How To Retire Early

personal finance Oct 03, 2020
How To Retire Early by TTM Education

Retiring early may feel like a pipe dream, but with the right consistency, dedication, and of course frugal living, you can make it happen.

Retiring early requires plenty of income, a serious budget, and an appetite for investing, aka risk. It’s not for the faint of heart, but if you have the discipline, you can retire as early as you want – some people retire in their 30s or 40s these days, more than 20 years earlier than the traditional retirement age!

How can you make it happen? Check out the guide below.

Think about What you Want

First, define what early retirement looks like for you. Some people think of it as not working and traveling the world. Others think of retiring as quitting the 9 to 5 rat race and instead doing what they love, whether owning their own business or working somewhere that doesn’t quite pay the bills, but still brings in income.

There is no right or wrong way to retire – you choose what works for you. Just make sure you define what early retirement looks like for you early on because it will determine the next steps.

Know how Much Money you Need

Now that you have a plan, it’s time to figure out how to make it happen.

You must know how much money you need. What’s your annual spending and will that change when you retire? Write out your expenses and decide if you’ll have the same expenses when you retire. If you’ll travel while retired or do something unusual, your expenses may change.

If you’re just planning to retire and do what you want, while living in the same house, the expenses may be pretty similar.

Either way, take a close look at your annual expenses including all fixed and variable expenses, and create a target number. Think about what age you’ll retire. The younger you are, the more money you’ll need because you’ll live longer. Multiply your annual expense number by 25, 30, or 35 depending on when you retire.

For example, if you retire when you’re 35, you’ll need a lot more money than if you retired at 50 years old. But your intended lifestyle matters too. Figure out what you’ll need to make retirement worthwhile. If you’ll inflate your lifestyle, make sure you’ll have the funds to support it.

Increase your Income

While you’re still working, increase your income as much as possible. Start a few side gigs and bank the money you bring in. Use your regular income to pay down your debts too. Retiring early with debts only drains your retirement income and isn’t ideal.

Stay focused and earn as much money as you can in the shortest amount of time. If you have a lot of debts, including a mortgage, car payment, and credit card debt, pay it all off before you retire. Keep working (side hustles too) until you get the debt under control.

Make sure you pay off all debts, even ‘good debts’ like your mortgage. Even though they help you build your net worth and even help your credit score, they take away from your retirement funds, making it harder to retire early.

Invest your Money

No matter how much you work, nothing makes your retirement funds grow faster than investing them. Max out your employer-sponsored 401K, taking advantage of any employer match you receive. 

If you have more money to invest beyond the $19,500 you’re allowed to contribute to your 401K, open an IRA, and/or invest in a taxable account. You need to diversify your funds and give yourself liquid assets to draw on before you’re 59 1/2 as that’s the earliest you can draw on your retirement funds.

No matter where you invest – invest for the money to grow. This isn’t a time to be conservative. You want the most growth possible early on because once you retire, you’ll need to pull back and make your portfolio much more conservative so you have money to live off of without the risk of a total loss.

Take advantage of compounded earnings and invest as much as you can as early as you can to give your money time to grow.

Live Frugally

This may be the hardest part of retiring early, but you need the cash flow now and when you retire. Cut out all unnecessary expenses and don’t use credit cards. Only buy what you can afford in cash and even that keep to a minimum.

If you live a frugal life now, it will be easy to carry into retirement. Ideally, you should only withdraw 4% of your retirement income each year to make your retirement funds last your entire life. If you start early living a frugal life, it’s a lot easier to do when you’re retired too. 

This doesn’t mean don’t treat yourself – this is supposed to be a time of freedom, after all, but don’t’ let your spending get out of control as that only leads to outliving your retirement funds.

Are you Ready to Retire Early?

With the right budgeting, retiring early is possible. It takes a lot of careful planning and dedication. Budget for your retired life and know how much you need long-term. Don’t retire until you know you have more than enough to handle your annual expenses plus a ‘buffer’ should something happen.

Retiring early is something anyone can achieve with the right steps. Start the process early – living a frugal life, budgeting, and investing aggressively to make the most of your chances of retiring at a much younger age than the traditional 59 ½ years old. 

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