- Traditional “retirement,” where you wait until 65+ to stop working, is an outdated concept. More and more people are now focused on achieving “financial independence.”
- Early retirement means building wealth using tax-advantaged accounts like 401(k)s and IRAs, plus taxable investment accounts and other wealth vehicles like real estate.
- Controlling how much you spend and how much you save or invest are keys to when you can stop working and kiss your job goodbye.
According to a Retirement Confidence Survey, workers reported that their expected median retirement age was 65. However, more and more people have made efforts to forgo these traditional views and retire early. This is demonstrated in books like “Early Retirement Extreme” and “The Millionaire Next Door.”
If you don’t feel like working for the rest of your life, the time is now to take a look at your personal finances, build a retirement plan, and start saving. In this article, we’ve provided a practical guide on how to retire early, no matter your financial situation. We’ll detail a couple of the things you need to know about how to escape the rat race, achieve financial independence, and become an early retiree. We also offer many ways you can feel more confident financially, if this goal of early retirement seems out of reach.
What Is Early Retirement?
Early retirement is technically any time that you retire earlier than anticipated. However, it more refers to the recent phenomenon known as “FIRE” — financial independence, retire early. FIRE represents a movement where individuals drastically boot their net worth by saving as much money as possible, often as much as 70% of their income. By building their nest egg through extreme savings, these individuals can forgo waiting for the traditional retirement age and instead retire in their 30s and 40s.
People who believe in the FIRE movement are typically not satisfied with the traditional perspectives on retirement. They don’t want to wait until their 60s to stop working. They’re not happy with an average life or having average retirement savings.
How Does Early Retirement Work?
Typically, early retirement as well as traditional retirement are only possible when passive or unearned income exceeds expenses. Often, this kind of income comes from returns from investments in the stock market or index funds, or bank accounts with high savings rates. Other examples of passive income streams include:
- Interest and dividends
- Capital gains when selling investments
- Real estate rental income yielding positive cash flow
- Royalty income from books, music, or entertainment
If you’re considering extreme early retirement, you want to make sure that you have enough money to make it through the rest of your life without working again, even in a part-time job. There are three different things that you need to consider when crafting your early retirement plan:
- The amount of passive retirement income that you generate
- Your lifestyle and living expenses
- How many years you plan to live “retired” and the expected cost of living during this time
For most people, the most accessible retirement planning strategy is to build up investments by doing things like learning how to buy stock, creating a fixed income stream, or participating in their employer’s stock option plan. Companies may also offer to match 401(k) contributions, which you can take advantage of. If 401(k)s aren’t an option, you can also consider self-funding an IRA. Take time to compare IRAs vs. 401(k)s before determining which is best for your personal financial situation.
If early retirement is your goal, max out your contributions in every retirement account available to you. You’ll also need to aggressively save and invest your excess savings in taxable investment accounts since you won’t be able to tap into your IRA or 401(k) without penalties until you reach age 59 1/2. You may also consider working for a company with high growth prospects that grant stocks or options as part of employment benefits, although consider that the prospects of high rewards come with high risk. If you’re a self-starter with access to capital, real estate assets with consistent rental income can deliver the cash flow you’ll need to cover your lifestyle expenses and enable your early retirement.
Factors You Have Control Over
While there are some factors you can’t necessarily control, such as the investment returns that you receive from the stock market, there are factors that you do have control over with early retirement planning. If you commit to trying to retire early, you’re going to need to adopt the lifestyle that will enable you to achieve that goal.
It doesn’t matter what your source of income is or how much you make in the first place — there are some lessons that you can learn by studying the financial habits of others. One of the best places to start is by taking a look at the wealthy who can probably retire early but choose not to.
These individuals, along with early retirement extreme and FIRE devotees track their spending and usually follow a strict budget. They don’t indulge in expensive consumable items, fancy watches or cars, or extravagant weddings.
They also practice frugality in every sense of the word. They don’t have a problem buying secondhand or skipping a purchase altogether. These huge savers will negotiate for discounts when possible. They minimize housing expenses, living in modest dwellings or with a roommate.
And, although they are concerned about how their money grows, FIRE devotees also report personal fulfillment as well. For instance, a minimalist lifestyle is often more aligned with one’s personal values. Some people also believe it’s better for the environment as well.
As “The Millionaire Next Door” details, millionaires don’t drive luxury cars. Instead, they drive domestic sedans or pickup trucks. They live a frugal lifestyle and don’t find themselves caught up in social status. Although they could afford to live a more high-profile or comfortable lifestyle, they instead choose to build their nest egg.
The most important thing to remember if you’re considering the early retirement extreme path is that you must be willing to sacrifice now for the bigger reward later. If you’re willing to commit to living a very simple lifestyle, then you could be in store for a whole lot more wealth and freedom down the road.
What If Early Retirement Isn’t a Practical Option?
Early retirement sounds great, it may not be for everyone. For instance, FIRE is much easier if “self-reliance” means just yourself. If you have kids or other family members depending on you, it’s probably much more challenging to save. However, there are still some things that you can do to improve your financial situation.
Focus on catching up on savings and maximizing your retirement savings contributions while you have time. No matter if you have an IRA or 401(k), funnel as much money as possible into these accounts.
If you’re getting a late start and are worried about whether you’ll have enough for retirement, you too should do what you can to maximize contributions. Tax laws allow those older than 50 or 55 to make “catch up” contributions into their retirement accounts that exceed normal limits.
Once you’ve maxed out your tax-advantaged retirement accounts for the year, you can invest in taxable accounts. Taxable accounts allow you to buy assets like stocks and bonds each year, or funds that carry a mix of investments. You pay taxes annually on the investment income or any gains you earned from selling assets in your account. But unlike most retirement accounts, you’ll have access to your money in these taxable accounts without tax penalties if you need to withdraw money before age 59 1/2.
Additionally, examine your spending habits and cut unnecessary expenses — the sooner, the better. Take the money that you would have spent and invest it instead. A certified financial planner or financial advisor practicing under the fiduciary standard can help give you proper financial advice.
If you’re stuck in a job that you’re not satisfied with, try to find work or other activities that feel more rewarding or where you feel appreciated. If you’re stuck at a job because of a pension, or if alternative job prospects are slim, look for alternatives outside of work — such as volunteering — to help you feel more fulfilled so that you can go on working for many years until retirement.
Looking for More Information?
Fisker stresses that retiring early is more about finding personal freedom and fulfillment. This book details how we’re spending more than we need to and that “it is a complete waste of all of our time, energy, happiness, and the entire planet. So let’s analyze our true needs as humans and figure out efficient ways to meet all of those needs. Then we’ll enjoy our new more natural life while continuing to earn a rich-world wage for a few years. Since the earnings will be far more than our spending, we will save and invest it, and the work portion will quickly become optional.”
Is Early Retirement for You?
There is tremendous opportunity available for early retirement, but chasing this goal requires a true commitment to change. If you’re willing to commit to such change, get ready to enjoy your impending rewards and freedom.
Unfortunately, it’s not always possible to make FIRE work. Whether you choose to retire early or you can’t make FIRE fit your situation, the most critical thing is to make sound financial decisions.
Empower yourself with knowledge. Learn about everything from career paths to personal values. Read up on investing, starting with a guide for investing for beginners. Once you’ve armed yourself with knowledge, you can then begin forming the habits to get you where you want to go. Your biggest asset to secure your financial freedom is yourself. Equip yourself with the tools and resources necessary to start financial planning and build wealth today.