Early retirement is not just the topic you daydream about during boring work meetings. This is a real aspiration for the community of people who are part of the FIRE movement – which stands for Financial Independence, Retire Early. If you want to join the FIRE ranks before the sixties and say goodbye to work, here are four steps to make it happen.
1. Reduce your cost of living
Reducing your cost of living is a strategy that appears directly from the FIRE textbook. And if you think that means you have to cancel your cable, you’re just a little bit right.
BRAND proponents take downsizing to the extreme. For example, you move out of your two-bedroom place and to a studio in a cheaper neighborhood. Exchanging your car for a bicycle will leave you with maintenance costs and gas and insurance costs. Swap your iPhone for a generic smartphone with a cheap provider. And yes, cancel the cable. You may be able to Amazon First membership, but only because you can use it to get free movies, programs, music and books as well as shipping.
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Your goal is to live on 50% of your income or less. This frees up the other 50% for savings. There is another benefit as well. If you are scaling down your lifestyle today, you need to reconsider what is really needed. Learn to live comfortably from less now, and this naturally lowers your income needs during your retirement.
2. Increase savings
This is an obvious point, but financing an early retirement usually requires a radical level of savings. The pension savings that are on a more traditional timeline usually need to set aside 15% of the income for a few decades to retire comfortably. It assumes that these traditional savings should be solvable for about 30 years. In your case, you may not have a few decades to save, and your money will definitely need more than 30 years. So you have less time – but you have to save more.
Here’s a look at the numbers. Suppose you are 30 years old and earn $ 48,000 a year. If you saved 15% of your income for the next 35 years, including an employers’ camp, you would make about $ 1 million. It assumes that your contributions grow by an average of 7% per year. However, to reach the $ 1 million goal within 20 years, you need to save and invest more than $ 2000 a month – that’s about 50% of your salary.
3. Diversify your savings
You can deposit $ 2,000 a month into your 401 (k), but you may not want to do that. The IRS normally prohibits 401 (k) benefits until you reach the age of 59 and a half. However, there is an exception to this rule. If you leave your job after the year you turn 55, the usual fine of 10% is waived. The age drops to 50 if you are a public safety worker. You do need to get the money out of your 401 (k) for your most recent job.
If your goal is to retire in your fifties, you can support 401 (k) – assuming you have enough in your most recent 401 (k) to survive at least a few years until you are 59 and a half range.
However, if you want to retire in your 40s, you want to save additional funds beyond your 401 (k). Two options are a Roth IRA or a taxable brokerage account. You can withdraw your Roth contributions at any time, but not the earnings. The earnings should remain in your account until you are 59 and a half years old and it is at least five years since you first made a Roth contribution.
The taxable account has no withdrawal restrictions, but you must pay annual taxes on interest, dividends and realized profits – which is not the case in your Roth account.
4. Sharpen your investment game
Since your timeline to retirement is short, you do not have much room to invest mistakes. You can not get too aggressive because you can not afford a lot of volatility. But you can also not be too shy. You will have a hard time achieving savings goals unless you at least see returns at the market level in your portfolio.
So become a student of investment this year. Learn more about index funds, diversification and asset allocation. Study the best practices of buy-and-hold gurus like Warren Buffett and Benjamin Graham. And – this is important – look at the key cycles of the stock market. Read through the slumps and the recovery that followed. You want to get comfortable with the idea that the market can be volatile in the short term, and that you can drive the cycles out.
It could be your year
It probably takes a little planning to start saving 40% or 50% of your income, but there is no better time than now to move in that direction. If your mind is drifting after carefree days with nothing on the calendar, shift your focus to the steps you are taking to retire early. Outline your efforts to scale down and save more, think about your strategy to avoid fines for early withdrawal from the IRS, and plan your self-directed investment education. Make 2021 the year you perform so that your dream can take shape in the real world.