If the FIRE movement (financial independence, retire early) teaches us nothing else, it proves that it’s possible to retire within five to 10 years of getting serious about it.
But “possible” doesn’t mean “easy.” As you explore what it takes to retire in your 30s, 40s, or 50s, keep the following in mind.
The Math: How to Retire Early
As someone planning to retire in my early 40s, people always ask me first about the math behind it. Yet the math actually proves the easiest part of early retirement planning.
How Much You Need to Retire Early
When you ask how much you need to retire, what you really need to know is how much you plan to spend each year in retirement.
As a general rule of thumb, you need a nest egg of around 25 times your annual spending in order to retire. That number comes from the 4% rule, which posits that if you withdraw no more than 4% of your nest egg each year in retirement, statistically it should last at least 30 years.
Early retirees need their nest egg to last longer than 30 years, so they should plan on a 3.5% withdrawal rate (see Certified Financial Planner Michael Kitces’ explanation for more details). That means you need a nest egg around 28.6 times your annual spending (100% ÷ 3.5% withdrawal rate = 28.6).
But your annual spending in retirement doesn’t necessarily equal your current annual spending. It could be lower without your commute, lunches out, and workplace wardrobe, or if you plan to retire somewhere with a lower cost of living. Or it could be higher if you plan to jetset around the world in retirement.
Plan out exactly what you want your life to look like post-retirement. Then budget how much you expect it to cost each year.
And yes, you can bend those withdrawal rate rules with cash-flowing investments like rental properties or passively managed businesses. But for the average person, a withdrawal rate of 3.5% makes a safe baseline target.
Timelines to Reach $1 Million
For some reason, we all fixate on $1 million as a magical figure. Who doesn’t want to be a millionaire, after all?
So as a convenient example, here’s how much you’d need to invest each month to reach $1 million, at a 10% return (the historical average return of the stock market):
- $1 Million in 5 Years: $12,914 per month
- $1 Million in 10 Years: $4,882 per month
- $1 Million in 15 Years: $2,413 per month
- $1 Million in 20 Years: $1,317 per month
If you find those numbers dishearteningly high, don’t despair. Start investing now with what you have, and gradually aim to grow your monthly investments over time by growing the gap between what you spend and what you earn.
You can toy around with numbers for your own financial and timeline targets at The Calculator Site.
Mind the Gap: Your Savings Rate
You build wealth by saving and investing money. The more you invest each month, the faster you build wealth.
To retire early, you want to maximize your savings rate: the percentage of your monthly income that you save and invest.
You can grow that gap between what you earn and what you spend in two ways. You can spend less, or you can earn more (and not succumb to lifestyle inflation). Or, ideally, you can grow your savings rate in both directions by spending less even as you boost your income.
This is where the real meat of retiring early and achieving financial independence lies. Not the math, not the hand wringing over health insurance (more on that shortly), but the day-to-day grind of spending less and earning more. It’s a marathon run over the course of years, so you have to build your life and budget around it.
Core Tips to Spend Less
Financial experts publish entire books every year about budgeting, spending less, and saving more.
Even so, here are a few core tips that I’ve found particularly useful.
Focus on “The Big Three” Expenses
The average American spends the bulk of their budget on just three expenses: housing, transportation, and food. Start by optimizing these for the greatest gains in your savings rate.
As for transportation, consider sharing a car with your spouse. My wife and I deliberately chose a city and neighborhood where we don’t actually need a car at all. But before we went carless, we started by experimenting with sharing one car.
Stop eating lunches out at work, and instead pack leftovers from dinner the night before. Look up ways to save money on groceries, and so forth.
Forget ways to save a few cents here or a dollar there, like couponing. Focus your attention on just these three big expenses before optimizing the little things.
Optimize Your Taxes
If we added a fourth spending category to make it The Big Four, it would be taxes.
There are many ways to optimize your taxes. The more of your income you keep (and invest), the faster you can retire.
You can start simple by contributing to tax-advantaged accounts such as 401(k)s, traditional IRAs, and Roth IRAs. Bear in mind that as someone who wants to retire long before age 59 ½ — the minimum age to withdraw funds from retirement accounts — you need to plan your retirement account strategy with more nuance than most Americans. Read up on FIRE tax strategies before maxing out retirement account contributions.
As an aggressive investor, you should also aim to minimize your capital gains taxes. Do some homework on reducing and avoiding capital gains taxes as well.
You can also move to a state with a lower total tax burden. High-tax states charge several times the total tax rate of the lowest-tax states.
Or better yet, move abroad. As an expat, I can take advantage of the foreign earned income exclusion to avoid most federal income taxes. Uncle Sam waives taxes on your first $108,700 of income in 2021, and double that for married couples. Because I invest that tax savings, it compounds over time and adds up to a pretty penny in the long term.
Choose Your Partner Carefully
You don’t need to marry a hedge fund executive or an English duchess. But your spouse’s spending habits and lifestyle goals directly impact your ability to retire early.
It took years for my wife and me to form an uneasy truce around money, and years more before we actually came to full agreement and started rowing in the same direction. She likes to spend, and I want to save and invest in order to retire early.
No matter what some FIRE gurus insist, retiring early does usually involve some form of sacrifice. You can boost your savings rates with tricks like house hacking, but that won’t get you all the way to the 50%, 60%, or 70% savings rate you need for extreme early retirement. At some point, you need to give up certain luxuries like frequent dinners out and spa days.
Not everyone is willing to make those sacrifices. If retiring early is a priority for you, make sure your partner shares your goal, or prepare to paddle in opposite directions and get nowhere.
Automate Savings & Investments
Willpower and discipline always fail you sooner or later, despite your best intentions.
So? Don’t rely on them. Automate the behaviors you want to ensure.
You can do that with automated savings apps such as Acorns or Chime Bank. Or you can set up automated recurring transfers from your checking account to your savings account scheduled for each payday. Better still, have your direct deposit split into each account.
I personally set up weekly recurring transfers from my checking account into my robo-advisor account. I don’t have to lift a finger — all my stock investments happen on autopilot.
You can similarly set up automated recurring investments with your real estate crowdfunding investments.
Core Tips to Earn More
Unlike playing defense by spending less, you can’t do everything on the offense side of the equation to earn more. Instead, you’re better off picking one or two strategies and committing to them.
On the simplest level, you could negotiate a raise or promotion with your current employer. Alternatively, you could look for a job in a similar field at another employer willing to pay you more or provide better benefits.
With a little more effort — but potentially greater results — you could level up your skill set and pursue a higher-paying career. That could mean as little as a new certification or two, or as much as a new degree.
If you like your current job and feel you’re earning a market or above-market salary, you could take another route and start a side hustle to boost your income. I have several, including freelance writing and real estate investing.
Your side hustle could include starting your own business on the side of your full-time job. It involves more work than picking up gig economy work, but it also comes with a much higher upside potential.
Then comes your passive income from investments. Counterintuitively, I recommend investing more aggressively in order to retire early, not less.
The difference between a 35-year-old looking to retire in five years and a 65-year-old looking to retire in the same time frame is that the younger retiree can easily pick up work again if they run into some sort of financial catastrophe. That offers an edge to people pursuing early retirement, in that they can leave their money in higher-return investments like stocks and real estate rather than retreating to lower-return assets like bonds as they near retirement. Read more about FIRE investing strategies to dig deeper.
Regardless of how you earn more annual income, observe one cardinal rule in order to retire early: invest your extra income rather than spending it.
Plan for Health Insurance
Most people don’t become eligible for Medicare until they reach 65. In a country where people traditionally get health insurance through their employer, that spooks many would-be early retirees away from even trying.
But over the past decade, Americans have seen more options open up for medical insurance without employer coverage, which makes sense given the boom in the gig economy. Research all your options for health coverage without a job.
Don’t necessarily discount the idea of getting health insurance through a part-time job either. It may seem like an oxymoron, but post-retirement jobs are often just the ticket.
Your Second Act: Post-Retirement Work
When most people in the FIRE community talk about “retiring,” they don’t mean storming out of their job in a blaze of glory in order to go spend the rest of their lives on a beach somewhere.
Instead, they mean ditching the obligation of work. They can and sometimes do quit their high-octane career jobs. But even if they do, they go on to find fun or meaningful work elsewhere.
That could mean starting your own business, from simple bed-and-breakfasts to ambitious startups. Or it could mean gig work such as consulting, or working for a nonprofit to change the world for the better. Or it could simply mean fun, laid-back work like pouring beers at the local brewery part time.
As a young retiree, you’ll likely keep earning active income long after you “retire.” So you don’t need to reach complete financial independence in order to quit your soul-sucking day job — you just need enough passive income to supplement your (potentially lower) paycheck.
Early retirees can’t count on age-based government benefits like Social Security to boost their post-retirement income or Medicare for health care coverage. When you retire decades before the typical retirement age, you need a more comprehensive retirement plan — and more retirement savings — than people who retire in their 60s and 70s.
Start investing now to build passive passive income streams. When in doubt, speak with a financial advisor, but the fundamentals aren’t as complex as you fear. Create a free brokerage account, ideally with a robo-advisor, and let them manage your investments for you.
Pick up one or two of the best books on financial independence and retiring early. You’ll find the mindset and day-to-day discipline of spending less are the hardest parts of pursuing FIRE, not the financial planning or investing.