You likely have heard or read about people in their 60s or early 70s who have retired and are living their best lives. They have moved their permanent residence to a foreign country, are traveling the world, or are pursuing passion projects. These retirement stories may have piqued your interest.
You may have thought to yourself, “How can I retire early?” before, but it’s actually something that you could achieve. Before you accept retirement because you think it’s out of your reach, consider the fact that it may be something you also could accomplish.
While it will not be easy and require hard work and discipline, the gains from your efforts may possibly permit you to retire early.
So, let’s explain how to retire early so that you can start working as soon as possible toward accomplishing your goal.
What age is early retirement and what does early retirement really mean?
What age is early retirement? Over the past several decades, the retirement age has changed based on different factors. The government’s guidelines specify a retirement age of 67 for anyone born after 1960 or earlier.
If you retire before the SSA’s standards, it means that you’ve stopped working and have chosen to receive your Social Security benefits before 67. In contrast, for millennials and Gen Z, early retirement has taken on a new definition.
Instead of connecting retirement candidates to when you can stop working and start getting Social Security payments, younger folks are more interested in how soon they can stop working for money. That makes a difference.
We’re now observing a trend toward earlier retirements as younger workers pursue their interests in growing numbers. While they will not be working in a typical nine to five, some are making an excellent living from their retirement pursuits. Before you begin on early retirement planning, consider what age is early retirement for you.
So, how much do I need to retire early?
Modify annuallyby 25 to 30 timesyour annual expenditures. How are these costs determined? It is based on the concept that is referred to as your withdrawal rate. Your retirement funds are invested in the stock market and are earning a return.
Your withdrawal rate is a percentage of the growth of your investments. A withdrawal rate of 4% adjusted for inflation is a normal benchmark for early retirees for early retirement. It is called the 4% rule.
According to the 4% rule, retirees should take no more than 4% of their retirement funds each year. This guideline aims to maintain a steady income flow while also maintaining a consistent account balance.
So if your investments are growing at 12% a year, your withdrawal rate is 4% of the 12% growth.
There are three important steps to consider when you want to retire early:
1. Calculate your annual retirement spending
A firm grasp of your spending will help you determine how much money you’ll need for retirement. You need to know how much money you spend each month, and you must avoid making large adjustments to your lifestyle that will eat away at your future income.
If you want to know how much you pay per month, track your expenses. This way, you can make accurate approximations on how much you spend.
You may want to track rent/mortgage, food, utilities, transportation, health insurance, clothing, entertainment, and any donations. You may have additional categories to add to the list.
If you add up the numbers, you will see that you will need $40,000 per year to live comfortably. You will need to have $40,000 × 25 or $40,000 × 30 to retire comfortably. Taxes should be included, as well. (Numbers depend on your lifestyle choices).
2. Determine your current net worth
Before you retire early, it is important to know what your current financial situation is, i.e., know your net worth. We often associate net worth numbers with celebrities but knowing your personal net worth will help you understand where you are with your finances.
To complete this challenge, you can merely do it by hand or with a net worth calculator. What you’re looking to identify are your assets (excluding) your liabilities. This metric is good to know even if you have a negative net worth.
A low net worth can be an indicator of student loan debt or financial debt that you may be carrying. Whatever the case, the higher your net worth, the better off you will be to retire early. Remember that your financial worth will increase as you gain more over your career years and maintain good financial habits.
3. Create a budget and strategy based on what you know
The key to successful early retirement is the ability to make efficient use of your budget. If you spend $4,000 a month but gradually increase that to $6,000, you could jeopardize your retirement plan.
As you make your budget, be sure to carefully estimate your spending habits, as budget production is all about meeting long-term goals. If you expect to see yourself eating more take-out in the future, include that in your budget, not aspirational lifestyle choices you might hope to make down the road.
8 Key tips for early retirement
Are you ready to start your early retirement planning? Here are some “early retirement” tips to help you get started!
1. Create focused goals for your retirement
The word “retirement” often conjures up images of someone lying on the beach all day doing nothing. You will have to dig deep into yourself to find out what will work for you.
Do you have a notebook? Whatever your reason for maintaining a notebook is, make sure that you set specific goals for using it that permit you to reach your retirement age. Setting goals is crucial to retirement planning!
2. Monitor expenses and cut back on your biggest costs
If you’d like to reduce your expenses, review the big-ticket items you’re spending money on each month. For most people, this would mean rent or a mortgage and transportation costs.
They say you should spend 30% of your income on rent. If that’s more than you can afford, consider moving to a newer apartment. As an example, moving from a $1,600 apartment to a $1,100 apartment could save you $500 per month.
This quickly escalates! You also consider roommates or renting a room in your house. The same principles apply to transportation as well. If you live in a city center and don’t need a car, don’t buy one.
Those who want a vehicle can save money by opting for a used car. Driving the same route will cost far less than with a new car. Redirecting funds as cost-effectively as possible is the most efficient way to retire early.
3. Take advantage of employer-sponsored plans
Companies frequently provide great perks to their employees, such as health insurance or a 401(k) plan. Don’t miss out on these excellent offers! Sign up and obtain a clear understanding of the potential benefits of a 401(k) plan so you do not lose out on possible 401(k) matches that could increase your retirement earnings.
This money is money you can tap for free. Maximizing your 401k contributions is among the most savvy “retire early” tips you can start now!
4. Automate & diversify your investments
You don’t know where life is headed, and tech may be the most popular thing today, but tomorrow, it may be real estate. It is unwise to put all your eggs in one basket because you potentially bet that things will change!
Diversification is crucial to early retirement planning. If you have trouble setting up your investment strategy, check out our course on investing for helpful advice.
5. Create multiple streams to increase your income
Diversification is not only crucial for your investments but also for your income. Instead of merely awaiting your paycheck at the end of each month, you can make added cash by generating outside-the-box solutions. Establishing multiple income streams not only increases your income but can serve as a buffer in the event of a job loss.
You should exercise caution, however, when doing things such as investing in investments, for example. If you want to retire early, be sure to use this extra income to fund your goal. If you create multiple income streams, you can retire earlier.
6. Start a side hustle
The most straightforward way to start making more money is by starting a side gig (or multiple side gigs). There are plenty of internet resources you can use to get started.
You can use TaskRabbit, babysit or house sit, or produce content online through YouTube and blogging to earn additional income. Part of early retirement planning is having a side hustle!
7. Ask for a raise
Are you playing well at work? If so, you should definitely ask for a raise. A lot of people let money go to waste by failing to readopt a raise based on their exemplary work. It’s a simple way to earn extra income from your work.
Even if you get a 3%-5% increase each month, that adds up to a lot of money over time. As an example, suppose you earn $15 an hour, work 40 hours a week, and earn a 5% raise. It’s another $30 per week. Multiply that by 52, and that’s an additional $1,560 per year!
Consider how much of a difference it would make if you spent that extra income? Asking for raises when they are due is one of the greatest “retire early” tips you could do!
8. Find an affordable retirement destination
One of the best “retire early” tips is to move to a less expensive state. The savings on rent, utilities, gas, and more will enable you to enjoy your retirement more comfortably. The cheapest places to live include Georgia, Tennessee, and Alabama.
The good news is there are some excellent beaches in Alabama for those looking for an enjoyable beach destination! Cutting your expenses by moving to a cheaper state can enable you to retire early more easily.
How to maintain your early retirement
Keeping a retirement plan is important, but it is also important to remain disciplined in your day-to-day life. Here are some tips to help you stay organized and on track with your plans.
Use the 4% rule investment strategy
As mentioned previously, if you want to get a good estimate of how much you can safely withdraw from your money investments, you can use the 4% rule to estimate the withdrawal rate.
This is a percentage of your return on your investment, so the faster your 401(k) account grows, the larger your income will be once you make a withdrawal.
Live within your means
Depending on your spending habits, this might be difficult or easy for you. The trick is to remember that you should live within your means — always. A little extravagance here and there is entirely reasonable, but overspending on living expenses, particularly after you have retired, may cause you to lose your job in the middle of retirement.
There are plenty of ways to save money on your medical costs, including automating all purchases, keeping to a budget, and changing your lifestyle habits.
Instead of spending a fortune on extravagant overseas vacations, why don’t you and your family visit local destinations or take advantage of travel hacks? Your finances will be much better off for it.
Continue to generate income doing what you love on your own terms
Our crews and methods have changed radically over the years. Back in our grandparents’ days, workers would go to work to gather food. People seek jobs that they are engrossed in. The beauty of retiring early is that you can still earn an income doing what you love on your own terms.
You may choose to retire with $500,000 (or much less) saved for retirement in the bank and keep working, but on your own terms!
Do you enjoy taking photographs or shooting weddings and other events? If you like to cook, start a food blog. The opportunities to earn income from what you love are endless.
Maintain a budget in retirement
You can have all the techniques in the trade, but the secret to building a successful retirement plan is maintaining a solid budget. This will make it easier for you to regularly check your expenses and be certain you stay within reasonable constraints.
Start early retirement planning now!
Early retirement is not an impossible goal, despite your income and age. However, it is essential to first set the goal and modify your mindset to reach the journey ahead.
The key to financial success is to start making good financial decisions as early as possible. Begin our free financial courses and worksheets today with the goal of retiring early.
