It takes a lot of work to quit work forever. You must be focused and committed to doing whatever it takes to achieve your goals. What follows is the 7 step guide which answers the question I hear most:
How can I retire early?
- Define retirement – What kind of lifestyle do you want
- Determine your current financial situation
- Determine your goal. Get it down to one number
- Determine what it will take to achieve your goal
- Focus on saving and investing
- Seek input from financial professionals (healthcare, taxes
- Reach your goal and soak in the glory of early retirement
Define retirement
Before you can devise a strategy to retire early, you must first determine what it even means for you to be retired. You need to figure out how to live once you decide to quit work forever.
Do you plan to travel when you are retired? Are you going to sit on the couch all day and watch TV? Is it your dream to open a business? Or maybe you want to volunteer all your time and donate all of your money. Each of these things have differing costs associated. So what will you do? You need to have an idea before you can determine your strategy to get their.
Determine your current financial situation
What is your current financial situation? Are you completely broke? Are you well on your way to a one million dollar nest egg? Two million? Do you spend every penny you earn and then spend more on credit?
You will need a budget in retirement when the income stops flowing. You need to get good at it now. Now is the time to take stock in what you have, what you spend, and what you plan to do in retirement.
Here is an example of a monthly spending budget of $2700
| Utilities | $400 |
| Phone | $100 |
| Internet/Cable | $100 |
| Insurance | $500 |
| Car | $300 |
| Food | $200 |
| Clothes | $200 |
| Entertainment | $100 |
| Vacation Savings | $100 |
| Home and Car Maintenance | $200 |
| Gifts | $100 |
| Savings | $300 |
| Hobbies/Misc. | $100 |
Determine your goals (Get it down to 1 number)
So you have an idea of how you would like to spend your time in retirement and you understand how to make a spending budget. now you will need to look in to your crystal ball and combine the two to determine what your spending will be like in retirement.
Since you will not have an income in retirement (or at least not as much as you do now) you will need to do your planning and saving now. The idea is to get it down to one number that you will aim to achieve before quitting the rat race forever.
So for example, if you plan on engaging in expensive activities in retirement you might find that you will need $5000 a month. But what does that mean you will need to save now so you don’t run the risk of running out of money?
If you plan to spend $5000 a month in retirement, the next question is, how many months will you live in retirement? You can not know the answer to this so you will have to come up with a way to estimate a safe amount that will allow you to live comfortably without worry.
As you can see, there are a million variables that go into determining your 1 nest egg goal and the variables are different for everyone. Before you can put a serious strategy into action, you will need to consider your variables.
Once you figure your annual spending, you can multiply by 25 to determine your nest egg goal. So in the instance above, $5000 x 12 months a year = $60,000 a year x 25 = $1,500,000. In other words, if you plan to spend $5000 a month, you can feel safe in knowing you will never run out of money if you save $1.5 million.
The reason this works is the 4% safe withdrawal rate . Here are two articles I have written which go further in debt on the 4% rule and early retirement.
How much money do you need to retire early?
How long will my savings last? The 4% rule simplified
What it will take to achieve your goals
Did you take the time to estimate your nest egg? If not, do so now. If you have no idea how much you will spend in retirement, use your current spending as a guide. You can (and will) make adjustments as you go anyway. You are not stuck with the number you choose now.
So lets use $1.5 million as an example of our required nest egg. Once you have made that determination, its time to figure out how you are going to get there?
The first thing you need to figure out is your retirement age and thus how long you have to save. How old are you now and what age do you plan to retire? Lets assume you have 25 years to accumulate a nest egg of $1.5 million. How do you intend to do that? Is it even possible? What do you need to save each year, week, month, etc?
If you are going to save $1.5 million in 25 years you will need to save $1200 every month and achieve returns of 10%. If you feel neither of those conditions are possible, you will need to make adjustments. Either you will need to settle for less in retirement, extend your time until retirement or find a way to save more money or earn a higher interest rate.
Here is a simple example of how determine either how long you have to reach your goal or if you need to adjust your savings rate.
| Current Age | 35 |
| Savings Goal | $1,500,000 |
| Current Savings | $250,000 |
| Current Monthly Savings | $600 |
| Estimated Total at age 55 | $1,275,000 |
| Shortfall | ($225,000) |
In this example, you would need to work longer, save more or figure out how to spend less in retirement. You can easily do this example using any simple savings calculator. I use bankrate.com but there are about a million out there that you can use. Just type it into your google machine.
In the example above I used a 7% interest rate to calculate the growth. In order to achieve the goal of $1.5 million in 20 years, you would need to increase savings to $1000 a month. Or you could work another 2.5 years. One final possibility os to figure out how to earn more interest and raise your growth rate from 7% to 8% annually.
When you start playing around with the numbers you see the need to constantly re-calculate and make adjustments. The important thing is to stick with it and always be focused on achieving your goals.
Focus on saving and investing – time to make some sacrifices
In step 1 you determined your total savings amount. In step 2 you figured out what age you will retire and how much you need to save each month to get there. Now that you have a number, it is time to make some sacrifices and focus on the actual work.
In the example above, one of the ways to overcome the shortfall would be to save more. Everyone can find some part of their spending that can be sacrificed in order to save more. It is simply a matter of how badly you want to reach your goal vs how badly you want the instant gratification that comes along with whatever spending you are about to do.
I wrote an article that identifies opportunities for every day spending cuts which you can read here.
Seek input from professionals – Figure out what you can expect. Taxes, healthcare
The closer you get to retirement, the more important it becomes to assure you protect yourself with regards to taxes and healthcare. The are 2 things that can destroy your nest egg quickly and both tend to be intimidating and confusing. You will want to consider seeking input from a professional when it comes to dealing with these 2 things.
You might also need assistance assuring your loved ones are taken care of after you are gone. Estate planning is not easy and you don’t want your hard earned money to end up in the wrong hands when you are gone.
Here is my article on how, when and why to hire a financial professional.
Reach your goal and soak in the glory of early retirement
Your hard work has paid off, you have reached your financial goals and you have done so at the age you desired. It is time to soak it in and enjoy your retirement.
You have worked hard your entire life and made the necessary sacrifices to get here. Leave your worries at the door and enjoy my friend. You have earned it! Now go live the life you have architected for yourself.
Earl