How to Retire Early

Author: Geoffrey Rogan

Although many people enjoy their jobs, we’ve all thought about enjoying our retirement. But achieving retirement (especially at an early age) requires strategic planning and dedication. 

This guide is written to help to explain the steps involved in early retirement. 

Steps to Early Retirement

There are two major problems with early retirement:

• You have a shorter time to save for retirement
• You’ll spend more time in your retirement years, thus potentially spending more money.

So, you must have a detailed financial plan that secures you throughout your retirement. You should also contact a financial advisor to help you make retirement plans.

But below is a step-by-step guide to help you achieve early retirement:

• Plan your Retirement Lifestyle

Planning for your post-retirement life is probably the first step. At this stage, you should be asking questions like:

• How do you want to live after retirement? For example, would you love to travel in your retirement days? Or do you have any expensive hobbies?
• How much will you be able to spend after retirement? This is commonly called a freedom figure or FIRE number.

Some experts suggests that you can spend 2.5-4% of your retirement savings annually. So if you saved 2 million dollars for retirement, then you can spend $50,000-$80,000 annually for 25-40 years.

You’ll often hear that you should save 25 times more than your annual salary. But it’s common for people to live more years in retirement than in their work years. 

So it’s crucial to have a long-term plan for life in retirement. Also, your retirement savings should account for unexpected factors like inflation, a life-threatening illness, or severe damage to your house.

Lay the Foundations for Early Retirement

The following steps can help you lay a good foundation for early retirement:

• Pay off High-Interest Debt

Having high-interest debt means you’ll eventually pay significantly more money. But the longer you carry high-interest debt, the longer it may take you to save for retirement. 

When incurring debt, you should consider if it’s a good or bad debt. Good debts are low-interest debts that help you make money, while bad debts have high interests and don’t help in making money. 

An example of good debt is a mortgage on a rental property or a low-interest debt to finance a laptop for your work. While bad debts include buying clothes with buy now pay later (BNPL) credit cards that have an interest rate.

To pay off high-interest debt, you should consider using the debt avalanche debt-repayment strategy.

The lesson is to remember that you can’t invest to build wealth for retirement when you are hindered by high-interest debt.

• Create an Emergency fund 

Besides your retirement fund, you should create an emergency fund for unexpected expenses. Also, an emergency fund ensures you won’t have to compromise money for investments that could bring profits.

• Build a Good Credit Score

You never know when you need a loan in the future, so you should always have a good credit score to help you out. Lenders use your credit score to judge if you are a trustworthy borrower. 

Furthermore, the earlier you start building your credit score, the faster you can achieve a good score.

An easy way to start building a good credit score is putting some expenses like gas on your credit card, then pay it back in full by the end of the month. This way, you’ll pay no interest while proving to lenders that you’re a reliable borrower.

• Reduce your Tax Liability

Taxes can take a big bite out of every dollar you earn. But using tax-efficient accounts can help minimize the amount of tax you pay.

For example, you can open a 401k which is based on an employer-sponsored retirement plan. A 401k account can help you save money you haven’t paid tax on. However, you’ll eventually pay tax, but the amount reduces as you get older and earn less.

There’s also a Roth IRA where you still pay tax, but won’t have to pay any tax on capital gains, thus helping you save money.

• Create Income Streams and Build Passive Income

Unless you have a high-paying job, you should be creating multiple income streams. Having several income streams is essential because you could lose your job, your business could crash, or your sole investment could fail.

Passive income is another important aspect of living a comfortable retirement life. But no income is truly passive, as they all require some effort. 

The key is getting your money to make more money instead of selling more of your time. 

Some examples of passive income include selling a course, money from rental property, selling digital assets like eBooks or software, etc.

• Save Money for Retirement

After creating sustainable sources of income, the next step is saving your retirement money. The truth is that the faster you save for your retirement funds, the earlier you can retire.

So you should start living more frugally, get on a budget, and cut down your expenses to save more money.

Changing to a frugal lifestyle isn’t easy, especially for beginners or people who are used to spending more. You may have to make sacrifices like riding a bike to work or cooking your food.

But it’s key to remember that building your ideal retirement fund requires a good saving habit. As you save, you should also involve any fees you’ll be paying during retirement such as your children’s school fees.

• Invest

If you truly want to live a stress-free life post-retirement, then you should start investing some money.

Having a good investment portfolio can keep your money growing while you’re retired. And investments can help you take care of financial emergencies and pay other bills after you retire. 

Investments could involve owning stocks, cryptocurrency, or even investing to grow your business. To reduce risk when investing, you should consult a financial advisor. 

Key Takeaways  

Retiring early isn’t easy, but it’s attainable with a good financial plan.

Here are a few takeaways to keep in mind as you consider early retirement:

• Multiple income streams offer protection in scenarios where you lose a job, or the stock market crashes. 
• Investments and assets can still bring money in your retirement
• You can’t retire without saving money, and high-interest debts can reduce the amount of money available for saving
• Increasing your earnings and reducing spending will help you save and reach your retirement goals early.
• Without an emergency fund, you may have to pull out your investment and miss out on potential profits. 

You can always reread this guide to help you out as you plan your early retirement.