More and more people are asking how they can retire early. There’s been a lot of media buzz about early retirement lately, making people wonder how much money they would need to quit their jobs or if it’s even something worth pursuing.
Why Retire Early?
For many, work is something we do because we have to. Early retirement gives us the freedom to choose how we spend our time—whether it’s relaxing on a beach or working on something we love that brings purpose and joy.
The Dream of Early Retirement
Many of us dream of leaving our jobs in our 40s or 50s, instead of sticking it out until we’re 65. However, we often keep working because we enjoy the lifestyle we’ve built—gadgets like iPhones, PlayStations, and nice cars. These things make us feel like we’ll work for 50 years or more.
People Who Retire Early
Interestingly, there are people who retire earlier than expected. A 2018 survey showed that 35% of retirees left work before age 60. Other surveys suggest that 18% of people retire by age 55.
These people aren’t necessarily rich or lucky. Most didn’t have high-paying jobs. They simply chose to live more frugally in their younger years so they could gain financial freedom early.
Challenges of Early Retirement
Early retirement is a great goal, but it can be difficult to achieve. There are three main obstacles you should consider:
1. Less Time to Earn Money
If you start working at 20 and retire at 65, you have 45 years to save. But if you want to retire at 45, you only have 25 years to build up your savings.
2. More Time Living on Savings
The average person in the U.S. lives to around 80. If you retire at 65, your savings may only need to last 10-20 years. However, if you retire at 45, you could need your savings to last 30-40 years.
3. No Traditional Retirement Benefits
If you retire early, you won’t be able to access Social Security or Medicare for many years. You may also face penalties if you withdraw from your retirement accounts before reaching the required age.
In summary, early retirees need to save more in less time, and their money has to last longer. Even if you stay healthy and the economy stays stable, that’s a lot to ask.
Should You Plan for Early Retirement?
Planning for early retirement is a great goal, but it requires careful thought and preparation. Let’s explore why you might want to retire early and how to make it happen.
Why People Pursue Early Retirement
The reasons people want to retire early vary. Some people want to escape from a job they dislike, while others want to pursue a passion. The most successful early retirees have a goal to work toward, not just an escape from something.
Common Reasons for Early Retirement
- Fun: Many people dream of retiring early to enjoy life—whether that means traveling, playing sports, or relaxing on the beach. However, most early retirees find they want more than just fun.
- Freedom: Retiring early gives you the freedom to do what you want. You can travel, volunteer, spend more time with family, or even take up a new job that you’re passionate about.
- Fulfillment: Some people retire early to focus on things that bring them personal fulfillment. This could be watching your children grow, starting a business, or pursuing hobbies like writing or hiking.
The Key to Early Retirement: Saving More
The most important thing to know about early retirement is this: the more you save, the sooner you can retire. It sounds simple, but it’s not always easy to do.
How Much Should You Save?
Most financial experts like warren buffet recommend saving around 10% of your income for retirement. Some suggest saving 20%. These are safe rates and will help you retire at 65 without too many sacrifices. But if you save only 10-20%, you’re agreeing to work for 40-50 years.
How High Saving Rates Speed Up Early Retirement
If you save more, you can retire much sooner. Here’s a simple breakdown:
- 10% saving rate: You’ll need to work 50 years (retire at 71 if you start at 21).
- 20% saving rate: You’ll need to work 37 years (retire at 58 if you start at 21).
- 35% saving rate: You’ll need to work 25 years (retire at 46 if you start at 21).
- 50% saving rate: You’ll only need to work 17 years (retire at 38 if you start at 21).
- 70% saving rate: You could retire in less than 9 years (retire at 30 if you start at 21).
Is it Possible to Save 50% of Your Income?
It may sound crazy, but saving 50% of your income is possible. Many people achieve this by living on one income while saving the other. For example, a couple might live on one paycheck and save the other.
How to Save More
If you want to retire early, you’ll need to save a larger percentage of your income. Here’s how:
1. Cut Spending
Two of the biggest expenses in the average budget are housing and transportation. Here’s how to reduce them:
- Housing: Spend no more than 25% of your income on housing. Choose a home in a low-cost area, and avoid buying too much home. Renting can sometimes be a better choice than buying.
- Transportation: The second-largest expense is usually transportation. Live in a walkable neighborhood, use public transportation, or choose a fuel-efficient car. Avoid seeing your car as a status symbol.
Cutting costs on housing and transportation can have a huge impact on your budget. Focus on these areas first to see the biggest savings.
2. Maximize Your Income
It’s also important to increase your income to retire early. Here’s how:
- Negotiate your salary: Don’t settle for less than you’re worth.
- Get more education: Higher education often leads to higher lifetime earnings.
- Sell things you no longer need: Declutter your home and make extra money.
- Start a side job: Consider making money from a hobby or taking on extra work.
How to Know if You’re Ready for Early Retirement
You can use a simple formula to check if you’re on track for early retirement:
- Multiply your current annual expenses by 25. If your savings are greater than this number, you can retire early.
- If you’re conservative, use 30 times your annual expenses.
- If you’re comfortable with more risk, use 20 times your annual expenses.
The math is simple, but reaching early retirement is not easy. It requires strong financial discipline and a focus on your goals.
Creating Your Wealth Snowball
Once your savings start to grow, your money will work for you through investment returns. As you save more, your wealth will grow faster, especially with the power of compounding. Eventually, you’ll reach a point where you no longer need to work for money.
Conclusion
Early retirement is possible, but it takes planning, saving, and hard work. If you want to retire early, you need to focus on saving a large portion of your income, cutting unnecessary costs, and increasing your income.
It’s not easy, but it’s worth it. Are you ready to make the changes needed to retire early?
