you’re planning to retire early is the restrictions on withdrawals. You won’t be able to take any money from your 401(k) without penalty until you’ve reached age 59 and a half. You can, however, dip into your Roth IRA, which is funded with after-tax money, and withdraw your contributions — not including any earnings — tax-free, at any time.
If you’re maxing out your retirement accounts, move on to a brokerage account. This is money you can invest directly in the stock market and cash out when you need it.
Many early retirees and self-made millionaires stick to billionaire Warren Buffett’s favorite investment: low-cost index funds. Index funds are all-in-one investments that track a specific financial market and are designed to diversify your money and minimize risk.
In preparing for early retirement, eliminating consumer debt with high interest rates is a no-brainer, but paying off a mortgage with good terms isn’t so cut-and-dry. For some, the peace of mind of being liability-free is worth it, while others may argue that the money saved in interest payments would pale in comparison to potential investment returns.
Tommy — who only goes by his first name online — retired nearly 10 years ago at age 51, after a more than three-decade career in telecom. He never earned a six-figure salary, but focused on saving consistently since his 20s and living frugally with his wife and three kids, he wrote in a blog post. One of his biggest regrets? Not paying off his mortgage before retiring.
“So much of our having a great retirement is mental. Being mortgage free certainly adds another level of mental freedom,” he wrote.
Leaving a full-time employer also means bidding farewell to your employer’s health insurance. If you’re waiting for Medicare to kick in at 65, usually the most cost-effective option for health insurance — if available to you — is joining a working spouse’s employer-sponsored plan.
Otherwise, you may consider continuing coverage through a former employer under COBRA; browsing coverage options and potential subsidies through the Affordable Care Act marketplace; researching health-sharing plans; or getting a part-time job.
No matter how foolproof your plan may seem, consider what could go wrong. You may find you hate the unstructured days of early retirement — would you go back to work? Or the economy could tank, taking your net worth with it — would you have room to cut expenses? Running through potential worst-case scenarios is essential when your livelihood is on the line.
Time and discipline are all you need to execute your plan from here on out. Keep saving and investing, but don’t forget to live in the present while you can.
As early retiree Steve Adcock wrote on his blog Think, Save, Retire, “Sacrifice is necessary to retire early, but it’s not all we do, either. It is important to treat and reward ourselves along the way by celebrating those smaller achievements.”