Nearly 4.3 million people quit their jobs in January. It’s no wonder that this moment in time has been dubbed the Great Resignation. As more and more Americans voluntarily leave their jobs behind, it makes sense that there’s a growing interest in early retirement.
Of course, not everyone who leaves the workforce now will do so indefinitely. Many people who quit can’t retire, at least not yet. But achieving early retirement may not be as far off as it seems. Let’s explore exactly what early retirement is and how people are trying to achieve it.
What is FIRE?
The FIRE is spreading, but what exactly does it mean? FIRE, or financial independence/retire early, is a movement that challenges the notion of traditional retirement. Rather than waiting until your 60s or 70s to leave the workforce, FIRE devotees aim to accelerate the timeline.
There are many iterations of what FIRE looks like. Just like traditional retirement varies from person to person, so does early retirement. For some early retirees, they stop working entirely. Others may opt to work seasonally or even year round, pursuing passion projects or taking side hustles full time. What all of these people have in common, though, is that work is optional. By achieving financial independence, you are the ultimate architect of your time.
The Basic Math of FIRE
How can you tell if early retirement is within reach? The math behind FIRE is surprisingly simple.
One indicator is called The Rule of 25. This rule comes from the Trinity Study, a retirement planning study that looked at portfolio success.
The Rule of 25 hypothesizes that once you have 25 times your annual spending saved, you should be able to safely retire in most market scenarios. So that means if you expect to spend $50,000 a year in retirement, then you will need $1.25 million saved.
Types of FIRE
Are you planning to live lavishly in your retirement years? Then, you might be on the path of what’s known as FatFIRE. To spend $100,000 a year in retirement, you need to set aside $2.5 million.
Conversely, if you plan to live frugally or perhaps even retire abroad with lower living expenses, LeanFIRE might be a good idea. A plan to spend $30,000 each year of your retirement means that you should set aside $750,000.
How to Achieve Early Retirement
The Rule of 25 is straightforward, but that still doesn’t answer the question, How do I achieve early retirement? Depending on your financial situation when you first learn about the FIRE movement, it can seem nearly impossible.
But there are specific strategies that you can start implementing right now to accelerate your journey.
Let’s explore how to achieve early retirement.
Strategy 1 – Address Your Debt
You don’t have to be entirely debt free. But you want to get a handle on high interest debt, such as credit card debt. The interest rate is usually much higher than any return you can earn in the market, so paying down your high interest debt is an important strategy to reach financial independence.
Strategy 2 – Slash Your Expenses
You actually can drink your lattes and retire early. But you want to make sure that you have a handle on your monthly expenses by curbing any impulse spending that you’re doing.
For many people, the idea of having more freedom and control over your time is priceless. Any expense that doesn’t fulfill a need or align with your values is only delaying that freedom. That means you want to analyze and reduce your expenses accordingly.
Strategy 3 – Earn More
It’s important to make sure that your expenses align with your values and that you aren’t wasting money. But you can only cut so much. That’s why it’s equally important to earn more money.
If your full-time gig isn’t particularly high paying, you can consider a side hustle. However, you might also explore options for overtime or try to negotiate a raise. Bringing in more money is one of the best ways to accelerate your early retirement journey.
Strategy 4 – Grow the Gap
There’s a common phrase in the FIRE movement that encourages people to “grow the gap.” The idea is that you want to slash your expenses and increase your earnings.
The larger the gap between how much you spend each month and how much you earn, the more money you can save and invest.
Strategy 5 – Invest
A critical mistake that some people make is that they don’t invest. Setting money aside into savings isn’t going to yield the returns you need to achieve early retirement.
Take the time to learn the basics of investing and savings rates. And then make sure that you follow through. The only thing worse than stashing your money in a savings account that doesn’t even earn half a percent each year is opening an investment vehicle like a 401k but then never making any investments within the account.
Step 6 – Track Your Progress
Tracking your progress is an important part of achieving early retirement. The path to FIRE isn’t easy and it isn’t quick. That means that your motivation can wax and wane.
By tracking your progress, you can inspire yourself to keep pushing forward. You might use a printable tracker, create your own spreadsheet, or use a fintech tool or app, such as Personal Capital’s free financial tools.
Step 7 – Keep healthcare and Social Security in mind
As you’re planning for your early retirement, be sure to consider medical costs, which can become higher as a person ages. Plan where your health insurance will come from and how you’re going to pay for it.
Your job may let you keep your current health plan after retirement (many public sector jobs in particular allow this).
Alternatively, the age of eligibility for Medicare is 65, regardless of when you retire or claim Social Security.
If you plan to retire years before you’re eligible for Social Security, you may opt to leave that out of your early retirement calculations.
Early Retirement Alternatives
With more and more employees looking to leave the traditional workforce, waiting years or even decades to reach FIRE can be frustrating. There are actually several early retirement alternatives that you can start to explore now.
For some people, negotiating the option to work from home or have a schedule that better suits their needs is sufficient. But other people might explore fully remote work, which can even allow you to become a digital nomad. This nomadic lifestyle allows you to travel while you work, rather than waiting for retirement.
Closing Thoughts on Achieving Early Retirement
Early retirement won’t happen overnight. But by utilizing strategies like reducing your expenses and earning more income, you can fast track your journey and ideal retirement age.
It’s hard work, but in the midst of unprecedented times, more and more people are willing to put in the work in order to gain something more valuable than money: control over their time much earlier than they thought possible.
You can take a few actions now to get yourself on the right track.
- Download 65 Ways to Retire Smart, an actionable guide with insights from fiduciary financial advisors. The guide is free.
- Sign up for the Personal Capital Dashboard. Millions of people use these free and secure professional-grade online financial tools. You can use them to see all of your accounts in one place, analyze your spending, and plan for long-term financial goals.
- Consider talking to a fiduciary financial advisor for more detailed guidance on your retirement saving strategies and personal finances.
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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.