There are many people who dream of retiring early. By leaving the workforce behind, you are able to spend your free time as you please. What is the best way to achieve early retirement? To succeed, you need discipline, planning, and a few smart financial moves.
You can retire early if you follow these 15 secrets:
1. Know your retirement number.
Generally speaking, people can establish rough retirement goals by following two rules of thumb.
Based on Income
It is suggested that you should save enough money to sustain yourself on 75% – 85% of your pre-retirement income. As an example, if you both earn $100,000 jointly, you should plan on saving between $75,000 and $85,000 a year for retirement.
Based on Expenses
Expenses rather than income should guide your retirement planning, according to the second rule of thumb. By multiplying your annual income by 25, you can determine how much money you will need during retirement, rather than setting a figure based on your current salary. This is how much you will need to save.
2. Be more mindful of spending.
Even if frugality isn’t in your nature, you can learn to be thrifty.
When it comes to reducing your spending, shifting your mindset could help.
For example, saving does not mean denying yourself. Instead, make the sacrifice beneficial. When you save money, you empower yourself to decide when and how you will retire. The main focus should be on what you’ll gain, not what you’ll lose.
To put it another way, every dollar you save is a step towards freedom.
3. Have a Marie Kondo approach to money.
When it comes to retiring early, you need to know where your money is going. Your next step should be to decide whether the things you buy bring you real joy.
After retiring from her marketing career at age 30, Purple, a nomadic blogger, asks, “Did that restaurant meal feel worth $250 of my blood, sweat and tears at the office? Could I make the same dish at home for a quarter of the cost with a lot more friends there to enjoy it in a more chill environment that I actually preferred? [If my answer was yes,] I kept that in my budget. [But when the answer was no,] I eliminated those things from my life and tried to be as intentional as I could about how I spent my money and my time.”
Pete Adeney, a pioneer of the FIRE movement and creator of the popular blog Mr. Money Mustache, has long advocated this mindset shift. “Every purchase is a choice,” he says, “between having this new thing right now or increasing your wealth and freedom for the rest of your life, starting right now.”
4. Tap into the power of compound interest.
“Compound Interest is The Most Powerful Force in The Universe.”
Einstein’s famous quote on compound interest illustrates its importance in financial terms. And, to retire early through compound interest, you should start saving and investing early.
In case you’re unfamiliar, compound interest is an investment’s interest plus the interest it’s already earned. In a way, it’s like a snowball effect that grows and grows.
When you start saving for retirement early, your money has more time to grow. If you are only able to save a small amount each month, compound interest will allow it to grow over time to a significant amount.
You can use compound interest to retire early by following these tips:
- Start saving early. It takes time for your money to grow, so start saving as soon as possible. The amount you save each month will add up over time, even if it is only a small amount.
- Invest your money wisely. Invest in long-term growth investments. Stocks, bonds, and mutual funds may be included in this category.
- Reinvest your earnings. Reinvesting your earnings earns you interest on interest. You can accelerate the growth of your money by doing this.
- Increase your savings rate as your income increases. Your savings rate should increase as your income increases. As a result, you will be able to save even more money for retirement.
Using compound interest as an example, you can retire early:
Let’s say you begin saving for retirement at the age of 25. In your retirement account, you invest $500 per month in a fund with an average annual return of 7%. You will have saved over $1 million by the time you reach 65.
It will take you $1,200 per month to reach the same $1 million goal if you wait until you are 40 to begin saving for retirement. The reason for this is that you have less time to grow your money.
You can significantly increase your retirement savings by starting early and reinvesting your earnings. You should begin saving and investing immediately if you are serious about retiring early.
5. Consider a dividend reinvestment plan (DRIP).
An investor can reinvest their cash dividends into additional shares or fractional shares of the company’s stock through a dividend reinvestment plan (DRIP). Companies typically offer DRIPs, which can be set up directly with them or through a brokerage.
DRIPs have the benefit of compounding investors’ returns over time. Your dividends are reinvested when you buy more shares of the stock, which will eventually pay dividends themselves. Over time, this cycle of reinvestment can result in significant portfolio growth.
A DRIP’s other benefit is that it typically offers commission-free investment options and may offer share price discounts. As a result, you will be able to save money on transaction costs and be able to buy more shares with your dividends.
6. Don’t play it too safe in your portfolio.
It is important to keep in mind that stocks carry a certain level of risk, which is why some investors may avoid them. Then again, you have to push yourself outside your comfort zone to grow your money significantly, so you should take on some risk.
In short, you may not be able to retire early if you continue to invest in bonds and similar safe investments.
7. Tapping your nest egg early can be costly.
Traditional IRAs and 401(k) plans usually have a 10% early withdrawal penalty if you retire before 59 ½. While there are some options for getting IRA money before 59 ½, it is complicated and has the potential to cause serious penalties if done incorrectly.
The amount you withdraw from traditional accounts funded with pretax contributions will be subject to income taxes unless you have a Roth IRA, which is funded with after-tax contributions. Withdrawing $20,000 from an IRA before you turn 59 ½ and being in the 15% federal tax bracket, for example, will cost you $5,000 in taxes and penalties.
To avoid penalties, make sure you have enough money stashed away until you can withdraw it.
8. Exploit your 9-to-5.
“I invested in my employer-sponsored 401(k) and got the company match of 4%, which was free money that my employer contributed on my behalf,” says Steve Adcock, who retired early at 35.
In addition to medical savings accounts, some companies also offer Health Savings Accounts, or HSAs, to help employees pay for qualified medical expenses, he adds. When you reach retirement age, an HSA can act like a 401(k). Upon reaching 65, unused funds can be withdrawn for any purpose you choose.
In addition to enhancing your marketable skills like computer programming, accounting, and time management, your full-time job may also offer educational and training opportunities. As your career progresses, these skills can help you gain promotions and raises.
You are also more likely to get a raise by taking a new job since negotiating a higher salary is a natural part of it.
“I got a 15 to 20% raise each time I switched companies,” Steve explains. “This is far beyond the typical, 3% cost-of-living raises many employers offer their staff.”
Make sure to not switch companies too frequently, he warns. Some employers won’t hire candidates who change jobs frequently, so stay in each position for at least one year. There is a cost associated with the hiring and onboarding process.
9. Move payments to savings after a bill is paid.
How exciting is it to pay off your bills? Maybe it’s a credit card, a car, or even your mortgage. Before you grow accustomed to having that amount available for expenditures, put whatever you have paid in full into savings.
Why? You don’t want to fall victim to lifestyle creep.
Having lifestyle creep means spending all of your extra income on new and unnecessary items. The result can be a difficult time saving for financial goals, such as retiring early.
So, let’s say that you were to pay off your $400 monthly car payment. Instead of going on a luxurious vacation or upsizing your home, throw that $400 into your retirement savings.
10. Customize the 4% rule.
A common guideline for retirement withdrawals is the 4% rule, which was developed by William Bengen in 1994. As a rule of thumb, you can withdraw 4% of your retirement savings every year without running out of funds. For some people, however, the 4% rule might not be appropriate, especially those who embrace early retirement.
Vanguard recommends updating this rule since it was based on historical market data from 1926 to 1992.
In order to make the 4% rule more realistic for early retirees, Vanguard offers some tips. Among them are:
- Use forward-looking return estimates. Historical returns are used to determine the 4% rule, but future returns might be lower. In order to make the 4% rule more realistic, Vanguard recommends using forward-looking return estimates.
- Choose a retirement horizon that is appropriate for you. According to the 4% rule, retirement is assumed to be 30 years long. The amount of money you need to withdraw each year may be less than 4% if you have a longer retirement horizon.
- Minimize costs. Investment fees were not included in the 4% rule, which reduced its probability of success. The likelihood of success increases significantly when costs are minimized.
- Invest in a diversified portfolio. Investing about 40% of your stock allocation in international stocks and 30% of your bond allocation in international bonds increases your chances of success regardless of your anticipated retirement horizon or financial goal. For long-term financial independence, FIRE investors use a dynamic spending strategy. They may deplete their retirement savings if they follow this strategy without considering market performance.
- Using a dynamic spending strategy. Your withdrawals can be adjusted according to market conditions with a dynamic spending strategy. By doing this, you can protect your savings and avoid running out of cash.
11. Instead of aiming for an age, aim for a savings amount.
For many people, retirement feels like a deadline that must be met on the calendar. However, experts suggest focusing on how much you need rather than when you need it if you want to quit working as soon as possible.
“It’s important to remember that retirement isn’t an age—it’s a number,” Robert Farrington, founder of The College Investor, told Best Life. “That number is the amount of savings and investments you have or the amount of income you can generate from your investments. The simple way to calculate your number is to take what income you need to live on and divide it by 0.04 percent.”
“For example, if you think you need $80,000 per year to live, you need about $2,000,000 saved or invested. If you need $100,000 annually, your number is $2,500,000,” Farrington explains. “Of course, you can work on other ways to generate that $80,000 per year with things like pension or retirement benefits—such as the military—and more. But the goal is the baseline.”
“With that framework in mind, you have to see about saving as much as possible as early as possible to take advantage of compound growth. Even if you can stash away $100 per month at 18 or 20, you could be well on your way to early retirement by your late 30s,” he adds.
12. Be aware of taxes.
It is possible to lose thousands of dollars each year because of taxes. If you reduce your tax expenses, you will be able to save more for your early retirement.
A little planning now can help you feel more confident when it comes to your future taxes after you retire.
To get an estimate of your future tax bill, you might want to use a retirement calculator.
Here are a few tax tips for early retirees:
- Is your state taxed heavily? As soon as you retire, think about moving to a state that has a low tax rate.
- Keep a close eye on your tax bracket when taking withdrawals from your retirement savings accounts.
- Withdrawals must be taken after the age of 72, and early withdrawals must be avoided.
13. Invest in real estate.
Early retirement can be achieved by investing in real estate. The property can generate passive income for you through rental income, and it can also increase in value over time. The key is to do your research and make wise investments.
For early retirement, here are some tips:
- Choose the right type of property. It is important to realize that not all real estate investments are the same. Several types of properties offer a consistent income, including rental homes and multifamily units.
- Invest in a good location. Your property’s location is crucial. It is important to invest in an area that is likely to appreciate in value over time and is desirable to tenants.
- Do your due diligence. Make sure you hire a qualified professional to inspect any property you intend to buy. If the property has any potential problems, this will help you identify them.
- Get pre-approved for a mortgage. You will be able to see how much money you can borrow and how much your monthly payment will be.
- Hire a property manager. An alternative to managing the property yourself is to hire someone to do so for you. In addition to finding and screening tenants, collecting rent, and making repairs, a property manager can handle all day-to-day tasks.
To retire early, you can use these real estate investment strategies:
- Buy and hold rental properties. Investing in real estate early in retirement is a common strategy. Buying properties and renting them out to tenants is the goal. Eventually, the properties will generate rental income and appreciate in value.
- Fix and flip properties. In this approach, properties needing repairs are bought, repaired, and then resold. Compared to buy and hold, this is a riskier strategy.
- Invest in REITs. In real estate investment trusts, income-producing properties are owned and operated by companies. In REITs, you can invest by purchasing shares. It’s possible to invest in real estate without owning or managing properties yourself with REITs.
Regardless of which real estate investment strategy you choose, discipline and patience are essential. To build a successful portfolio of real estate, you must invest over the long term.
14. It’s OK to retire early, but only temporarily.
There was a time when working for 40+ years, then enjoying yourself, was the norm. However, more and more people are working well into retirement age, so why not find a way to inject some fun and freedom into your career?
For a few months or a year, consider taking a sabbatical, career break, or unpaid leave or absence. In some companies, employees are offered a formal sabbatical program, which means they can take time off, either paid or unpaid, while still having a job to return to afterward. This is beneficial since it’s difficult to re-enter the workforce once you leave.
Make a decision about when and for how long your break will last. Make it concrete, not just a dream. During your break, you should pay off your debt, reduce expenses, and plan for covering your expenses.
Next, decide how you want to spend your time. Would you like to travel, volunteer, learn a new skill, write a novel, or finish the home improvement project you started but never completed?
Be sure you have a plan for what you will do during your career break. If you do nothing for several months, you are likely to become bored and depressed.
15. Staying engaged and active in retirement is essential.
Early retirement is associated with a shorter lifespan, according to some studies.
Why? The desire to go somewhere, see people, and find a reason for living is essential to maintaining mental, emotional, and physical health.
If you plan to retire early, make sure you have a plan for remaining active.
Early retirement can be a great goal, but it requires planning and discipline. It is possible to enjoy your golden years sooner if you follow these 15 secrets.
What is early retirement?
The term “early retirement” refers to retiring before the traditional retirement age of 65. Early retirement is not a specific age, but it is usually considered to be retiring before you turn 62, the age at which you are eligible to receive Social Security retirement benefits for the first time..
Why would someone retire early?
Several factors may influence someone’s decision to retire early The ability to save enough money to support themselves in retirement may influence someone’s decision to retire early. Some people retire early so they can indulge in hobbies, travel, or volunteer work.There are also people who retire early because of health problems or because they are no longer able to work..
What are the benefits of early retirement?
There are many benefits to retiring early, including:
- Spending more time with family and friends
- Having more time to pursue hobbies and interests
- The ability to travel more
- Stress levels are reduced
- A better quality of life and improved health
What are the challenges of early retirement?
There are also some challenges associated with early retirement, such as:
- Income reduction
- Cost increases in healthcare
- An extended retirement period
- Social isolation
How can I prepare for early retirement?
Planning ahead is essential for early retirees. Consider these tips:
- Save early and as much as you can.
- Make sure you invest your savings wisely
- Prepare a retirement budget..
- Repay any debts you owe.
- If you are retired, consider working part-time.
- Plan for healthcare costs.
- Engage in social activities and stay active.