How to retire early (in 5 simple steps)

by | May 18, 2021 | 0 comments

How to retire early (in 5 simple steps)

Most people want to retire early and think longingly about what life could be like. It’s time to take some actions and make that dream a reality. It’s simpler than you think.

Retirement is not an age. It is a dollar figure. When you achieve that dollar figure, you have freedom. Freedom to work or not work. Freedom to live your life on your terms and not feel stuck in a job or a situation from lack of financial resources.

Here are 5 simple yet powerful steps you can take today to put you on the path to retire early.

Step 1: Figure out how much you need to retire.

It’s surprising how many people don’t know what they need to save to retire comfortably. Begin by reviewing your monthly expenses. How much money do you need each month to live on? Use that number to come up with an annual figure.

Here is an example: if your current household expense are $3,000 per month, you need $36,000 a year to live on. Using the ‘25x’ rule of thumb, you should target to have $900,000 (36,000 x 25) invested in your retirement account. It may seem like a large number especially if you have very little savings. Don’t let that paralyze you into doing nothing.

The ‘25x’ rule is a simple way to estimate what you will need to save for retirement. This rule is based on a 1994 study (also known as the Trinity Study) by financial advisor William Bengen. According to William Bengen, you can withdraw 4% of your retirement reserves without running out of money.

Step 2: Increase your savings rate.

Now that you have a number to work towards, it’s time to increase your savings each month. Analyze your monthly expenses. Start with the BIG 3. For most of us, the top three expenses are housing, food, and transportation. Start by taking a serious look at how much you spend in these three categories. Then do a reduction exercise.

Ask yourself if you have too much of a house? Can you downsize and have lower rent or mortgage? Can you drive a cheaper car and save those hefty car payments to fund your retirement instead? How much money are you spending on food each week including groceries, eating out, ordering in, and alcohol?

Challenge yourself to trim the big 3 expenses by $500 – $1000. Put all those extra savings into your retirement investments.

You will be surprised how quickly your retirement investments begin to grow.

Step 3: Invest your money.

Investing is for everyone. You do not need to be an expert or hire expensive financial planners to invest for you. Index funds are an excellent option for just about everyone. The world’s greatest investors like Warren Buffet openly recommend Index Funds as a responsible and well diversified way to get the most out of the stock market without paying hefty fees to fund managers.

You are investing in an entire index instead of picking individual stocks. Spend some time researching various index funds. Ideally, you want to choose funds that cover a broad market such as Total Stock Market or S&P 500.

“I believe that 98 or 99 percent—maybe more than 99 percent—of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.” —Warren Buffett

Step 4: Know your numbers.

Track everything! Know what you are spending each month to live on. This can be done as easily with a notebook or a spreadsheet. There are many apps that can help you track your spending as well. Don’t make it complicated.

Know your saving goal each month to reach your financial goals and stick to it.

Start tracking your net worth. Net worth is the difference between what you own and what you owe. Assets – Liabilities.  

Management guru Peter Drucker said, “what gets measured gets managed.” Remember you are the CFO of your life. Make sure you know where your money is going. You spend upwards of 40 hours a week earning money. Spend a few minutes a week taking care of it.

Step 5: Keep your lifestyle from inflating.

As you sit back and enjoy the fruits of your labour, you will see your retirement fund grow exponentially each year. There may be a desire to ‘upgrade’ your house, your car, your phone, buy a boat, buy stuff in general to celebrate how far you’ve come. Resist the urge to do so.

Keep your expense low. Continue to add any extra income from your pay increases, bonuses, or any other sources to your investment accounts. It’s not how much you make but how much you save.

If you follow these 5 simple yet powerful steps, you will be surprised how quickly you will become financially independent. You will be able to choose what you do with your time. You may want to keep working. You may want to reduce how much you work. You may want to start a passion project or volunteer your time.

Having the freedom to choose is a beautiful thing.