Want to know how to retire early? It turns out there is a step by step process to retiring early so you can sip pina coladas by the beach or travel the world before you know it.
Many people dream of early retirement, but few know how to reach that goal. In fact, a surprising percentage of Americans over 50 don’t have nearly enough money to retire within 15 years.
There is no magic to figuring out how you can retire early but it will require you to commit financially to your vision to more freedom and relaxation.
In fact, the reason most people struggle to retire quickly is that they don’t have a plan or clear steps to retire by a certain date.
By following the early retirement strategies outlined below, you can plan for early retirement and enjoy the flexibility to kick back with your slippers on or explore the world as you wish.
So, what are the best ways to retire early?
Step 1: Define Your
The most important step is to define your retirement vision. It’s also the easiest one to gloss over but do so at your peril.
For some, retirement means lazy mornings with a cup of coffee reading the paper. For others, it means whisking off to Nepal to climb Mount Everest.
If you are looking to retire early and travel extensively in your golden years, the cost of retirement will be significantly higher than if you were content to stay close to home.
Once you have a general idea about how you plan to spend your retirements years you can create your retirement vision, such as: I want to retire in 10 years.
Or if you are in your twenties, and purchased cryptocurrencies, like Ethereum or Litecoin, in the early days on and sold them when they spiked higher, your vision might be about how to retire at 35.
No matter what age you are, your retirement vision will influence your next retirement steps, which begin by creating a retirement budget.
Create A Retirement Budget
No matter how much money you have saved up in your nest-egg, retiring early is a pipe dream if you spend too liberally.
Even world famous actors like Nicholas Cage, who amassed a career fortune reputed to be over $100 million, ran into financial difficulties by spending too much.
Athletes like Mike Tyson also earned and lost millions of dollars by not controlling expenses carefully.
So, it doesn’t really matter how much money you have saved if you fritter it away, which is why the next most important step is to create a retirement budget.
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Estimate How Much Money You Need
Early retirement requires a lot of financial planning. Before you can start setting your goals, you need to know how much money it takes to retire.
The specific amount of money that you will need depends on several factors, including your lifestyle and health. Most people assume that they need at least $1 million to retire at age 67. Since you plan to retire early, though, you will probably need more than $1 million to pay for basic needs like:
Plus, you want to enjoy your retirement, so you will need enough cash to take vacations and pursue hobbies.
Calculate How Much You Spend
If you don’t have a good handle on where your money goes, check out the Personal Capital mobile app, which is free and syncs to your bank accounts automatically.
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It will show you how much you spend and in what categories, whether food, utilities, insurance, debt, travel, rent, mortgage, gifts, and so on.
Once you have a clearer view of how much you spend now, you will need to estimate whether your expenses will rise or fall during retirement.
When you retire, you will have much more time on your hands, which means much more opportunity to spend money.
If your retirement vision includes travel and adventures, your spending may actually increase.
On the other hand, if you plan to cut back on big purchases during retirement, such as a new car, and expect to have all your debt paid off then you may have find your retirement costs will be significantly lower.
Either way, run the numbers using Personal Capital or Mint, or some other budgeting tool and you’ll have a better idea of whether you can afford to retire early.
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Step 3: Calculate Your
If you have squirreled away a chunk of savings into your retirement accounts over the years, your next step is to calculate your retirement income.
Can You Retire Early With A 401k or IRA Only?
It’s normal to wonder whether your retirement account can cover your costs during your retirement years.
The good news is even if an IRA or 401(k) doesn’t fully get you to where you need to be, social security income may provide the cash flow boost to support a comfortable retirement.
Even in a low interest rate environment it may be possible to earn an annual yield of 4 → 5% on your retirement savings. When interest rates are higher, much higher savings rates are possible.
During the 1980s for example, some savers were able to lock in 30-year government bonds that paid annual yields of over 14% at one time. These days, bond investors can only dream about such returns!
After you have made an estimate of the income you can receive from savings and added it to your expected social security income, see if any other income is on the horizon.
Include Other Income Sources
For example, are you due to receive an inheritance? Do you plan to rent out a room in your home on Airbnb for extra income? Have you plans to do part-time work, which would boost your monthly income?
The bottom line is you may have many income sources to sustain your retirement lifestyle that include:
- 401(k) or IRA
- Social security income
- Passive income from Airbnb or other assets
- Working part-time
Max Out Your Retirement Contributions
The more you contribute to your retirement vehicles, the more money they can accumulate over the years. For the best results, you should max out your retirement contributions.
In 2019, you can add:
- $19,000 to your 401(k)
- $6,000 to your Roth IRA nor IRA
If you’re 50 or older, you can put even more money into your retirement accounts. For your 401(k), you can contribute an extra $6,000. You can put an additional $1,000 into an IRA.
Remember that the interest compounds on the money that you put into your retirement savings. If possible, start maxing out your contributions while you’re young. It will make a big difference in the amount you have when you retire.
Step 4: Invest To Retire Early
After you run the numbers between what retirement will cost and how much money you need for retirement to cover those costs, you will probably discover a financial gap exists.
In order to close that gap, you will need to save and invest to retire early.
How To Save For Early Retirement
You are not alone when it comes to saving for retirement. Dozens of great budgeting tools, like Tiller Money and Status Money, can help you to budget smarter.
You can set spending limits and receive notifications in many budgeting apps like Mint and YouNeedABudget (YNAB) to alert you when you have spent too much on say entertainment, groceries, or clothing.
The most important step when saving for early retirement is setting a monthly and yearly goal to deposit a fixed amount in order to close the financial gap that will help you reach your financial goals.
If you find it difficult to stay on track, put up a sticky post-it note to remind yourself of the opportunity cost of not saving.
Here’s a statistic that should make you perk up and pay attention to every dollar you spend.
If you saved $10,000 by buying a used car versus a new car and invested those savings over 30 years at an 8% rate, your money could grow by about 10x.
For every $1 you spend, think about the real cost of it being 10 times higher and ask yourself would you still buy it?
Is the $100 pair of shoes today really worth foregoing $1,000 of retirement savings in the future?
If you still find it difficult to save regularly, check out some of the microsavings apps like Acorns or Digit that help you to squirrel away extra savings each year every time you buy something.
How To Invest To Retire Early
Investing for early retirement is simpler than you might think.
What makes investing challenging for most people at the outset is the endless list of possibilities.
But don’t let all the choices flummox you. For example, should you buy stocks or bonds or options or futures? If you buy equities, what are the best stocks to buy now? And should you invest for the long-term or trade short-term in order to keep your portfolio liquid during stock market crashes?
Unless you have the investing skills of Warren Buffett, follow the wise advice from the Oracle of Omaha, which is to invest regularly in a diversified portfolio.
Shark Tank’s Mr. Wonderful aka Kevin O’Leary is also a highly successful businessman and investor, and he recommends a mix of dividend-paying stocks and corporate bonds.
If you are trying to figure out how to retire now then you will probably choose more bonds than stocks. However, if you plan to retire in 30 years, you can probably own a higher percentage of stocks.
The rule of thumb is to subtract your age from 100 to arrive at the percentage of equities you should hold. So, if you are 30 years old then a ratio of 70% equities and 30% bonds would be reasonable but contact your financial advisor who can better understand your entire financial situation.
When it comes time to invest in a diversified stock fund, Vanguard may be your best bet. It is famous for its low cost equity funds like VFIAX and VTSAX that will give you broad exposure to the major market
Or if you prefer a hands-off approach to investing, Betterment and Ellevest are robo-advisors who can automate the investing process.
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Step 5: Plan For Hidden Costs
With your budget created, your retirement income calculated and your retirement investing under control, you might think you are done but there is one more thing to consider: hidden costs.
When you retire early, health insurance costs can come as a shock.
The costs are multiplied for adventurous explorers who travel internationally, and may need to buy extra insurance coverage.
Before you hand in your resignation letter and jet off to the Maldives, build in the cost of annual health insurance, which may be as low as a few hundred bucks per month.
If you haven’t purchased life insurance to provide for your family, now might be a good time to do that too, especially as your income from salary is going to disappear.
For health conscious individuals, Health IQ provides lower rates to reward your lifestyle choices. Or simply shop online at Policygenius to find competitive insurance quotes from top-rated providers.
For each person, hidden costs may differ but it is wise to take some to think about what other expenses may crop up when you are planning to retire early.
Not sure whether you can retire early? Check out this piece: Can I Retire Yet?
The Super Simple Math to Retire Early
If retirement still feels like an impossibility, then you need to take a look at the simple math.
Start by thinking about two things:
- How much money you earn (post-tax) each year
- How much money you need to live
When you look at these two factors, you realize that you can prepare for retirement by saving more of the money that you make.
More likely than not, your savings rate will change throughout your life. During your 20s and 30s, you will probably spend a lot of money on things like repaying student loans, buying a house, and raising children. Even if you can only set aside 10% of your income, though, you will inch toward your goal.
As you get older, you can save a higher percentage because you own your home, you earn more money, and your children don’t need as much help from you. During this time, save as much as possible. The money will continue to grow even after you retire.
You can retire early as long as you make the right decisions. Set a goal and work toward it. You’ll get there before you know it.
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