How do you define early retirement?
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- It takes time and self-discipline to retire early.
- Your goal should be to save/invest 25-30% of your annual expenses, depending on what you want your retirement lifestyle will be.
- Regardless of how you want to spend yearly, you will find yourself in one of the three FIRE categories: FIRE, fatFIRE, and leanFIRE.
- To achieve your goal you need to maximize your income, spend less than what you’re making and make the most of your retirement accounts.
- Pay all high-interest debts before you retire including early pay off of the mortgage.
Planning your retirement isn’t easy. You have to give your effort and self-discipline to maximize your earnings, savings, and investments the most you can while you are still young.
Early retirement can be seen in a lot of ways. How you visualize your retirement will determine how you can get there. We have listed the steps you must take to get there:
Tips for Early Retirement
- How do you define early retirement?
Early retirement doesn’t mean you won’t earn any more. A lot of early retirees interpret it as having financial independence or not having to work to support a living. Some describe it as leaving their corporate jobs to do what they want or be their own boss. While some explain it as focusing on non-income generating activities or traveling in between works, or even working just whenever you want to.
Knowing what early retirement means for you is the first step you need to do. Once you have visualized what your early retirement looks like, you can easily make plans to achieve your goal. However, be adaptive to changes as your plan may evolve.
- Make an inventory.
A 43-year-old retired anesthesiologist and the person behind Physician on FIRE, Leif Dahleen, said that taking inventory of finances is the first step for someone who wants to retire early.
According to Dahleen, you need to do two things to plan for your future. The first is to calculate your worth, and the second is to calculate your annual expenses. You can guess your expenses based on your spending habits as well as your credit card statements.
He further added that setting up a semi-automated tracking app will help verify the amount of money you spend every year.
- Set Your Goal Amount
Once you have set your vision of early retirement, you need to set your goal of how much money you need to see that vision become a reality.
Self-made millionaire and an early retiree himself Grant Sabatier recommends saving or investing between 25-30 times your expected yearly expenditure on top of one year worth of cash expenses.
Sabatier shared a formula to calculate his “target number” in his book “Financial Freedom: A Proven Path to All the Money You Will Ever Need.” He broke down the number to different saving goal period: monthly, weekly and daily.
With the possible recession and other events that may affect your investments, it can be difficult to calculate this on your own. Looking for a financial planner will help you deal with the numbers and provide you with a realistic plan to reach your goal.
- Spend less than what you earn.
Spending more than you earn does not only make it hard for you to save, but it can also lead to debt accumulation. If you want early retirement, you have to spend less than what you are making. It other words, you have to live below your means. This is the best – and perhaps the only – way for you to save and invest more for the future.
Reducing your biggest expenses like housing, transportation, and food will help you increase the amount you can save every year.
Regardless of your spending, you need to understand about FIRE, which means “Financial Independence. Retire Early.” There are three FIRE: Fire, leanFire, and fatFire.
Fire is someone whose expenditures are around the US household’s average which is approximately $60,000/year.
LeanFire is someone who lives on a lean budget and saves up to 25 times their yearly expenses and spends less than the average American.
FatFire, on the other hand, is someone who spends more than what’s the average.
- Control your income.
Financial Planner Eric Roberge said it’s essential to keep track of your spending and cost-cut only to a limited degree. On their podcast, “Beyond Finances,” Eric and his wife Kali said that increasing your income can make a big difference.
Increasing the money that’s coming in is a long-term solution, which is in direct contrast to the short-term solution brought about by cost-cutting expenses and daily spending.
He also said that diversifying your income sources is a good way to increase cash flow. The best way to increase your cash flow is to invest in passive income like real estate. Having a passive income business that provides even a small amount of money which can help cover for your monthly spending “gives you more flexibility and potentially the opportunity to reach financial independence very quickly.”
- Maximize retirement accounts
Early and frequent savings. These two are the most common strategy in almost every success story about early retirement and financial independence. The best way to enhance savings is to save on retirement accounts.
IRAs and employer-sponsored retirement plans offer great tax benefits and investment growth. Last 2019, a person can contribute $6,000 to traditional IRA and up to $19,000 pretax to a 401(k). The amounts you contributed can be used as a tax deduction on the year’s tax return.
The only disadvantage of saving on retirement accounts for early retirement is withdrawal restrictions. You cannot withdraw money from 401(k) contributions with no penalty until you are 59 ½ years old. But you can withdraw your Roth IRA. This is funded with after-tax money and allows you to withdraw your contributions tax-free anytime. However, you cannot withdraw your earnings on this account, just the contributions only.
- Invest unused money
If you have extra money, proceed to invest it directly. For example, if you have reached the contribution limit of your retirement accounts, invest the rest to a brokerage account in which you can invest and withdraw anytime you want in the stock market.
Warren Buffet’s favorite investment is low-cost index funds. Index funds track the specific financial market and diversify your money while minimizing the risk. Many early retirees and self-made millionaires are investing in this.
- Pay off your mortgage
Paying off the mortgage early is a good deal when preparing for an early retirement… that is if you get a good deal with your financial institution. Paying off the mortgage and other liabilities also provides a sense of relief and stress-free mind to a lot of people.
An early retiree named Tommy who retired when he was only 51 years old after more than 30 years of working in a telecom company said he never earned 6-figure salaries, but he focused his efforts on saving since he was in his early 20s and lived on a tight budget with his wife and three kids. However, he only has one regret and that is not paying off his mortgage early.
He said in one of his blog posts, “So much of our having a great retirement is mental. Being mortgage free certainly adds another level of mental freedom.”
It really is worth it to pay your mortgage early.
- Get health insurance.
Once you retire from work, it also means saying goodbye to your employer-sponsored health insurance. It is also not a good plan to just wait until you are 65 years old for Medicare to start. You need to have insurance between the time you leave your work until you are 65 years old and the best one is to join a working spouse’s employer-sponsored health insurance plan.
You may also continue the coverage from an old employer under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). COBRA allows an eligible employee to continue the benefits he is receiving even after he leaves an employer. You may also browse other coverage options and subsidies via the Affordable Care Act marketplace, get a part-time job with insurance benefits, or research on other health-sharing plans.
- Get your back-up plan ready
There is no such thing as a perfect plan. Even if you have visualized your early retirement and the road you will take to achieve it perfectly, something can go wrong along the way. There are times when an early retiree realizes that it’s such a bore to do nothing – if this happens to you, will you work again? Or there might be some recession or any economic downfall that will affect your net worth and savings – can you afford to cut your expenditures by then?
Having a back-up plan will help you in these trying times should worst things come to happen and affect your early retirement plans.
- Work on your future early retirement, while making sure that you still enjoy the present.
Thinking of the future tends to make us overlook the present. We focused too much on thinking about what our future looks like while disregarding our present lives. Time and self-discipline are needed to have early retirement and relax, but make sure that you still have a present life.
Steve Adcock, an early retiree, wrote, “Sacrifice is necessary to retire early, but it’s not all we do, either. It is important to treat and reward ourselves along the way by celebrating those smaller achievements.”
Think about the future, but also live life in the present.
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