Ever dream about how to retire early?
It sounds amazing to be able to spend more time having the freedom to enjoy the things that matter most to you—whether that’s spending more time with family and friends or having the chance to discover a new passion project.
According to the United States Social Security Administration, the average retirement age is 67 years old, and this estimate applies to individuals born during or after the year 1960.
However, times are changing.
Research shows that in 2021, as a result of the COVID-19 pandemic, more than 3 million Americans were able to retire early—a number that is equivalent to more than half the workers missing from the labor force from pre-pandemic levels.
These findings suggest that people will not stop wondering how to retire early and acting on their impulses to do so. In fact, government surveys done throughout the last year found that 2.7 million Americans age 55 or older plan on retiring sooner than they’d hoped.
And, you can be one of them. If you hope to retire five, ten, or even twenty years early, I will show you how to start planning for retirement so you can secure your desired financial future.
8 Steps to Retire Early
To retire young, you must learn how to be your own retirement, financial planner. If this sounds like a big undertaking, don’t worry. It’s not.
By following these eight easy steps for retiring early, I can guarantee that you’ll put yourself on the path to living a prosperous life in your later years.
Step 1: Determine What Kind of Lifestyle You Want
You won’t know how to save for retirement until you determine exactly how much money you’d like to have when you retire. This step forms the baseline for your entire retirement plan.
And the number will be influenced by a variety of different factors.
To start, think about how much money you’d need to maintain the lifestyle you have now, which would cover everything from necessary expenses to funds that are set aside for special events, nights out, and vacations.
From there, you can decide if you’d like to have more money to play around with once you’re no longer part of the workforce.
Keep in mind that it’s also really important to consider what you’d like the reality of your retired life to look like. Though various experts recommend retiring with $1 million, you may want to save more if you aren’t willing to make certain lifestyle changes.
Step 2: Assess Your Current Financial Situation
The next step to know how to retire early is knowing how much money you have already set aside in your retirement accounts.
Once you determine how much money you currently have, you can estimate how much more money you need to save.
Based on your existing budget, create an early retirement plan built around a realistic amount of savings that you’d like to have by the year in which you’d like to retire.
To find your “number” think back to the lifestyle you’d like to live and keep in mind the amount of money you think you need in order to live comfortably.
By taking the time to not only review your current accounts, but also your monthly income and spending habits, you can create SMART saving goals to put aside a specific amount of money each month over a certain number of years to slowly get closer to your target savings number.
Step 3: Wipe Out Any Debt
One of the biggest roadblocks to early retirement is bad debt. High-interest debt, especially from credit cards, can hinder your ability to save for the future.
In fact, many of these cards have interest rates as high as 18%. When you eliminate that extra expense, you can actually be paying yourself that 18% back in savings instead. Therefore, you should do everything in your power to rid yourself of this debt immediately if you wish to retire young.
Step 4: Educate Yourself in Investing
If you haven’t dipped your toes in investing yet, it’s not too late to start.
This is a huge untapped learning opportunity for many. Like learning any new skill, it will take time to become fully immersed in the language of investing, but it will help you better understand what is happening with your money.
To build your investing knowledge, you can start by talking to friends, family members, or peers who are passionate about investing.
In addition, there are some great books, blogs, and online resources available to help you learn how to start investing and master the basics.
And, if you’re worried about how to retire early because you don’t have extra money to invest, try cutting down on your spending in other areas to find some extra cash. Even if you’re only able to save a little money, you can use those funds to invest for early retirement.
Step 5: Familiarize Yourself with the 4% Rule
The 4% rule is a standard that you can use to figure out a practical amount of money to withdraw from your retirement account every year. It suggests that 4% of your retirement savings should be withdrawn in the first year of your retirement.
Then, each year after, you withdraw the same amount after this number has been adjusted for inflation. In theory, this strategy should make older adults feel more secure about their money lasting for 30 years.
However, the effects of inflation on retirement can be more complex than they first seem. The 4% rule may not be realistic if you need your savings to last longer than originally anticipated.
In this instance, it might be beneficial to consider lowering your withdrawal rate to 3.5% or 3%.
As far as early retirement strategies go, this one can produce some uncertainty. If you calculate what you need for early retirement and determine your withdrawals won’t be enough to afford all your expenses, you’ll then be forced to shift gears and find a solution that could involve limiting your spending or pushing back your retirement date.
Step 6: Start Researching Wonderful Companies
This step is invaluable in any early retirement plan!
Start researching companies that you understand and that have meaning to you. You shouldn’t be investing in any company or asset that leaves you puzzled as to where your money is actually going.
Most people put their money into the market by buying a mutual fund or stock option, but don’t always know what it is they’re investing in. They’re just hoping the market will go up over time, which is speculation. Not investing.
Steer clear of this approach. Instead, consider these four things to ask yourself as you begin to invest for early retirement:
- What is this investment, and what does it mean to me?
- Is this investment in a business and is it a good one? Does it have a good moat?
- Who is running the business? Do they have integrity? Are they good at what they do?
- What will the margin of safety be for that business?
And, last but not least, consider becoming a Rule #1 investor so you can learn even more strategies to help you invest for early retirement.
Step 7: Choose the Best Investment Vehicle for You
When I talk about investment vehicles, I’m referring to the method by which you choose to invest your assets and control your money.
There are many different types of vehicles that include IRAs, 401(k)s and pensions, Roth IRAs, bonds, mutual funds; and each of these early retirement strategies has its benefits and drawbacks.
When choosing the vehicle that is right for you, you’ll want to keep in mind the predetermined fee structures, costs, and benefits that are available to you through each option.
There are vehicles to fit every lifestyle, you just need to find the one that allows you to retire young by freely investing in wonderful companies without being taxed.
Step 8: Stay on Track & Keep Investing in Your Future
If you’re still feeling a bit uncertain about how to retire early, don’t worry. Consistency is key, so the most important thing you can do is exactly what you’ve been doing.!
Continue to follow your early retirement plan and budget to maximize your chances of successfully saving for your future. Remember that investments in wonderful companies equate to healthy investments for early retirement.
Plus, by using Rule #1 investing principles as a guideline, you will be prepared to lay the foundation to support your retirement goals.
Wondering if you need a professional retirement financial planner? Not necessarily.
Try our Retirement Calculator for guidance on how to find out how much money you need to save per year to retire on your timeline.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.