Early retirement is an ambitious financial goal, but it is possible with the right plan in place. Start by evaluating your current situation.
Ideally, you want to enter retirement debt-free, so pay off any high-interest credit cards and other loans first. Next, create a budget that includes all expected expenses in retirement.
1. Determine Your FIRE Number
The key to determining your FIRE number is understanding what expenses you expect in retirement. Consider factors like one-time expenses (like a home remodel) and recurring ones (like groceries and utilities).
It’s also important to factor in your expected investment annual return and any other sources of income you plan to use in retirement. For example, some people supplement their retirement savings with side hustles and other income streams. This can accelerate their FIRE journey and provide more flexibility in retirement.
2. Create a Budget
If you want to retire early, you’ll need a budget that can support your lifestyle. For example, if you plan to retire before Medicare kicks in, you’ll need to have a backup income strategy in place to cover health care expenses.
Northrup suggests creating a separate emergency account that automatically transfers funds you’re earmarking for retirement into your investments each month. Doing so allows you to take advantage of financial concepts like compound interest. It also gives you a buffer if market volatility sends your spending out of whack.
3. Create a Retirement Savings Plan
A solid retirement savings plan can help ensure a smooth transition into the golden years. It can also help you mitigate risk by ensuring that your assets will last longer than expected.
Make saving for retirement a line item in your budget, starting with the money that you can easily spare. Consider making catch-up contributions to your 401(k) or IRA if you haven’t done so already.
Understand that many expenses you pay today won’t continue post-retirement. This includes things like utilities and food costs.
4. Create a Retirement Income Plan
There are multiple strategies that can help you create a sustainable retirement income. Often these include a savings plan with higher contribution limits, such as a solo or SEP IRA, the ability to profit share and access to a broader array of investments.
It’s important to make sure your day-to-day expenses — such as housing, food and utilities — are covered by lifetime guaranteed income sources. This may require an approach that uses a bucket strategy, where assets are divided into three “buckets” to balance investment growth with easy access to funds.
5. Create a Retirement Income Strategy
It’s important to create an income strategy for early retirement. Many people dream of retiring at an age that’s decades away, but they don’t plan for how they’ll generate income to cover expenses.
A popular rule of thumb is the 4% rule, which says you can safely withdraw about 4% of your invested savings in the first year of retirement and increase that amount slightly every year to counter inflation. This approach can help you avoid running out of money.
6. Create a Retirement Investment Strategy
No matter when you start, it’s important to save and invest. The earlier you start, the more time your money has to grow. This allows you to take a more aggressive approach to investing. It also gives your nest egg a chance to recover from any market downturns before you retire.
Consider taking advantage of any 401(k) matching programs or opening a traditional IRA. These accounts allow you to make pretax contributions and your money will grow tax-deferred.
7. Create a Retirement Income Strategy for Your Spouse
If you retire before you reach age 65, you may need to find a way to pay for health insurance. A financial advisor can help you create a strategy to bridge the gap between early retirement and Medicare eligibility.
You should also consider the timing of Social Security benefits. Taking benefits at 62 rather than waiting until your full retirement age can significantly reduce the amount you receive. Your advisor can help you determine your optimal Social Security claim strategy.
8. Create a Retirement Income Strategy for Your Children
Many people who pursue early retirement do so to travel, pursue passion projects or simply enjoy life more. However, to get there requires some in-depth financial planning.
This includes evaluating how you can change your current lifestyle to reduce expenses and funnel more into savings. You may need to work more, get a second job or invest more aggressively.
It’s also a good idea to create a strategy for tapping into investment accounts without incurring any major tax penalties.