How to Retire Early: The 10-Step Method

By Gaurav Sharma, BA | May 9, 2017

How to Retire Early

Have you ever thought about early retirement, but believed that it just wasn’t possible? If you’ve thought this, you’re not alone. However, you may be surprised to learn that that a few people actually make this dream into a reality. In fact, while the traditional age of retirement is 65, it could be achieved as early as 50, 45, or even 40.

Those who retire early tend to have plans in place for how to save for retirement, with more than a few things in common. Now, you may be wondering what those are. Below is a 10-step process, including early retirement tips, money saving tips for early retirement, and how to retire early with no money.

1. Write Down Your Goals (Not Financial Ones)

I would say this is the most important step in the retirement process. You may not think so when you read it, but no goals can be achieved without it.

The first step to achieve early retirement is to write down your retirement goals and desires. Also, determine a exact age to retire in rather than an ballpark range. For example, if you are 30 right now, you may want to retire at 50 specifically, rather than between 60 and 65.

Even though you just wrote down a single sentence, you’ve taken a big step to starting your retirement plan. Having the age down on paper keeps your early retirement goals in the back of your mind at all times, and will serve as a constant reminder.

You should also write other goals on this list that have nothing to do with your retirement. These should address other things you want for yourself, in terms of the lifestyle you want to live in early retirement. The more time you spend now figuring this out, the easier it will be to make it a reality.

For instance, do you want to travel, and how often? Will you focus on a hobby? Where you are going to live? What does your spouse want out of retirement? Are you going to retire at the same time? Do you have the same lifestyle goals? How often do you plan to see your children and/or grandchildren?

This list could change over the years as your goals and interests do. For example, the lifestyle you initially wanted may no longer suit you. When writing down your goals, I would say aim for the stars, but be ready to pull things back if needed.

2. Take a Look at Your Current Monthly/Annual Income and Expenses

Once you have written down your goals for early retirement and the lifestyle you want to live, the next step is taking a detailed look at your financials. This includes your income, as well as recurring and one-time costs. The point of this step is to understand how much money is going into and coming out of your pockets.

This is important because you need to determine your future expenses heading into retirement, including necessities such as food and living arrangements. Understanding how much of your current income is going towards these costs can give an idea of how much you’ll still be spending in retirement based on your planned lifestyle. This will also give you the understanding of how you are spending your money and whether you are living within your means; consider it practice for early retirement.

You will also get a general idea of how much money you would need to retire early. For example, if you are bringing in $30,000 and spending about the same amount then, to maintain this lifestyle in retirement, you would need to somehow maintain the same income. However, you would now have to factor in the cost of inflation to understand future expenses.

Traditionally, inflation is three percent per year so, if your goal for early retirement is in 20 years, $30,000 would be needed. The formula is $30,000 (1+0.03)^20 = $54,183. This would mean that in 20 years, your first year of retirement income would need to be at least $54,183, factoring in the price of goods and services increasing. And that’s just for one year.

3. Based On the Desired Lifestyle, Create a New Monthly/Annual Budget

Step three is to arrange a budget based on the cost that would be incurred during retirement. This obviously requires some research, be it the fees to live in a retirement community or the price of medications you will likely need in your senior years. This will prevent any surprises when your early retirement begins.

Also understand what new costs will arise in retirement that are not in your present budget, such as the aforementioned health care. The more time that you spend researching various costs, the more prepared you’ll be when making the transition from worker to retired individual.

I would recommend creating a mock budget to better understand where the money will move to and from during retirement. Keep in mind that there could always be a need to make adjustments, as you never know what the future holds.

4. Stay Out of Debt/Reduce Debt as Quickly as Possible

With easy access to credit these days, it is easy to accumulate debt. This could be in forms such as a credit card, line of credit, car loan, or mortgage. Needless to say, this could actually become a very large burden and potentially affect your retirement.

This means that a certain percentage of your income must be allocated toward debt repayment, which in turn means it can’t be saved for your retirement. And the longer that debt is held, the greater it could become.

Also, when carrying debt, there is always the risk of interest rates working against you. For instance, when interest rates increase, so does the interest obligation towards the loan. Then, when money is put toward the outstanding loan, there is less money paying down the principal and more put toward interest cost. This means the outstanding loan is held longer than expected.

There are also times when the interest rate on debt could increase, even when interest rates haven’t changed. When this occurs, it is an independent action by the bank that holds the loan, possibly because it believes that the outstanding loan is a greater risk based on your credit profile.

The sooner that the debt is eliminated, the more money that can be put aside for your early retirement fund.

5. Save Money (Save More than You Can)

I would recommend putting 10% of all your income into a savings, investing, or retirement account. This alone will help you live on less as part of your current lifestyle, and force you to save for your retirement.

When you are using less money for your everyday living, it will become a habit to act as if you earn less than you do. I would recommend increasing the amount by simply one or two percent as often as possible. As time passes, keep increasing the amount as one of your financial goals.

I would recommend opening an account for retirement at a different bank than the one(s) you keep the rest of your money in. Then, set up a automatic deduction from your primary bank account to this new one.

Why am I suggesting this? Because, as the saying goes, “out of sight, out of mind.” Keeping the money in another bank will discourage you from touching it, since you don’t visit that bank for your normal needs. You may be surprised at how quickly your account grows!

6. Cut Unnecessary Costs

Next, look over your current budget and find what can easily be eliminated. This includes small costs, such as your daily cup of coffee purchased on the way to work; while it’s only $2.00 a cup, that’s over $700.00 a year, so saving that $2.00 every day can really add up. Instead, make your coffee at home for a fraction of the cost.

In contrast, a larger cost that could be removed from your budget is things that you pay for but don’t use. This could be things like a gym membership that isn’t being used or a monthly transit pass if you could just as easily walk most of the time.

Remember that cutting these costs doesn’t have to mean removing them outright. In the case of the gym membership, you could use an exercise method that doesn’t require equipment, or visit a friend who has a mini-gym in their basement.

7. Take Advantage of Employee Retirement Accounts

This step will address how to retire early without having to put in your own money.

Many companies that are listed on public stock market exchanges will offer their employees a retirement account as part of their compensation. I would highly recommend that employees take the time to understand how this works, and the associated rules.

There are various methods used by companies to reward employees with a retirement account. One is that shares of the company will be placed into an account, based on your annual salary and years of employment.

Another commonly used method is the purchase of investment funds, which are managed by professionals. It is normally the human resources department that decides which investment company should be used for this.

Both of these methods would require no money from you to fund your retirement. However, there are rules in place designed to benefit both the company and the employee. For one, most companies have a certain time period for which the employee must be working at the company before funds could be pulled from these retirement accounts. And, if you haven’t been there long enough, the company does have the option to claw back some of the money that it has put into your account.

Some businesses offer their employees a retirement account, but want those same employees to contribute to the plan as well. In these instances, a deduction from each paycheck is put into a retirement account, with the employer matching the contribution. The percentage differs between businesses; one may make a dollar-for-dollar contribution, while another may only contribute $0.50 for the same amount. If your employer offers a retirement matching plan, I would encourage you to take advantage.

Many companies will only match a certain percentage of each contribution. For instance, a company may allow you to contribute 10% into a retirement account, but only match three percent. The same three percent could be received by contributing six percent of your income.

This is why it is important to take a look at what your company has to offer, since it adds to your bottom line and can be viewed as free money from the company. Simply taking the time to understand the employee-based retirement plan could help you make great strides toward early retirement.

8. Generate an Extra Source of Income

When you begin planning for your early retirement, your job is likely the largest source of your income. But, if you want to retire early, you need additional sources of income.

Potential sources include dividend income from stocks, rental income from a property, or an income source in the form of a small business.

However, keep in mind that retirement means that the income coming in from employment will eventually disappear and something else would need to fill this gap. This is why you should look into another source of income a the very beginning of your retirement planning process. The earlier you start, the faster that income source will grow.

9. Be Willing to Sacrifice Now and Enjoy Life Later

While you want to remove some things from your budget, as noted above, there are other things that cannot be removed. For instance, it depends on how much you need to get around; there’s a good chance you will need to buy a car. Therefore, this cost cannot be eliminated from your budget, so there is no point of stressing over it.

However, you can control this decision somewhat, namely in regards to the type of vehicle that you buy. Let’s say you want a luxury SUV that you’ve had your eye on for awhile. However, this will cost you a lot: purchasing the SUV itself, gas, insurance, and maintenance. This all means that you are putting more money into the car then you have to. However, you could always go with a cheaper, but less luxurious SUV, or maybe look at a different type of vehicle, such as a small sedan that is more fuel-efficient.

Decisions like this could also be applied to parts of your life such as your living arrangements, furniture, and clothing. These short-term sacrifices will lead to long-term gains.

10. Know How Taxes Could Impact Early Retirement

The final step is, at times, overlooked, but due diligence can mean major benefits. Now, taxes are another cost that cannot be removed, but they can be reduced. This applies to both the income from investments and from your traditional job.

For example, if you have an investment account (IA) which holds stocks, you would have to pay taxes on the dividend, capital gains, and interest. However, there are rules that could work in your favor if you hold qualified investments for a certain time period, providing the benefit of a reduced tax rate. If you are a landlord, the same rules apply to income.

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Another way to reduce your tax liabilities is by contributing money to a investment retirement account (IRA). This would benefit you in two ways. The first is reducing the amount that must be stated as income on your tax return. which would lower the amount of money you have to pay to “Uncle Sam.” The second would be the income and gains generated within the IRA.

Taxes are not due within the IRA until a withdrawal is made from the account. In the meantime, the money remains growing and tax-free.

What to Take Away When Planning Out Your Early Retirement Reality

The real secret to achieving early retirement is time and action (with a plan). What this means is that you need to be patient when working towards your long-term goals while also changing habits and setting goals.

Now, you may accomplish the first one or two steps immediately, and then complete the rest much further into the future. Just keep in mind that they don’t have to all be done at once. After all, everyone has their own pace and ways they like to do things. It is better to spend more time on each step rather than rush to finish all 10 as soon as possible.

Once all the steps are completed, it is okay to make adjustments to your early retirement plan. There may be unexpected factors that arise before you reach the finish line, which don’t have to throw you off. The focus should be on the bigger picture, which is having the lifestyle you want upon retirement, when you want it. It will all be worth it in the end.