How to retire early: 10 steps to early retirement
Have you been dreaming of early retirement?
Are you looking forward to spending time with your family after years of hard work?
Believe it or not, it's possible and not a luxury reserved for a few ones.
Actually, it's all about your retirement strategy.
But how do you do it? Is there a step-by-step guide for anyone who wants to retire early at 40?
Yes, there is, and we will share it with you.
Here's a little spoiler: by making the right choices and having clear goals, you're on the path to early retirement.
But let us warn you, it will take a lot of work.
However, as you probably know, those who take their chances are the ones who enjoy the harvest.
It's time to get excited! Because after reading this article, you'll learn how to retire early.
What is the early retirement age?
Many people seek to know how to retire early at 60, and some even want to retire earlier, in their 50s or 40s.
The craving behind this early retirement is to start living their lives to the fullest.
Traveling, enjoying a passion project, and ultimately, waking up at the time and place they want.
However, you can begin receiving Social Security benefits at age 62, but your monthly benefit is reduced if you take them before reaching the full retirement age of 66 or 67.
And it gets worse: depending on your birth year, the monthly reduction in your benefits could lead to a decrease of up to 30% in your Social Security benefits.
So, you need to self-fund your retirement. That's the harsh truth.
Early retirement is a dream that requires a deep commitment to keeping expenses low, staying out of debt, and prioritizing saving and investing.
With a great plan, those sacrifices will pay off, and your golden years will start sooner than you expected.
10 steps to retire early
The question is not, "How much do I need to retire early?" Instead, you should ask yourself, "What do I need to do to retire at the age I want?"
The key lies in the process, so it's better to start enjoying the ride.
We take this vision very seriously and have prepared 10 simple steps to guide you toward early retirement.
Following these 10 steps can be life-changing if you read this article until the end and get ready to work just after.
1. Set your goals for early retirement
Every person who wondered how to retire early at 40 and succeeded had one thing in common: a clear set of goals and expectations.
Having goals is necessary for all aspects of life, whether you want to begin a family, start a new job, or get better at something.
With your retirement, you should do the same.
Let's start very simply by grabbing a piece of paper and listing what you want to do in retirement.
Visiting your grandchildren, starting your own business, dedicating your time to volunteer work, or planning an extravagant family getaway, these aspirations may require a substantial budget to bring them to life.
Once you know what you want for your golden years, you can start running the numbers on how to retire early in the US.
2. Calculate your total savings needs
Knowing what life you want in retirement is fantastic because now you can be specific about the amount you'll need to live on every month.
Make a mock monthly retirement budget to determine your financial needs. Include current and future expenses such as insurance, utilities, home maintenance, travel funds, etc.
The budget should exclude mortgage payments because paying off all debts before retiring is essential.
And please take into account that due to inflation, basic items such as gasoline and groceries will gradually become more expensive.
To determine your annual retirement needs, start by adding up your estimated monthly expenses and multiplying that total by 12.
This calculation gives you a baseline figure for what you’ll require each year.
To add a touch of flexibility to your budget, consider increasing this amount by 10% to 20%.
Now, how do you save that money? First, let's understand key financial principles.
- Rule of 25: You should have 25 times your planned annual spending saved before retiring. For example, if you plan to spend $30,000 in your first year, aim to have $750,000 saved.
- 4% Rule: You can withdraw 4% of your invested savings in your first year of retirement, adjusting that amount for inflation in subsequent years.
While these rules provide helpful frameworks, they are not infallible. You need to consider your investments, risk tolerance, and market conditions.
Lastly, remember to be careful with withdrawals from tax-deferred accounts before age 59 to avoid penalties.
3. Evaluate your current situation
How to retire early is similar to booking a flight at a travel agency.
You need to know your starting point and the journey ahead.
But if you're unsure of your financial status, Ramsey's 7 Baby Steps can be your travel assistant.
These simple steps will help you understand where you're standing right now and guide you through the following steps with a clear understanding of your progress.
Baby Step 1: Save $1,000 for a starter emergency fund.
Baby Step 2: Pay off all non-mortgage debt using the debt snowball method.
Baby Step 3: Build a fully funded emergency fund of 3–6 months' expenses.
Baby Step 4: Invest 15% of your household income for retirement.
Baby Step 5: Save for your children's college education.
Baby Step 6: Pay off your home early.
Baby Step 7: Build wealth and give back.
To bridge the gap between your current situation and your early retirement goals, consider strategies like paying off your home early, reducing your retirement budget, or taking on a part-time job to increase your savings.
These steps can significantly improve your financial stability and help you reach your early retirement aspirations.
4. Maximize your income
The key is that higher earnings lead to greater savings.
You can increase your income by working extra hours, pursuing promotions, or switching jobs.
By diversifying your income sources, you can enhance your financial stability and work towards early retirement.
5. Avoid withdrawing money from your retirement accounts
When you have a substantial balance, it might be tempting to withdraw a large sum of money.
Don't do it... yet.
The longer your funds remain invested, the greater the potential for growth.
Another reason to avoid tapping into your retirement savings is that in most cases, the IRS imposes a 10% penalty for withdrawals made before age 59.5, on top of having to pay regular income tax on the withdrawn amount.
You're after the big prize, be extra patient for now.
6. Control your spending and save the most
If you want a safe retirement, stick to your budget.
Small luxuries, like retirement parties or new hobbies, can jeopardize your withdrawal rate.
The 4% rule is effective with inflation adjustments but not for significant increases in spending.
7. Invest safely and strategically
Retiring early comes with two main challenges: a shorter saving period and a longer time for your savings to cover expenses.
There is a way to overcome these challenges and maximize your income in the process: Investments.
Strong investment returns are always part of any retirement strategy.
At Bloom Financial, we suggest our clients to invest in a balanced portfolio with low-cost index funds and a stock-heavy allocation as long as they are comfortable with the associated risk.
As you get closer to retirement, think about moving some of your savings into safer, easy-to-access assets. This will help you have money available without needing to sell investments at a loss.
Keep one to two years' worth of expenses in cash, and invest the rest to support a 4% distribution rate for a secure financial future.
8. Zero debts
Get out of debt as soon as possible.
Taking out a long-term loan puts your retirement savings at risk and increases your expenses due to unnecessary and preventable interest costs.
9. Establishes several sources of income
- Start by diversifying your income streams through investments in rental properties or small businesses.
- Investments in stocks or retirement accounts.
- Look for higher-paying job opportunities.
- Explore side hustles: freelance work, consulting, or selling handmade products.
10. Be aware of the life change you will make
Let's talk about the real deal.
You need to be willing to make efforts and sacrifices for early retirement.
For example, reducing your vacation budget or grocery expenses can free up significant funds for investments.
Cutting back on clothing, entertainment, dining out, gym memberships, and subscription services can increase your savings.
Even minor adjustments can lead to considerable yearly savings.
In the end, the decision to retire early is in your hands.
Do you want to retire early? Contact us
How to retire early without all this work is quite tricky.
However, when you embark on this journey and commit to yourself and your ambitions, it is easier than you think.
But with all of this meaningful information, doubting how to begin is normal.
We're here to help you with a tailored plan for your early retirement needs.
Bloom Financial is ready to hear from you.
