Traditionally, workers have planned to retire in their 60s, or even later, but the surging popularity of the Financial Independence, Retire Early movement, frequently dubbed “FIRE” for short, is changing all of that.
While the idea of retiring in your 40s or even 30s sounds appealing on many levels, you’ll have to take some dramatic steps to achieve that goal. If your mind is set on retiring early — even if that means in your early 50s — here are some tips to help you get to where you want to be.
Maximize Your Retirement Plan Contributions
A workplace 401(k) plan is your best bet to get ahead in the retirement savings game. Not only are annual contributions relatively high — $20,500 for tax year 2022 and $22,500 for tax year 2023 — but it’s also likely that your employer offers matching contributions. Let’s say your employer matches 100% of the first 6% of your compensation. If you earn $100,000, this means that your employer will contribute up to $6,000 additional dollars to your 401(k) plan on your behalf. If you can earn an even higher salary, your matching contributions will also rise. This means that in 20 years you could get $120,000 or more in “free” money from your employer, on top of the $410,000 you could contribute for yourself at the 2022 maximum. But since the 401(k) contribution limit rises over time, you’ll be able to contribute even more. These types of major contributions to your 401(k) plan will be necessary if you intend to retire early.
Open an HSA
A health savings account is one of the most underrated retirement savings vehicles available, and you could be eligible to contribute if you have a high-deductible health plan. The intended use of an HSA is generous enough, as it is essentially triple tax-free. First, you get a tax deduction on any contributions you make, and you also benefit from tax-free growth of your investments while inside the account. Lastly, when your distributions are used for qualifying medical expenses, they are also tax-free. However, there’s also a retirement planning angle to an HSA. If you wait until age 65, you can withdraw money from an HSA for any purpose at all, without any taxes or penalties. Although you can’t use the money for general purposes at age 45, for example, without paying a 20% penalty, you can use other funds to bridge the gap from your early retirement until age 65 and then have a triple tax-free retirement nest egg waiting for you in the form of your HSA.
Acquire Multiple Streams of Income
Investing is key to retiring early because no matter how much you earn, it’s hard to get wealthy simply from a salary. But the only way to invest a lot is to earn a lot. Since one salary can only go so high so fast, it’s a great strategy to find as many streams of income as you can. And since there are only so many hours in a day, it’s important to find as many passive income opportunities as you can. One of the most common examples of this is real estate. If you can own a number of different rental properties, you can generate many streams of income with only limited day-to-day effort on your part. Having side gigs in fields that you enjoy can be another way to earn more money without “working.” For example, if you’re an expert in your field on a particular topic, you can give weekend or evening lectures for businesses or organizations that will pay you just to hear you talk about what you love, or about how you have succeeded. Get creative and see how many aspects of your life you can convert into revenue-generating opportunities.
Adopt a Conservationist Mindset
One of the biggest advantages of the FIRE movement is that it encourages young people to maximize their retirement plan contributions and invest as much as they can. But the truth is that without also adopting a conservationist mindset, it’s unlikely that your FIRE dreams can come true. Any time that you can reduce your expenses, you’re effectively earning a higher income. If you’re looking to retire early, you’re going to have to commit to making some major sacrifices. This means more than simply giving up your daily latte. To really retire in your 30s or 40s, you’re likely going to have to save 70% or more of your income. To achieve this, you’ll need to not only avoid pleasures like eating out or traveling around the world but also reuse things as much as possible and only spend on items you truly need to survive. Committing to this type of lifestyle is probably the most important — and hardest — step to retiring early.
Bank All of Your ‘Extra’ Money
A nearly inviolable principle of the FIRE movement is that you can’t fall prey to lifestyle creep. As you earn more money, it’s natural for most people to begin spending more and improving their quality of life. But to retire early, you’ll have to instead bank any extra money you make. This applies to all forms of “extra” money, from an increased salary to year-end bonuses, tax refunds, inheritances or any other type of money you receive that’s not the salary you use to survive. Dumping all that “extra” money into investment accounts will help accelerate your early retirement timetable.
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Daria Uhlig contributed to the reporting for this article.