Retire Early
Retiring early is a dream, fueled by the FIRE movement, that many have, but not as many accomplish. It requires a level of determination and dedication that many lack. However, with the right steps in place, it’s possible. At the end of the day, it comes down to “how bad do you want it”? Retiring early involves sacrifice that some simply aren’t willing to undergo. And rightfully so. It isn’t for everyone. however, I think that learning to be content with less material things, while also investing more in the future, is a wise course of action. I’m always going to be working, but I want the 9-5 to be optional, not required. So here are the six steps to retire early that I am using.
Control Spending
Creating a high savings stream also involves cutting expenses.
Simple actions like reducing streaming services, dining out less, and canceling unused memberships can significantly lower discretionary spending. You really don’t need Hulu or Disney+ as much as you think you do 😁.
For larger savings, consider major expenses. The average household spends about $70,000 annually, with a third on housing. Exploring more affordable living arrangements or downsizing can provide substantial financial relief.
While some may see this frugality as restrictive, others find simplicity and freedom in a minimalist lifestyle. Author and minimalist advocate Joshua Fields Millburn captures this sentiment, saying, “Now, before I spend money, I ask myself one question: Is this worth my freedom?”
Maximize what’s coming in.
A high income isn’t necessary for early retirement. A survey by Empower shows Americans link financial independence to an annual income of about $94,000.
However, the simple truth is that higher earnings make it easier to save more.
You can boost your income by working extra hours, seeking promotions, or finding a better-paying job. Outside traditional employment, consider starting a side hustle, freelancing, or investing in assets that generate passive income. You could also leverage your home’s value with a house hack, like converting your basement into an Airbnb rental.
Plan. Carefully.
Early retirement presents unique financial planning challenges, including greater longevity risk.
To determine how much you need to retire early, use the Rule of 25. Multiply your estimated annual retirement expenses by 25. For example, needing $80,000 annually translates to a $2 million savings goal, allowing for a 4% annual withdrawal while preserving capital.
However, a 4% withdrawal rate might not suit everyone, especially for retirements beginning in the 30s or 40s and lasting 50 years. There is research that suggests that early retirees use a dynamic spending withdrawal strategy, adjusting spending based on market performance to improve portfolio longevity.
Early retirees must also consider tax implications, penalties on early withdrawals from certain accounts, and healthcare coverage before Medicare eligibility at 65. These factors require meticulous planning and possibly alternative solutions. Additionally, understanding state taxes on retirees is crucial.
Government employees face additional considerations. If you earned a pension on wages not covered by Social Security, your Social Security benefits will be reduced.
For early retirees with a family, having a solid estate plan is essential. It’s important to ensure that your income and health needs are covered, and that your spouse and children are supported in the event of your death.
Invest. Invest. Invest.
Retirement, especially early retirement, is challenging without investing. To achieve it, you should maximize contributions to your employer’s retirement plan, individual retirement accounts (IRAs), health savings accounts (HSAs), and other investment vehicles.
Within these accounts, consider allocating funds to stocks, bonds, mutual funds, and other investments.
Investing a high percentage of your income monthly, starting as early as possible, allows significant growth in your savings, making early retirement attainable.
Save. Save. Save.
The more of your income you save, the sooner you can retire. This is where you can consider if budgeting is right for you.
On average, Americans save only about 4% of their earnings, far below the 10-15% recommended by financial experts. T. Rowe Price’s analysis suggests that saving at the higher end of this range could help you accumulate 11 times your pre-retirement income by age 65.
To retire early, however, you need to save significantly more. FIRE enthusiasts often aim to save 50-70% of their income, indicating a substantial change in spending and saving habits is required.
Make sure it works for you.
Getting out of the rat race of a career as quickly as possible is a common dream. However, early retirement often requires significant sacrifices and a commitment to austerity, which many find challenging, especially when friends and family lead more affluent lifestyles.
Beyond financial challenges, finding fulfillment and contentment can be difficult. Consider how you’ll occupy your time, if your plans align with your spouse or partner, and if you’ll feel lonely while your friends are still working.
Researchers have found that some early retirees experience “feelings of emptiness and anxiety” and struggle to find their identity and purpose.
Fortunately, early retirement isn’t irreversible. You can always decide to “unretire,” and there’s no downside to saving more. You can still retire at the right time for you.
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