Retiring early may seem like a fantasy, but for many people, the goal of retiring early is pushing them to reach FIRE (which stands for Financial Independence Retire Early). This so-called FIRE path often involves careful budgeting, smart investing, and being financially savvy, but no matter what you might think, it is not impossible. Here are nine steps you can take to retire early!
1. Plan your Budget Today
You can start planning for early retirement today by creating a budget and sticking to it. Pay special attention to areas where you spend most, expenses that are optional or unnecessary, and places where you can cut and save. The general rule is that 50% of your monthly income should be spent on necessities, 20% should be used for saving and paying off debt, and 30% can be used on things that you’d like. If you want to retire early, it may be important to save and invest more than the recommended 20%. Finally, double check that you’re not paying for unused and unwanted monthly subscriptions, which often are charged to your account automatically.
2. Plan your Retirement Budget
While it’s important to plan out your budget today, it’s also a good idea to estimate what your budget will be when you reach retirement age. You will want to consider options such as where your income will come from (savings, retirement plans, pensions, investments, etc.). Keep in mind that you may not be able to access certain retirement savings until you reach specified ages (at least, not without a penalty). You should also plan for living expenses - will you downsize your house, or live in a retirement facility? What utilities will you have, and how much will you need for your hobbies, traveling, and entertainment? Remember to account for inflation, potential medical bills, and plan to have enough saved for emergencies. Chances are, your retirement budget will change as you get older, but having a target to aim for can give you an idea of how much you need to save for each year of retirement that you want to have.
3. Find Ways to Invest
One way to build wealth and retirement savings is through investing. Make sure you’re contributing to a 401(k) or other retirement plan, and determine other types of investments that might work for your lifestyle. Typically, if you have many years before retirement, you can be more aggressive with your investments, but if you’re planning to retire soon, it may be better to be more conservative so that dips in the stock market don’t affect your savings too badly.
4. Contribute as Much as you Can
Retirement accounts typically have maximum limits of how much you can contribute each year. In order to build your savings and invest as much as possible, try to meet these limits. If your employer offers a retirement plan with a matching contribution, make sure you’re taking advantage, as this can significantly increase your retirement savings.
5. Refinance Your Mortgage and Pay Off Debt
One thing that’s critical when you retire is to have as little debt as possible, especially high interest debt that has monthly payments. Refinancing your mortgage while interest rates are low is one way to reduce your monthly interest rate and potentially pay off your loan faster. It’s also a good idea to pay off your car loan and avoid building up credit card debt. Be smart with your spending and saving, and remember that while it’s healthy to have some debt, too much can be overwhelming.
6. Earn More Income
One way to save more is to earn more, so if you’re planning on retiring early, it may be worth it to search for ways to earn additional income now. This could include seeking a raise or promotion, finding a better paying job, or getting a part time job or side hustle. You could also see if investing in real estate and becoming a landlord is right for you.
7. Use your Equity to Finance your Retirement!
If you're 62 or older, you can utilize a Reverse Mortgage to help finance your retirement! With a reverse mortgage, you can borrow from the equity in your home and use the funds however you wish. If you've paid off all or most of your mortgage, then you could be sitting on a gold mine of equity. A reverse mortgage allows you to access that equity in either a lump sum, fixed payment amount, or a line of credit. Even better, there's no monthly payment to the lender required, and the loan only has to be repaid when the last borrower sells the house, moves out, or dies. Planning to utilize a reverse mortgage can help add additional cash to fund your retirement. You can click here to see if a reverse mortgage is right for you!
8. Find the Right Insurance Plans
As you consider retirement, it’s important to have the right insurance plans. This goes for both medical insurance as well as long-term care insurance. Getting the right insurance plans now can be especially important if you’re ever in need of a home-care nurse, nursing home, or other assisted living facility, or if you experience a medical issue that could result in a large bill.
9. Consider Early Retirement Plans
Sometimes companies offer early retirement plans as a way to reduce payroll expenses by having employees voluntarily leave in exchange for compensation and benefits. If you’re already considering retirement and are offered an early retirement plan, you should determine whether or not taking this package is the right choice. If the company is struggling financial or dealing with long-term hardships, taking the retirement plan could be a good idea, rather than risk being fired. And remember: just because you accept an early retirement plan doesn’t mean that you have to retire – you can pursue a different job or career, either full or part time. Early retirement is a serious financial decision, but one that can be well-suited to the right lifestyle.
Ready, Set, Retire!
Most people retire when they’re in their 60s – 62 is the age when you can start taking Social Security benefits. But through the FIRE method, many people are retiring younger than that – in their 50s or 40s, and some people are even achieving retirement in their 20s! While this is a lofty goal, it’s not impossible, and it’s always smart to take a look at your budget and figure out the best ways you can earn, save, and invest.