Want to retire early? Who doesn't! Most people have the dream of retiring early as a millionaire.
And it's entirely possible.
In this article I'm going to lay out how to turn the dream of early retirement into reality.
Sit back and take notes because I'm going to lay out the blueprint to how to retire early as as a millionaire.
What does it mean to retire early?
But first, what is early retirement? It's important to define this so we can set the goal of retiring at 40, for example.
Whenever you think of someone that’s of retirement age, you probably picture them as being in their 60’s.
While the 60's are the typical retirement age, some end up retiring much later. Some people don’t ever retire at all.
The Financial Independence Retire Early (FIRE) movement is all about achieving your financial goals sooner - so you can retire early.
This concept of early retirement applies to almost anyone.
You just need a plan. Let's get started.
Set an early retirement goal.
Retirement means different things to different people.
One person may be fine retiring and living in the same one bedroom apartment, while another person’s idea of retirement involves a big house for future grandkids and 3 exotic vacations per year.
Everybody has a different set of end goals.
The first major step to achieving financial independence is to figure out what you hope to achieve in early retirement.
It takes a tremendous amount of foresight, planning, and discipline to achieve financial independence and to retire early.
This is going to be a huge goal, so you need to clearly define what you want your early retirement to look like.
Find your "why" (your motivation).
In order to achieve anything worth achieving in life, you need to set a goal and you need to find your "why".
Figuring out why you want to retire early is an important step in achieving financial independence.
Sure, answering the question of ‘Why?’ has nothing to do with how to invest or what steps to take to achieve financial independence. It does, however, help you stay motivated.
Discovering the exact reason why you want to achieve financial independence and retire early is what will motivate you -- it will be your driving cause -- to stay focused and never stray far off track.
How much do you need to retire early?
Next, you need to find that magical number you need your nest egg to get to before you can retire.
This retirement number is the amount of money you need to live off of for the rest of your life.
Calculating your retirement number is based around figuring out how much money you need to set aside where you can count on the interest, dividends, and passive income payments to fully support your ideal early retiree lifestyle.
How can you calculate how much you need to have saved up before you can retire?
A few of the major players in the game of retirement and investments have created some easy-to-use calculators to help you come up with your retirement number.
While these retirement calculators do take inflation into consideration, it doesn’t hurt to overestimate how much you think you’ll need to live off of.
For example, if you can achieve your ideal retirement lifestyle with $50,000 per year, try plugging $60,000 or $70,000 into the retirement calculator to see how much more you can get by putting a little more effort into your retirement nest egg.
How to find your retirement number.
Another popular way to figure your retirement number is by using the 4% rule.
You simply take your desired annual retirement income and divide it by 4%. So, if you can live your ideal retiree lifestyle on $60,000 per year then you divide 60,000 by 0.04 and you come up with $1,5000,000.
In this example, in order to retire and live off of about $60,000 per year, you need to have a portfolio of at least $1.5 million.
Now try doing the same calculations with 3%. Because the average human lifespan is increasing with modern advancements in medicine, a growing number of financial planners are now recommending you follow the 3% rule in order to be super cautious should you live longer than expected.?
The 3% rule for the same example of $60,000 per year would suggest you have a $2 million portfolio before officially retiring.
These 3% and 4% rates are simply your withdrawal rates. If you had a $2 million portfolio and withdrew 3% of it, you would have withdrawn $60,000.
Withdrawing $60,000 from your $2 million portfolio every year would give you an annual income of $60,000 per year for over 33 years.
Now, this is an investment portfolio you’re withdrawing from (or, at least it should be!), so it should realize market gains and earn a yield that lets you account for inflation over time.
An ideal portfolio would almost act like an endowment fund where your yearly withdrawals never deplete the original principal invested.
Key points to remember when figuring out your retirement number.
If so, you need to consider the cost of taking care of somebody. Even when they’re grown up, will you want to send them to college? Buy them a car? Will they ask to borrow money?
Insurance and medicare cover a good chunk of health costs, sometimes. Other times you’re stuck with high deductibles, monthly premiums, and out of pocket costs.
Unforeseen health expenses are often a huge reason a retiree’s nest egg gets depleted too soon.
Credit cards, old student loans and car loans need to be factored in to your current/future expenses.
If not, you need to factor in a monthly house payment.
Don't forget property taxes and homeowners insurance. These have to be paid even when you don't have a mortgage anymore.
Perhaps it is (or will be) an elderly mother or a disabled sister in law.
You should also be amortizing one-time expenses into your retirement budget.
If you want to spend $20,000 on your daughter’s wedding, then you should assume that your annual retirement income will be $2,000 higher.
This helps you come up with a conservative estimate and, worst case scenario, you’re left with more money to live off of in the long run.
Now that you have a goal (an age and an amount), it's time to set the plan in motion for you to retire early as a millionaire.
Step 1. Start with your budget.
The desire to retire early is a great motivating factor behind creating a budget or evaluating your current budget. Most people who retire early have one thing in common: they are amazing at creating a detailed budget, and sticking to it!
If most of your purchases are made with debit and/or credit cards then tracking your spending is incredibly easy by using some amazing budget-tracking apps out there.?
One of the most popular apps for this is the Mint app. Personal Capital and You Need A Budget are also great choices for budgeting apps.?
These apps are important because in order to properly set a budget, you need to be able to track exactly where your money is going.
Tracking your spending lets you take a detailed look at what’s going on in your life. Are you living well within your means? Are you eating out too much? Does your car note eat into your paycheck every month?
Now is a good time for us to say that there is absolutely nothing wrong with having a nice house, driving a new car, or going out to eat. However, if you’re planning on retiring early then these wonderful amenities may be holding you back.
If your mortgage payment is so high that you’re often one paycheck away from foreclosure, or if your $500 car note eats into a big chunk of your paycheck, then it might be time to consider downsizing your new home and heading out to the used car lot.
When you’re planning to retire early from financial independence then you need to not just live well within your means, you need to live below your means. Save more, spend less, it’s that simple.
Step 2. Avoid inflating your lifestyle.
The last thing on your mind when trying to achieve financial independence should be what other people think of you.
Who cares if the dad across the street got a new riding lawn mower. Who cares if your little sister got a new designer handbag. Who cares if your coworker’s engagement ring is bigger and more flashy.
Comparing yourself to other people is a great way to ruin your future finances. Now might be a good time to also rethink how you use social media.
Lifestyle inflation comes naturally as people want to spend more money when their income increases. You get a raise at work so now you can afford a bigger house. You got a nice end-of-year bonus so maybe a new car has caught your eye.?
That’s completely natural human behavior. You need to retrain the way your brain processes increased income.
Again, there’s nothing wrong with having or wanting nice things. That’s perfectly fine. However, if you’re reading this article then you are likely trying to retire early. It’s hard to retire early if you’re caught up in unnecessary spending.
Even if you are able to afford a nice treat for yourself and still have money left over, is it worth it in the long run? How much closer would you be to financial independence if you had invested that money instead?
Step 3. Be smart with your investments.
I’m sure many of you saw the title of this article and thought that we were going to give you some get-rich-quick investing tips that would let you play the markets in your favor and walk away rich enough to retire.?
Unfortunately it’s just not that easy.?
Being financially independent enough to retire early is a process, and every step is just as important as the others. While investing is just one piece of the pie, doing it the right way can make a huge difference.
There are so many different types of investments that it would be impossible to give a one-size-fits-all answer of how to invest your money.?
You may know someone who is “retired” because they own a dozen rental properties. Or maybe your uncle built a business 20 years ago and sold it for $3 million.?
Most of the people that retire comfortably do so by living below their means, saving and investing more than they spend, and by following a strict budget.
Just about any financial advisor you talk to will try to discourage you from putting your money only into stocks and trying to play the market.?
Instead, it’s recommended that you keep a bulk of your money in low-risk, low-cost index funds. Despite the low risks, index funds regularly realize returns of 8% or higher in the long run.?
That’s way more than any savings account or certificates of deposit, and it is much safer than playing with traditional stocks.
With that being said, it’s still good to diversify. It doesn’t hurt to take 10% or less of your nest egg and invest it a little more aggressively into higher risk higher reward areas.
Diversification could also mean you have a mixture of index funds, bonds, stocks, and even private equity or real estate holdings.
If you’re going to be risky with your investments then it’s best to do so early on. The closer you get to retirement age the more conservative you want to be with your investments.
Step 4. Millionaires love compound interest. You should too.
A millionaire’s best friend is compound interest. Whenever you hear a wealthy person on TV say that their money works for them and not the other way around, compound interest is usually involved.
Compound interest investments will take the interest that’s earned throughout the year, and reinvest it into the next year.
Using the magical number of 72, you should find out how often your money should double. Divide your projected interest rate by 72 to get this number.?
For example, if someone inherited $100,000 when they turned 18 and they were able to realize a return rate of 9%, they can divide that by 72 and get 8 years. This means every 8 years their money should double.
At age 18, they’ve got $100,000. At age 26 it’s now $200,000, at age 34 it’s $400,000, and by the time they’re in their 40’s they would have almost $1 million.?
This is all from compound interest and assumes that this person does not invest a single penny more.?
Imagine if you had an investment fund earning compound interest that you put money into every single month. Over time the exponential growth would have you nice and set for retirement whenever the time came.
Step 5. Pay off your debt now.
Just about any debt you have likely has a higher APR% than the average APY% you would see from an investment.?
Your money, in the beginning, is better spent paying off any high-interest, unsecured, or revolving debt. Maybe you’ve got credit card debt sitting there with a 29% interest rate. Or maybe you were young and signed a car loan at 12.75% interest.
This high-interest debt needs to be paid off before anything else.
Low-interest debt is another story. Obviously you’re not going to just wake up and decide to pay your mortgage off in 6 months. Your mortgage also is going to have the same 29% interest rate as your credit cards might have.
You can’t achieve financial freedom from under a mountain of debt and paying that debt off early on is the best possible solution. You can then roll these debt payments into your investment portfolio.?
If you’ve got a credit card with a minimum monthly payment of $300 per month, wouldn’t it be nice to pay that off now so that this same $300 per month could be tossed into an index fund and earning money for you?
Step 6. Invest every single extra dollar you earn.
You cannot realize returns, take advantage of compound interest, and keep your money safe from spending if you don’t properly invest it.?
Another key trait among those that retire early as millionaires is that they invest every single extra dollar they earn. Regardless of how much or how little that amount may be.
Even if you aren’t earning extra money, you can still work hard to find extra money.?
Remember how we said earlier in the article you should be budgeting? What if you found a way to spend $100 less per month on groceries for your family? That’s an extra $1,200 per year that can be invested!?
What if you drove a cheaper car and saved $300 per month? That’s $3,600 per month extra to invest!
“Finding” this extra money may come with some pretty big lifestyle changes. If you aren’t able to earn extra money, then lifestyle change will help you find some.?
Do you trust your spouse to cut your hair from now on? Is anyone at your office carpooling?
Many people swallow their pride and end up taking on a second job or finding side gigs. Mowing lawns in the summer might net you an extra $1,200-$1,500 per month to invest.?
If you’re a white-collar professional, then possible consulting on the side would be great for extra income. I’ve seen people sell their soul on places like UpWork and Fiverr just to make sure they have more money to invest into retiring early.
Step 7. Plan ahead for inevitable failures.
There are ups and downs in everyone’s lives. You will probably fail along the way.?
The only thing you can do to ensure your failure isn’t a total loss is to try to learn from it.?
Every single multi millionaire out there has failed somewhere along the way. They’ve learned from these failures and used them to strengthen and bolster their next move.
The best possible thing you can do for yourself is to stay educated. You can learn as much as you can about investing and take a hands-on approach. Or you can meet with a financial advisor and use their guidance as a roadmap.
Learn about different ways to invest: stocks and bonds, index funds, private equity, retirement accounts, and learn the taxes, fees, and potential penalties that come along with these different investment mediums.
Wrapping it up
What it all boils down to is that this is your future. You are in control, so stay educated and make smart decisions along the way.
Set goals and then achieve those goals.
Set a budget and stick to it.
It is entirely possible to retire early and achieve financial independence using nothing but a solid game plan and a great work ethic.?
And if you happen to get lucky along the way and get a bonus at work or fall into some money, then invest that too!