I’m going to make a bold statement here: early retirement is the same as conventional retirement.
You may be rolling your eyes, thinking, “But Greg, if it’s the same, why aren’t more people retiring early?” Because the one factor that makes the difference between retiring early and at the typical retirement age is time.
People are worried they won’t have enough money to say sayonara to their jobs at age 67, let alone 55. But the truth is that the same strategies that set you up for retirement success are the ones that will help you retire early if you set your mind to it. Early retirement just means you have less time to accumulate savings and more time to live off said savings.
I bet you’re thinking, “That’s all well and good, but how can I turn the early retirement pipe dream into a tangible reality?”
1. Know Your Financial Freedom Number
Before you even put pen to paper to create your retirement bucket list, you’ve got to know your financial freedom number. What is the magical nest egg amount that you need to be set for life?
You know that simplicity is my middle name. There’s no need to overcomplicate the calculation or do extensive scenario planning. The basic rule of thumb for the financial freedom calculation is that you will need about 25 times your annual expenses (not salary), assuming a 4% withdrawal rate in retirement.
First, you need to have a realistic view of how much money you need in retirement.
Let’s say after adding up the costs of housing, basic living expenses, saving for retirement and kids college, taxes, etc., you come up with the monthly sum of $6,000. Multiply that number by 12 and your annual cost of living is $72,000. Twenty-five times that amount is $1,800,000.
But that’s actually a little high. Keep in mind, when you retire, some of your bigger expenses drop off. For example, you aren’t saving for retirement anymore. I know it sounds like I’m stating the obvious, but that’s a big expense that will drop off when you retire. Also, your house should be paid off and kids may be done with college, too. (Unless you have boomerang kids, which may change the equation).
So, maybe that $6,000 / month figure above is more like $4,000 / month in retirement (especially if you were saving aggressively, which I recommend below). Your financial freedom number then becomes a little over a cool million; $1,200,000 to be more precise.
That is a rough estimate of your financial freedom number. Don’t let your number scare you. You just need a game plan.
2. How Much Is It Worth To You?
On that note, you need to get serious about making lifestyle changes. You may dream of an early retirement, but are you willing to do the hard work to get there? Nothing of value comes without a price.
If you have debt (including a mortgage), get rid of it. You won’t be able to save like crazy if your debts are growing and accruing a ridiculous amount of interest.
Cut back on unnecessary luxuries. Do you really use your expensive cable subscription (I only have the basic Netflix streaming and love it)? Do you really need a new car every 2 years? Evaluate your budget and find ways to throw every extra dollar towards your retirement goals.
Can you get a second job? Do you have a skill you can market that will bring in a couple hundred more a month? If you put away $200 every month (including what you’re already investing), that’s an extra $24,000 in 10 years, interest not included.
A combination of these factors could radically change your retirement picture.
3. Save. Then Save Some More
The typical bachelor’s degree graduate will make $60,000 per year when they reach career peak. That may not sound like much, but over the course of their entire career, they’ll earn $1.19 million, cumulatively. So why aren’t more average Americans millionaires when they reach retirement? Because they didn’t save.
For every year you delay in saving, you’ll have to contribute exponentially more to reach your savings goals because of my favorite thing – wait for it – compound interest! If you start saving $400 per month at age 25, you would have $1 million saved by age 65 (assuming a 7% annual investment return). If you don’t start until age 35, you’ll have to save around twice as much to reach $1 million by age 65.
4. Invest for Growth
Your goal retirement date doesn’t have to dictate your investments’ time horizon. You may be retiring in 10 years, but you don’t need to set a 10-year horizon for your investments because you’ll only need a small portion of your nest egg in the early years. The rest of your money may stay invested for another 20 to 30 years. Make sure you are investing with the proper perspective and don’t cheat yourself out of years (or even decades) of growth.
Yes, you want growth, but please please please don’t chase returns or try to beat the market as a strategy to retire early. You still need to maintain a proper asset allocation so your portfolio can grow healthily without too much risk.
5. Max Out Your Employer Match
Free money? I’m in! But not everybody else is. One in four Americans leaves money on the table by not maxing out their employer’s 401(k) match. 1 No matter what match percentage is available, take it and run with it.
Need a hypothetical example? If your employer offers $0.50 per $1 up to 6% of pay and your annual salary is $100,000, that’s $3,000 in free money(!) for a total of $9,000 saved for the year. Assuming a 7% return rate, if you started saving at age 30, you could potentially save $1 million by age 62 (not accounting for taxes or inflation). If you contributed the maximum allowable amount — $18,000 per year — that savings could reach $2.1 million.
Along with upping your contributions to your retirement accounts, try to avoid high-cost funds, which can eat away at your savings. The higher the fees you pay, the longer it will take for your investments to grow. Many people don’t realize the fees they’re paying (or assume they aren’t paying any), but retirement account expense deductions average 1.5% per year. 2
6. Take Advantage Of Your Advisor
You won’t get to early retirement by wishing and dreaming. You need a plan and accountability (I hate to admit this, but at times my best value to my clients is not my investment knowledge or financial planning skills, but simply to hold them accountable and, frankly, get shit done). It’s time to take control of your financial future and get serious about your money. An advisor can steer you in the right direction, making sure your finances are on the right track.
And by advisor, I mean me (shameless plug). Download my free wealth building checklist now and decide when you want to retire.
For many people, a 401k is their largest retirement account. It deserves your undivided attention. Download our Ultimate 401(k) Guide for a step-by-step strategy to master your 401(k), including a prioritized checklist. It’s free!
Pathway founder and principal Greg Brown is a fee only financial advisor with broad financial planning and investing expertise. Greg’s financial advice has been featured in publications like Yahoo Finance, Bankrate, Investopedia (all articles here), Wall Street Journal, and USA Today. He holds a master’s degree from the University of Chicago and a mechanical engineering degree from Michigan State University. Prior to Pathway, Greg was a lead analyst at Morningstar and previously held engineering roles at Dell (including a US Patent).
Also published on Medium.