A Step By Step Guide On How To Retire Early
/Do you ever wish to retire early?
Are you currently staring at your laptop reading this article to avoid the drudgery of work that awaits you…wondering how you can retire early?
Traditional retirement has been from the age of 60 to 65, so if you want to retire early that could happen anytime before the age of 60 to 65. Maybe, you want to retire at some point in your 50s or 40s or maybe even your 30s. All in all, early retirement is any retirement before the traditional retirement age.
You could retire a lot sooner than you think with an early retirement plan. Planning an early retirement may seem like an overwhelming and complicated process. But the key to reaching your financial goal is to come up with a solid plan and incorporate some significant lifestyle changes. Here is a step-by-step guide on how to retire early.
Find out why you want to retire early
It is important to ask yourself first why you want to retire early. Maybe you want to start a side project or a business you have been dreaming about, spend more time with your family, or travel the world.
It may be the freedom that comes with early retirement you want to have. If you know why you want to retire early, you will have a good idea of when you can retire and what kinds of lifestyle changes you may have to go through to retire early.
Many people skip this critical first step. However, it is the foundation for success - in anything, but especially money- to know why you wish to accomplish the goal you’ve set for yourself. Knowing your why will give you the fuel you need to keep going when the going gets tough.
Photo by Tomaz Barcellos from Pexels
Create a retirement budget
If you’ve been reading Money & Mimosas or a member of the Money Makers membership program, you know that I do not like the word budget. I prefer to use spending plan. However, in some instances the word budget is appropriate. This is one of them. In order to retire early, you do need to implement a more strict approach to your spending in addition to boosting your income.
Do you have a monthly budget? If you do not, the first step you should take if you want to retire early is to create a budget because a realistic budget will help you meet your early retirement goals. A monthly budget gives you a detailed view of exactly how much you are spending on a month-to-month basis. If you have decided to retire early, you need to create a retirement budget that is focused on your early retirement. If you already have a budget, you will need to make some adjustments to your current budget.
To create a budget, first, you need to calculate your total monthly income. Then you need to list out all the things you spend money on every month. Once you have identified your monthly income and expected expenses for the upcoming month, subtract your expenses from your income.
If your expenses are less than your income, you have a surplus budget. You can maximize your savings by identifying expenses you can cut down on or cut out completely, and put those savings into your retirement savings. If you have got debt, then split the extra money between paying off debt and boosting your savings.
But, if your income is less than your expenses, you should make some significant changes to how you spend money every month and/or increase your income. To live below your means and find extra money in your budget, you will want to identify expenses you can cut back on or eliminate completely to save as much as possible. You can then apply the savings toward your debt repayments to pay off your debt quickly while boosting your retirement savings. Once the debt is paid, then you can direct 100% of the extra money into your retirement account every month.
Once you have created a retirement budget, you need to stick to it. Depending on your current financial situation and your early retirement savings goals, you may need to live on 50% or less of your monthly income. Update your budget every month to find extra money in your budget so that you can meet your retirement goals.
For full disclosure, this why I do not have the goal of retiring early. Philosophically, I don’t believe in the idea of retirement, and the whole budget thing doesn’t work for me. But, that is for another article. While I may not believe in the concept of retirement, I understand that others do and this is why I am providing this information.
Figure out the total savings needed for your retirement
You should have a clear idea of how much you should have in your savings account before retiring early. The amount you will need to save for retirement will depend on the length of your retirement and the lifestyle you choose aka your cost of living.
To calculate your total savings needed, multiply the length of your retirement by your annual cost of living. For example, if your annual cost of living is $40,000 a year and the length of your retirement is 30 years, then the amount you will need to save for retirement would be $40,000 * 30 = 1,200,000.
Once you have calculated your total costs over retirement, divide it up by the years you have until your planned retirement age to estimate how much you will need to save.
Evaluate your current financial situation
Now that you know when you are retiring and how much savings is needed to cover expenses over retirement, it is time to evaluate your current financial situation to see how much you will have saved for retirement by the time you want to retire. Subtract how much you will have by the time you want to retire from your total costs over retirement.
In the example above, the amount you will need to save for retirement would be 1,200,000. But if you, say for example, have $500,000 by the time you want to retire, then there is a big gap between the amount needed for retirement and the money you will probably have at the age you are retiring.
So, what do you do to close the gap? There are several actions you can take to close the gap between the amount needed over retirement and the money you will probably have at the age you are retiring. You can cut spending to save some money every month and put aside that extra money in your retirement savings account. Another option is to increase your income. If you have debts, then you will also need to factor in those debt payments as well.
Pay off your credit card debt
Now that you know when you are retiring and how much savings needed to cover expenses over retirement, it is time to start saving for retirement. But if you have credit card debt, balance paying those down while you boost your savings.
The reason why I suggest focusing on credit card debt, versus loans or perhaps a mortgage, is because they typically come with a high-interest rate. Therefore it is very expensive for you to hold on to this debt. There are several approaches you can take when it comes to eliminating your credit card debt.
One method is the snowball method where you pay off the card with the lowest balance first, while paying the minimum amount on the other credit cards. Once you pay off the first credit card, then you snowball those monthly payments to the next credit card.
Another method is the avalanche method where you pay off the card with the highest interest first, while paying the minimum amount on the other credit cards. Once you pay off the first credit card, then you avalanche those monthly payments to the next credit card and so on.
A third method is to do debt consolidation. This is where you call your credit card companies and ask if they will consolidate your credit card balances onto one card. Typically if they do this, they will offer a lower interest rate on the card. This can be great for some people because it results in having only one payment per month versus several payments which can be overwhelming.
Start saving for retirement
There are several ways you can invest your money for retirement savings. You can invest your money in your employer-sponsored 401(k) retirement plan, a self-employed retirement account, mutual funds, stocks, and more.
It is never too late to start saving for retirement. So start saving for retirement right now even if you just have a little to set aside in a retirement account.
If your employer offers a matching contribution to a 401(k) retirement savings account, take full advantage of that to get that free money. Say your employer offers a 100% matching contribution up to 2% of your salary. If your gross monthly income is $5000 and you contribute 2% of it, then your employer will contribute $100 a month on top of your $100 contribution.
If your employer does not offer a retirement plan, or you are a freelancer, you can open a traditional IRA or Roth IRA, depending on which is best for you.
Cut spending
One of the main tenets of the F.I.R.E. (financial independence retire early) approach is to look for ways to cut back on unnecessary spending so that you can find extra money to boost your retirement savings.
The F.I.R.E. method suggests cutting spending on nonessentials each month. Then the money that you save can be put toward increasing your credit card debt repayments or boosting your investing/savings.
Take a look at the expenses category in your budget to identify what expenses you might be able to cut back on or cut out completely temporarily to free up extra cash in your budget.
Canceling your cable TV and using a low-cost alternative such as Netflix, Hulu or Amazon Prime Video will save you a ton of money. You can also or downgrade your TV package, Internet package, or cell phone package to save a lot of money every month.
At first, it may be difficult to pick up these new lifestyle habits, but adapting your lifestyle will help you reach your goal of retiring early.
Earn more money
This tip is my favorite because I prefer to increase my income than cut expenses. With that said, earning more money won’t do you a lick of good if you are not disciplined with your spending. If you want to save all the money you will need for retirement by your planned retirement age, consider picking up a side hustle or expanding your freelancer business to increase your income.
Some ideas for increasing your income include selling your unused and unwanted items online and offline to make some extra money that could be put toward debt repayment. You could make money online by teaching English to students from around the world, writing for blogs and websites, proofreading online content, managing social media accounts for others, selling your own handcrafted items online, and more ways, depending on your skills. You can also make money on the side by becoming a rideshare or delivery driver.
Talk to a professional
If you have got some specific questions about how to maximize your money or about your best investment options, it is highly recommended you talk to a professional. A financial advisor can help you with 401(k), investments, short-term goals, long-term goals, and retirement guidance.
In conclusion
As you have seen, retiring early requires dedication, effort, sacrifice, and a lot of planning, but if it is something you have been dreaming of, it is definitely worth the work. Following the above step by step guide on how to retire early will help make your goal less daunting.
Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
