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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 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 can retire a millionaire.
- You can retire in your 40’s.
- You can retire early with kids.
- You can even retire in 10 years!
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 yea, youu divide 60,000 by 0.04 and 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.
- 1. Do you have children that will depend on you after you retire?
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?
- 2. Evaluate you and your spouse’s health.
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.
- 3. Do you have any debt?
Credit cards, old student loans and car loans need to be factored in to your current/future expenses.
- 4. Will the mortgage be paid off by the time you retire?
If not, you need to factor in a monthly house payment.
- 5. How much are your other house-related annual payments?
Don’t forget property taxes and homeowners insurance. These have to be paid even when you don’t have a mortgage anymore.
- 6. Do you have other people who depend on you?
Perhaps it is (or will be) an elderly mother or a disabled sister in law.
- 7. Amortize major one-time expenses you may have.
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, trackingcking your spending is incredibly easy by using some amazing budget-trackingthere.
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 bectoer to set a budget properly, you 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. When trying to achieve financial independence, thee last thing on your mind 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.
Mopeople whohat retire comfortably do so by living below their means, saving and investing more than they spend, aby 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 8% or higher returns 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 likely have 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 a 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.
How to save a million dollars before retirement
For many of us, making our first $1 million is the ultimate financial goal. While this has become much more attainable in recent times, many people still never hit this mark.
Many people fail to realize that saving $1 million by retirement is not out of reach. In fact, with careful, calculated planning, one can be practically sure to retire with the much-coveted millionaire status.
There are a few essential guidelines for achieving this goal. Ultimately, when it comes to saving, starting early is key. Very few have ever made $1 million overnight.
On the contrary, it requires consistency, perseverance, and – most importantly – time. While it would be optimal to start saving in your 20s, the best time to start is now – no matter your age.
In your 20s
During your 20s, retirement can seem distant and unreal. But the years go by quickly; anyone nearing retirement can attest to the old saying “time flies”.?
In addition, reaching the intended amount of savings becomes increasingly difficult the later it is started due to accrued expenses such as mortgage and childcare payments.
The primary reason to start early with retirement planning is compound interest.
Simply put, compound interest is the process by which a sum of money grows due to interest building upon itself over time.
Logically, the more time you have, the more you can benefit from compounding, which is why investors in their 20s should take heed.
Here are some of the basics of compounding interest:
If you invest $1,000 in a safe long-term bond that will earn a 3% interest per year, the investment will grow by $30 (3% of $1000 after the end of the first year). This gives a total of $1,030.
The following year there will be a 3% gain on $1,030, this means that the investment will grow by $30.90.
Using this same model and projection, by age 40, the investment would reach $3,262.04.
At this stage, to dramatically increase earnings, the proper thing to do would be to invest in a higher earning instrument, such as a stock market fund.
Let’s say you start investing in the market at $100 a month, and you average a return of 1% a month (or 12% a year, compounded monthly) over 40 years.
Your retirement account will be a little over $1.17 million after a 40 year period. If the investor was lucky enough to start at age 20, he could retire at 60 years old with upwards of a million in retirement funds.
In your 30s
As mentioned above, the sooner you begin investing, the better. But what if you missed the opportunity to begin investing in your 20s?
Your 30s are your next best bet. After consulting with your financial advisor, make a small initial investment in the stock market to gain an understanding of the market and learn what equity investing is all about.
Pick a company that has a product or service that is familiar to you or that you personally like. Pick companies that are well known and relatively stable. Play it safe.
Let us assume that you are 30, earning $50,000 a year, and want to retire at 65 with $1 million in savings. Once again, we will assume that you are beginning with zero in savings.
In this case, the easiest way to accomplish this would be to save around $2,317.00 a year. On a monthly basis, that equates to $193. This amount should then be invested in a financial instrument that earns 12% annually.
In another scenario let’s imagine that at age 30, you have $50,000 a year in earnings and zero savings, and you want to live on 85 percent of your pre-retirement, pre-tax income when you retire (which is $42,500 per year).
To achieve this goal, you’ll need to amass $2 million ($2.06 million, to be exact) by the time you retire. In order to achieve this, you would need to save $600 per month.
The correct way to invest the aforementioned amount would be to spread the investments out. One option would be to put 70 percent into stocks, 25 percent into bonds, and keep five percent in cash.
The prognosis of $2 million is based on the assumption that the markets are performing on average.
In your 40s and beyond
They say life begins at 40; so can investing. A 40-year-old who wants $1 million when he or she is 67, for example, must save $10,000 annually and earn nine percent a year to reach that goal.
The best pieces of advice for those 40 and over would be to maximize savings and to invest independently. You should fund your 401(k) to the maximum limit.
With regard to investing independently, consider an individual retirement account (IRA).
Many people in their 40s and 50s place money into these accounts, according to the Employee Benefit Research Institute (EBRI), a Washington DC-based research institute.
These provide an opportunity to maximize savings by making use of the tax advantages that come with IRAs. For example, with a Roth IRA, you’ll never pay taxes on earnings.
Traditional IRA contributions have no salary caps, unlike a Roth IRA. This means that anyone with an earned income is eligible to invest.
Nonetheless, there are Traditional IRA contribution limits to how much you can put in. The maximum total annual contribution for all of your combined IRAs (Both Traditional and Roth) is $6,000 for those under 50 and $6,500 for those aged 50 and over.
No matter your age, healthy savings are within your reach. It bears noting, however, that every investor’s situation is unique. The ideas listed above are just a few examples of steps you can take.
Before investing your own money, you are encouraged to consult with a reputable financial advisor who can tailor your path based on your age, income level, and goals.
With this in mind, if you would like to learn more about some of the key differences between an IRA and a 401(k) you can find some helpful resources on the SoFi website.
Open a Roth IRA if you haven’t already
Millennials live in the here and now, but there are those who understand the importance of saving for the future. And for millennials, there is no better retirement account than a Roth IRA.
Roth IRAs are the best retirement vehicle for millennials who want to make their money grow tax-free.
Let me explain why.
The money you contribute into a Roth IRA account will not be taxed when you withdraw it (source). Not only that but even the interest you earn will never be taxed! It’s the only retirement account that will truly grow your money tax-free.
With a 401k retirement account, you will be taxed when you make a withdrawal. Do you really want to pay taxes on your savings when you’re retired? I thought so.
Opening a Roth IRA is super easy and can be done online. Another reason I like Roth IRA’s is that you can put money in your account up until April 15th and have it count for the previous year. With a 401k, you only have until December 31st of the current year to make a deposit.
Don’t get me wrong here; it’s not that I hate 401k’s. I just think that if you have an employer-sponsored 401k, don’t think you’re done. Millennials should consider opening up a Roth IRA in addition to their 401k.
I do like 401k’s because the money you put in is deductible on your tax return and I especially like it if your employer offers to match a percentage of your deposit.
I also like 401k’s because you can deposit up to $18,500 per year, while the max on a Roth IRA is $6,000 ($6,500 if over 60). (Numbers are current as of 2021).
But if I only had a limited amount to invest into retirement, I’d drop the first $6,000 into the Roth IRA and the rest in a 401k.
With that said, I believe Roth IRAs are superior, and here are the 6 main reasons why I prefer Roth IRAs for Millennials.
You Don’t Have a 401k Plan
If your employer offers a 401k plan with a match, definitely take advantage of it. That’s free money.
But a lot of companies either don’t offer it or many millennials don’t even work for a company, but rather are freelancers or working as independent contractors. For those millennials who don’t have access to a 401k plan, a Roth IRA is an ideal retirement vehicle.
Your 401k Plan Sucks
Just because your employer has a 401k plan doesn’t mean you should be pouring all your money into it. If your employer offers a 3% match, put in your 3% so you can get the full benefit of the match.
But if your 401k plan sucks, stop putting extra money in it and instead open and deposit money into a Roth IRA.
Some 401k plans have high fees associated with them, and your employer might not have a wide variety of investment options. When you choose a Roth IRA the power is in your hands and the fees are often times lower.
A Roth IRA Offers Unique Tax Advantages
With a Roth IRA, you can withdraw your money without any tax penalty after the age of 59. It will be completely tax-free.
When you earn income as a millennial in your 20s or 30s, it will be taxed. You can’t escape that tax. But when you’re young you typically aren’t making that much money so your income is taxed at a low tax bracket.
When you are over 60 years old, odds are you are making more money and belong in a higher tax bracket.
This is a major benefit of a Roth IRA. You will be taxed when you are young at a lower tax rate compared to a 401k, where you will be taxed at a higher tax rate when you’re in your 60’s.
Use Your Retirement Money To Pay For College
If you want to withdraw your money from your Roth IRA before the age of 59, you will incur a 10% penalty. However, if you plan to withdraw money and use it to pay for college expenses, you will not incur any fees nor pay any taxes!
This is useful to millennials interested in pursuing a master’s degree or considering going back to college to further their education.
You can also withdraw your money penalty-free and tax-free to pay for your future children’s college education.
Use Your Roth IRA As An Emergency Account
I would never recommend using a retirement account as your emergency savings account. You should really have a separate account for that.
With that said, you can use the contributions you’ve made into a Roth IRA without any penalty any time you want. The only thing you can’t withdraw penalty-free is the interest you’ve earned.
If you’re trying to build a nest egg for retirement, however, you really shouldn’t be dipping into your Roth IRA funds though.
Contribute To A Roth IRA For As Long As You Want
With a traditional IRA or a 401k account, there are mandatory withdrawals that you must make when you turn 70½ years old. This is not the case with a Roth IRA.
You can keep your money earning interest for as long as you want. You can even continue to make contributions for as long as you want.
This makes a Roth IRA ideal for those who don’t see themselves retiring at a young age because this lets you grow your money longer.
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!