April 12, 2019

How to Retire Early

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It's not too early to retire. Read this guide to learn how to leverage your income, invest for growth, and retire early (at 55, 50, and even 40 years old).

Today retirement means more than not working any longer. It means having financial independence to do what you want with your life, even if that includes working for who you want when you want, rather than being stuck in the rat race because you "have to" in order to make ends meet.

Before you decide to retire early, you have to take some specific steps. In other words, you have work to do in order to retire. It sounds like an oxymoron, but it's the truth. The more work you do now, the more likely it is that you'll be able to retire as early as you hoped.

The Basic Steps to Retiring Early

No matter what age you want to retire, you'll need to follow these few basic steps to make it happen.

Monitor Your Spending

One of the most important steps (and probably the hardest) is controlling your spending and/or increasing your savings. You are going to work hard now to allow yourself to not work in the not-so-distant future.

This could mean cutting costs and eliminating certain expenditures in your life. It sounds horrible now, but you'll thank yourself down the road. Cutting your expenditures now actually helps you in two ways - it helps you save more money and reduces what you need in the future.

Figure Out How Much You Need in Retirement

Now you need to figure out what you'll spend in retirement. You've already got your spending under control, but it's going to change a bit.

You probably won't spend as much on commuting or work clothing any more, but you might spend more on health insurance or traveling.

Putting together a plan will help you know what you'll need. For example, the retiree who wants to travel the world will need a lot more than the retiree who just wants to volunteer his days at the local animal shelter.

Learn How to Invest for Growth

If you want to retire early, you can't choose the "safe" investments. You need to choose the investments that are intended to grow, which means you also take a large risk of loss. The most common investment for FIRE adopters is low cost index funds. If you can handle the ups and downs, you should stick to a majority of your investment allocated towards stocks.

How Much Do You Need To Save To Retire Early?
The typical retiree needs approximately 8 times their salary saved in order to retire at 62 years old. If you plan to retire before then, you may need as much as 10 - 16 times your salary saved, depending on how early you want to retire.

How to Retire Early at 55

Retiring at 55 is only 7 years earlier than the "typical retirement." That being said, you'll have to ramp up your savings, but not as much as if you wanted to retire when you were 30 years old, for example. Since the average person needs 8 times their salary saved before they can retire early, you may need as much as 10 times your salary, depending on your plans.

At 55 years old, you'll need to think about things like:

Health Insurance
You can't get Medicare until you are 65 years old. Getting insurance through the marketplace can be costly, so you'll want a good idea of what the insurance might cost you for the next 10 years before you retire.

If you have a decent retirement account built up already and that's what you plan to live on, you'll have to cover the taxes on the withdrawals until you are 59½ years old. If you have a Roth IRA, you won't have to worry about this. But any other company-sponsored 401(k) or individual IRA withdrawals will incur taxes and penalties, so keep that in mind.

What You'll Do
How will you spend your spare time? Will you spend it with family, travel the world, or do some volunteer work? What you decide will determine how much money you'll need to make it happen. If you have big plans, you'll need "big money" to fund it.

Can You Retire At 55 And Collect Social Security?
The earliest you can collect Social Security is age 62 (unless you become disabled). It's best to wait until age 66, though, as that is when your benefit is the greatest (you'll earn the most income).

How to Retire Early at 50

Retiring at 50 is going to take a lot more conscientious saving than retiring at 55. Now you are talking about retiring 12 years early, which means you'll need a lot more money saved up to make it work. If you are serious about retiring then, you'll need to start your aggressive savings strategy as early in adulthood as possible.

A good way to make that happen is to avoid adjusting your lifestyle to your income as you work your way through the ranks. Trim the fat on your budget right away and then keep it that way, no matter how much money you make. All too often people ramp up their lifestyle as they make more money. Instead, put that "extra" money into investments and savings to achieve your goal of retirement at 50.

One thing you must do is stay out of debt. Debt makes it more expensive to live in retirement and could render your plans to retire at 50 null and void! You want as few monthly payments as possible as you near 50 and retire. This includes your mortgage.

According to Ellie Mae, Americans buy their first home at age 32. If you take out the traditional 30-year mortgage, you won't own your home free and clear until age 62. If you want to retire at 50, you'll need to accelerate this schedule by making extra principal payments. If you can afford it, calculate what a 15-year payment would be on what you owe and make those payments right away.

How to Retire Early at 45

Retiring at 45 means you realistically work 20 - 25 years before retiring. That's almost half of what the traditional American works before retirement. You're going to have to get much more creative if you want to shave this much time off your working years.

A few tips to make this happen include:

Downsize Your Home
You don't have to live in the maximum size home that you can afford. Instead, think of what you "really need." If you can downsize at all, you'll add money to the amount you can save. Why throw unnecessary money at a mortgage when it's room that you don't need?

Don't Buy New Cars Unless You Must
Everyone wants to drive the latest and greatest vehicle, but it's like throwing money out the window. You aren't going to see a return on your investment because cars depreciate fast. Instead, drive your "old reliable" as long as you can. When it becomes necessary to buy a car, don't opt for the fancy, new car. Instead, look for the frugal, used car that is inexpensive, but dependable.

Stop Following Your Friends
It's so easy to want to keep up with everyone else in your life, but at what expense? Are they retiring at 45? Don't spend money on items unless you absolutely need them. This goes as far as the grocery store. Make a list and stick to it. Don't buy unnecessary items. Even an extra $5 here and there adds up and takes away from your retirement goal.

How to Retire Early at 40

There's one word that people who retired at age 40 have in common: commitment. Deciding to retire at 40 is a serious decision. If you want to do it, you are going to have to "trim the fat" in your budget as much as humanly possible and avoid giving into temptation.

You'll have to do everything that anyone wanting to retire at 45, 50, or 55 must do, but you'll do more. Where you can really help yourself is in your career. You need to get ahead - and fast. You have to invest in yourself. Going back to school or getting certified in your field can help you get ahead. Find someone who can mentor your desire to climb the ladder at lightening speeds and take their advice.

You'll have to save an even larger percentage of your income if you want to retire at 40. This means having little spending money now. Of course, there are basic costs of living that no one can get around, which is why having a higher-paying job can help. As long as you don't rise to the income and change your way of living, you should have more to save for your financial independence at 40.

How to Retire Early and Travel

Retiring early and traveling the world means you'll have to do more than the person who just wants to retire early to enjoy life at home.

Chances are you don't travel the world now, so your expenses will increase quite a bit when you start traveling. Before you can decide to retire and travel, you'll need to figure out where you will travel.

Then do your research to see how much it will cost to do these travels (account for inflation). This will give you an idea of how much money you'll need to complete your desired travels. This will then give you an idea of how much more you need saved in addition to the standard 8 times your salary if you retired at age 62.

Deciding to retire early and travel typically means you agree to a life of frugality. You'll need to live well below your means now in order to enjoy your money while traveling. This may mean:

  • Own a Cheaper Home
  • Buy only Necessary Cars
  • Max Your 401(k) and IRA
  • Invest Aggressively

Can You Retire Early with No Money?

Retiring means that you have money. What if you don't have the million dollars saved that your neighbor saved to travel the world? Can you not retire early then?

Luckily, you may be able to with the right steps. The person who retires "with no money" may have a much different lifestyle than the millennial who saved to retire and travel the world. Again, retiring doesn't necessarily mean "stop working." It just means leaving the rat race and doing what you want. What you want could include working in some other fashion, whether it's opening your own business or working part-time in an industry you've always dreamt of working.

The strategies that those who retired early with money used in the years leading up to their retirement are the strategies you'll use now. For example, you'll have to live a frugal life if you don't have a nest egg to use. You may even have to get creative about where you retire. This could mean moving to a less expensive city or even retiring in a mobile home.

While you probably can't just stop making money, you may be able to make some tweaks as to how you make it. If your goal is to become Financially Independent before the typical retirement age, you'll have to adjust your lifestyle accordingly.

Bottom Line

No matter what age you want to retire, you have to do one thing - plan. Don't just think that you can decide one day when you are 45 years old that you want to retire at age 50. It requires years of saving, sacrificing, and planning. It can be done; it just takes a lot of dedication and commitment to make it happen.

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Chad Parks knows first-hand how hard it is for small businesses to succeed in today's economic landscape.
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