Early retirement has always been something of a fanciful dream for American workers, but in recent years the idea behind it has grown into an actual movement. Dubbed FIRE, for “Financial Independence, Retire Early,” the idea is that by working hard and making smart financial choices, nearly anyone can retire early.
Yet, as with many plans, the devil is in the details. While the idea of retiring early sounds wonderful, and even easy to accomplish, it takes some dedicated planning and sacrifice. Here are 10 tips to help make that dream a reality.
Last updated: July 30, 2021
Put Your Money To Work
It’s hard, if not impossible, to retire early unless you put your money to work for you. Unless you receive a large inheritance or otherwise fall into a large sum of money, you’ll need to earn compound interest on your savings and investments to get anywhere close to early retirement. This is one of the core principles of the FIRE movement — by diverting otherwise “wasted” money into investments, you’re channeling all of your finances away from frivolous spending and into your early retirement.
Start as Early as You Can
If you’re planning to retire early, that means you’ll have a much shorter runway to reach your savings goals. Whereas most workers put in about 45 years before they start drawing their Social Security checks, if you want to retire early, you might only have 20 or 30 years to save and invest. This makes it imperative that you start as early as possible, even in your teens. By starting early, not only do you have more years that you can save, but you also benefit from compound interest. Starting even a few years later can cost you greatly by the time you retire.
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Make Sacrifices — Now or Later
Americans are notorious for “lifestyle creep,” which refers to spending more money as your income increases. If you’re planning to retire early, however, this isn’t an option. From an early age, you’ll have to learn to say “no” to things like fancy dinners, extravagant hotels or the latest gadgets. This doesn’t mean you can never go out or have a good time, but it does mean you’ll have to make smart choices throughout your life and keep your standard of living fairly constant.
Understand You May Live Longer Than You Think
When you choose to retire early, your life calendar gets flipped a bit. Rather than having a long working life and a shorter retirement, which is true for most Americans, if you follow the FIRE movement, you’ll have a shorter working life and a longer retirement. The trick is that many Americans underestimate just how long they’ll live after they retire. According to the CDC, as of 2016, Americans of all races were expected to live until at least age 84 once they hit age 65. If you retire at age 40, for example, this means you’ll likely live another 44 years or more. Since many American are used to the idea that life expectancy at birth is only in the 70s, the idea that most will live to 85 or 90 once they reach traditional retirement age can be a surprise.
Don’t Be Too Conservative
Investing as much money you can at a young age isn’t enough to get you to early retirement. You’ll also have to be wise about how you allocate your investments. If your investment profile is too conservative, even with the power of compound interest you might not earn enough to reach your retirement goals. Although the stock market can be volatile, it has never lost money over any 20-year period, a fact that surprises many investors. While you’re safer from losing principal over the short run with insured investments like CDs or Treasury bills, over the long run, the remarkable durability of the stock market — along with its outsized returns relative to more conservative investments — makes it an important component of your FIRE portfolio.
Maximize Your 401(k) Contributions — and Company Match
Contributing to a company-sponsored 401(k) plan is one of the best ways to maximize your retirement savings. In addition to the large contribution limits — $19,500 for 2021 — most 401(k) plans include a company match. Typically, this will amount to 50% to 100% of your contributions, up to a limit of 3% to 6% of your salary. Over time, these additional contributions can provide a significant boost to your retirement savings. Considering both personal and company contributions grow tax-deferred while in your 401(k) plan, this is an optimal way to get you closer to your FIRE goals.
Avoid ‘Bad’ Debt
It should go without saying that if you’re trying to aggressively save for an early retirement, you have to turn off any drains on your cash flow. So-called “bad” debt, especially credit card debt, is an absolute no-no if you’re trying to live a FIRE lifestyle. With interest rates typically in the high double-digits, carrying credit card debt is a surefire way to sabotage your plans for early retirement. Investment debt, such as mortgages on housing and rental properties, can pay off in the long run, as the underlying assets should appreciate in value and/or provide supplementary income. But any type of debt that just charges you interest with no investment payoff should be avoided at all costs.
Plan for Multiple Sources of Income
Just like it can be hard (or impossible) to retire early without help from investments, it can be equally difficult without multiple sources of income. This is a good financial strategy for everyone, not just FIRE adherents, as with multiple sources of income, it’s not crippling if you happen to lose one of your jobs. But for those looking to retire early, multiple sources of income are critical. In addition to protection against job loss, multiple sources of income typically raise the amount of money you’re bringing in, which allows you to invest and save more. Potential sources of additional income include side gigs, investments and rental income, among others.
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Consider an HSA
If you have high-deductible health insurance, you might qualify for a health savings account, or HSA. An HSA is a tax-advantaged savings account that is triple tax-free when used properly. You’ll get a deduction on your contributions to an HSA, your earnings will grow tax-free and your withdrawals are also tax-free when used for qualifying health expenses. This can be a great way to reduce the sting of health expenses that aren’t covered by your insurance. If you can manage to keep your HSA intact until you reach age 65, you’ll be able to withdraw the funds tax-free for any purpose. As some HSA providers allow you to invest your funds in a brokerage account, this can make an HSA an even better retirement savings plan than an IRA.
Have a Side Job During Retirement
If you retire in your 40s or even 50s, you’ll still be in the prime of your life. Although you’ll no doubt have plenty of ideas on how to spend your time, you might be facing 50 or more years in retirement. In addition to being something of a mental challenge, that long of a retirement can be a serious drain on your finances. Getting a side gig doing something you enjoy can help solve both problems. In addition to keeping your mind stimulated, you’ll be earning additional money, which can be a significant boost to your long-term retirement finances. If you pick the right gig, you’ll still feel like you’re in retirement, rather than continuing to work a job.
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