What would you do if every day was a weekend?
Typically, that is how people look at retirement. But rather than waiting until their 60s and 70s, some people are striving for an early retirement plan. The FIRE movement, which stands for “financially independent, retire early” attracts followers who work toward some serious goals, like retiring in their 30s, 40s, or 50s.
The idea of early retirement sounds incredible. Living your best life when you are young and healthy enough to enjoy it—what could be bad? Working because you want to rather than because you have to.
Following your passions and spending your time on your terms. This leads many people to wonder, how can I retire early? The simple answer is that it’s not easy—but with a well thought out plan and a lot of discipline, it can be accomplished.
First, step back and look at the big picture. What will you need to accomplish in order to retire early?
The Rule of 25 May Reveal Your Early Retirement Potential
The rule of 25 recommends saving 25 times your annual expenses in order to retire. According to Forbes , “once you’ve achieved that milestone, you are financially free.”
Forbes gives this example: if you spend (not earn, spend) $75,000 a year, you’ll need a nest egg of $1,875,000 in order to retire. This is before any other retirement income is even considered, like social security. (Come to think of it, If you’re retiring early, social security won’t be available to you early on anyway.)
The Rule of 25 is based on the idea that, historically, investors have been able to withdraw 4% from the starting value of their investment portfolio without running out of money. Of course, just because it worked in historical simulations doesn’t mean it’s guaranteed to work in the future, but it’s a good starting point.
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Based on the Rule of 25, the first variable you should look at is your spending. The more you plan to spend annually, the more money you’d need to have set aside to achieve early retirement.
Examining Your Spending and How it Will Affect Your Early Retirement
The bottom line is that achieving early retirement requires a mindset shift. The average American does not save very much money; In fact, the average American saves less than 5% of their disposable income.
That’s much lower than what most financial professionals recommend for a normal retirement let alone an early retirement. This means early retirement may require cutting additional line items from the budget.
As you begin tracking and refining your budget, you may want to consider leveraging technology to make your life easier. SoFi Relay makes it easy to know where you stand, what you spend, and how to hit your financial goals—all with one convenient app.
A good amount of the money you’re earning now could be invested toward your early retirement. In order to determine how much you need to save, you have to be aware of the money you’re currently spending. Keeping an eye on your spending habits and making budget cuts whenever possible can accomplish two vital things:
• More money to save. The money you’re not spending can now be invested for your future.
• Less lifestyle to fund. Spending less on living expenses can reduce the amount you need to save.
And speaking of less lifestyle to fund, here’s how you can reduce:
Shopping around. Are you paying the lowest price and getting the best deal on the goods and services that drain your budget every month? Get proactive about comparing and contrasting the deals offered for Internet service, phone, car insurance, loans, credit cards, and even groceries. Choose the better deals and put the money you save into your retirement account. And don’t be afraid to use coupons.
You may want to get serious about trimming your budget. Cutting the cord, clipping coupons, and getting a good deal on car insurance will reduce your spending, but typically it will not be enough to retire early. You may need to look at all aspects of your budget and think about whether or not you really need to spend that money.
This may sound drastic, but it is not necessarily a bad thing to pass up an expensive car, large house, or a new iPhone every year in order to be financially independent at a younger age. There are plenty of alternatives to the costly habits of the average American that are healthier physically and financially.
Calculating How Much You Think You’ll Spend During Your Retirement Years
Good habits start early. If you spend sensibly and live rather frugally, your retirement years may not seem so much different than how you’re living and spending now. That means that you might need less in retirement as you may think.
Once you have your current monthly expenses and budget nailed down, see how that may change during your retirement years. What will you need more of, or less of? What can be deleted from your life in your retirement? What expenses might you need to add as a result of being retired?
Once you land on that monthly figure, multiply it by 12, which will give you an estimated annual retirement budget.
Knowing Where to Save for Early Retirement
When you are saving for early retirement, you may need to rethink where you save for two reasons. You would need to withdraw retirement money sooner than the average person, and you would need to save more money than the average person.
Let’s dive into the first reason. Many retirement accounts like 401(k)s and IRAs offer tax advantages. However, you have to pay close attention to the rules.
When you withdraw the money you will need to pay taxes, and might have to pay an additional 10% penalty if you withdraw the money before age 59.5.
Roth IRAs, on the other hand, allow you to withdraw your contributions without paying taxes or penalties. This means that you will need to build in more flexibility by contributing to employer-sponsored plans, individual retirement accounts, and taxable accounts. This way you can access the money you need while avoiding costly taxes and penalties if at all possible.
Let’s dive into the second reason. Retirement accounts have contribution limits that might be suitable for the average person but are typically lower than what you will need to save to achieve early retirement.
In 2019, the annual contribution limit for 401k’s is $19,000 and the limit for Traditional and Roth IRA’s is $6,000. Depending on your income, expenses, and goals, you may need to save more than that. That is why many people striving for early retirement leverage a taxable account.
So where do you stand? You may need a little guidance to land on a strategy that works best for you.
SoFi Invest® Can Help You Get Started
SoFi Invest< helps you plan for your early retirement with multiple options, including active and automated investing. Active investing allows you to buy and sell stocks and ETFs without paying trading fees.
Automated investing automatically invests your money for you in a diversified portfolio based on your goals and time horizon without paying SoFi management fees.
Additionally, a SoFi financial planner can help you think through the road to an early retirement. Our planners are here to help identify your goals and collaborate with you on a plan to achieve them.
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