It sounds like a dream: retiring early to spend your days at leisure, allowing you to travel and enjoy your life without working.
But in recent years, the FIRE movement — or “financially independent, retire early”—has gained a great deal of steam as a way of making this dream a reality.
Of course, preparing for more freedom in retirement involves much more work on the front end. If you’d like to redefine your finances and learn how to retire early, you’re in good company. We’ve put together a list of the five things you’ll need for an early retirement.
Decide How Much You’ll Need in Retirement
First, estimate how much you’ll actually need in order to retire. This can be done with an online calculator, or by averaging your current monthly spending. Add a little extra wiggle room as appropriate.
Don’t forget to adjust for inflation, and keep your taxes and health care costs in mind as well.
Once you have this figure in mind, you’ll have a better idea of the wealth building strategies you’ll need to help you get there.
Take Inventory of Your Finances
Your ability to retire early will be affected by your current financial situation, so it’s a good idea to stop and see where you are. Calculate your net worth, figure out how much you spend and where you spend it, and have this information ready as you move on to the next steps.
Set a Bare Minimum Budget
If you’re going to start putting a significant amount of money toward retirement—enough to consider retiring early—you’ll need to cut out a lot of your expenses. This will mean cutting your budget down to your bare minimum.
Depending on your current income, you may want to aim to live off of 50% or less of it.
This means more than cutting out coffee. It means wiping out your debt, paying a bare minimum for food and transportation, and even reconsidering your housing.
Depending on your age and other factors, you’ll need to decide your risk tolerance and begin investing accordingly—if you haven’t already!
If you want to retire early, you’ll have a shorter period for your investments to grow, so you need to plan to make that growth happen. However, don’t forget that you’ll also be able to allow your money to grow during your retirement as well, even for 50 years or more depending on your plans. This means you may not necessarily need to take on less risk.
Work with an expert as needed to make sure that you’ve put together a balanced portfolio that can support you in the long-term. This means maxing out your retirement accounts and investing extra money where you can.
Know How to Retire Early
Early retirement will require time and discipline in the years to come. You’ll need to save more, better manage your wealth, and develop personal finance strategies to make your goals a reality. However, using the steps above as a jumping-off point can help you take your first steps as you learn how to retire early!
If you’re interested in strategies to help you with FIRE or other personal finance tips, check out our other posts.