How to Retire Early
Everybody wants to retire early and be able to travel the world, spend more time with their family, and have time to do all the things they always dreamed of doing.
But the unfortunate reality is that while many people say “I want to retire now or retire early,” that doesn’t work out for most.
However, even though it is not easy, figuring out how to retire early is entirely possible if you learn how to manage your finances the right way.
So, where should you get started? How to retire at 50 or less? And how early can you retire, realistically?
Let’s answer these and many other questions below.
What is Considered “Early” Retirement?
If you asked ten people to describe what early retirement means for them, you’d probably get ten different answers, and that’s completely understandable.
Every person has their own vision of how they’d like to live, and while some want to retire now and have complete independence, others are interested in having more control over how much they work.
For others still, retirement might mean pursuing a life-long passion that could also serve as a partial income, which would mean that they wouldn’t need to save enough to sustain themselves for the rest of their life.
Another important aspect when talking about how to retire is the age – do you want to retire a few years earlier than most, be free from your current job at 50, or maybe start enjoying peace of mind at 35?
Each of these goals has its own requirements and costs, so having a clear understanding of what early retirement means to you is the first step towards reaching your goals.
FIRE, leanFIRE, and FATfire
If you’ve ever read anything about how to retire early and rich, you’ve probably stumbled upon the term FIRE at least once or twice and asked – how can I retire early using this system?
Well, to put it shortly, FIRE (Financial Independence, Retire Early) is a savings strategy that revolves around cutting costs and being able to retire as early as possible.
The basic formula is quite simple – save 25 times the amount of your annual spending, invest it, and live off the 4% returns that you get.
There are three subcategories of the FIRE method that each have their own take on how much a person should save.
The traditional FIRE model is based on the income of an average American household, which is around $60,000 per year.
LeanFIRE is a more cautious model in which you would save 25 times the amount of less than the average American household yearly income.
Finally, the FatFire model is based on saving 25 times the amount of more than $60,000.
What Do You Want Your Retirement Lifestyle to Look Like?
We already talked about how early you can retire and how different people have different visions about what early retirement means, but in the end, it will come down to the type of lifestyle that you want.
Someone who wants to spend their retirement traveling around the world without having to worry about money will likely need to set higher financial goals during their working years to achieve those goals.
Meanwhile, if you just want to be able to spend time with your family and live comfortably without having to work at all or at least as much, then the goal will require much less investment, both financially and commitment-wise.
So, list the types of things you would like to enjoy in your retirement, because that will serve as a basis for the next steps in the planning process.
Create a Budget to Reflect That Lifestyle
Once you specify the lifestyle that you would like to achieve, you will have a much easier time bringing that vision to life in terms of how much it would cost.
Use the lifestyle that you imagined and break it down in terms of monthly costs.
Start from basic things like food, utilities, insurance, and others, and work your ways to more individual expenses that you might incur.
Make sure to do thorough research and be realistic about the costs, as you want to give yourself some breathing room and account for unexpected expenses.
After listing everything you could think of, add the expenses together, and that will serve as a basis per month amount that you can use in various calculations.
Cut Your Current Budget and Start Saving
Now that you’ve looked into the future and specified exactly how you want it to look, the next step in figuring out how to retire early is looking at your present financial situation.
First off, you need to look at your current income and your current expenses, as well as how much you have saved.
That way, you can calculate how long you have to go until you reach your goals and can start identifying areas where you can increase savings, and how to refine your budget to do so.
Since you already know what you’re aiming for, you will have a much easier time making sacrifices, as that vague idea of retiring early will now be a very specific plan that outlines what you need to do to achieve it.
Create an Investment Strategy for Your Retirement
The primary goal of cutting costs is not to shove that money in a sock and hide it away, but to put it to work so that it can provide you with substantial rewards throughout your lifetime.
You see, every $100 you set aside and invest is going to gradually increase in value if you know where to put it, but for that to happen, you need to have a proven and reliable investment strategy that you can follow.
However, there are certainly many safe and proven investment opportunities out there, so you will need to evaluate your goals and come up with a course of action that has the best chance of being successful.
Leverage Your Income
No matter how much you make right now, you can always look for opportunities to leverage your income and try to invest more each month.
Now, that may seem difficult, but if you identify ways to cut costs in your daily life, you may find that you can save much more than you initially thought.
However, it’s true that with your current income, you’ll eventually reach a limit of how much you can invest unless you find additional income sources.
So, you should also think about how you could increase your monthly income – perhaps you could pursue a new position in your company, ask for a raise, or maybe take on a side hustle that generates a few hundred bucks each month?
Even small additions to your income can accumulate over time and become a significant part of your savings, making it easier to figure out how to retire early.
Consider Working with a Financial Advisor
At this point, you should have a pretty good understanding of how to retire early and the steps behind realizing your retirement dream.
However, knowing it in theory and putting it into practice are two different things. That’s why it’s always a good idea to work with a financial advisor who can help you avoid some of the common pitfalls and ensure that you have the best chance of success.
After all, financial advisors have years of experience in helping people work down their debts and save for retirement, so an experienced professional can look at your plan and tell you if it’s realistic and what you might need to change to make it happen.
Practical Factors to Consider
The reason why it’s so important to put together an individual retirement strategy is that there are just too many variables between you and the next person who says, “I want to retire early.”
For one thing, you will need to set realistic goals that are in line with your financial situation – there’s only so far that you can stretch your current income, so make sure that your goals are ambitious but attainable.
Debt is another factor that can hinder your early retirement efforts – if you have to pay interest on the debt, it will be hard to accumulate savings and set aside money for the future.
However, at the same time, don’t be afraid to set ambitious goals, even if that means making compromises such as taking a second job or postponing your retirement a couple of years further down the line.
Don’t Forget to Enjoy Your Younger Years
The reason why many people hate thinking about savings is that they associate it with making sacrifices that can make life in the present seem dull.
However, just because you are smart about your future doesn’t have to mean that you should sacrifice your life today.
You should always evaluate today’s choices against the potential future benefits of saving that money instead. Still, if it’s a meaningful life experience that fits within your plans, you should definitely allow yourself to take it on.
After all, while many people regret not saving for their retirement, many others wish they could have enjoyed life more when they were young, so you should think carefully about how to maintain that balance in your life. Need help weighing those scales? Credit Associates can help. Contact us today and start your journey towards stable retirement.