If you want to retire early, you need to achieve financial independence. This means you can pay for your living expenses without having a full-time job. It could mean that you have a passive income that supplies you with enough money that pays for your basic necessities. Or it could also mean you have enough savings and investments that allow you to live off the interest rate.
Obviously, you need to have saved a lot of money before this can happen. If you want to retire with a passive income, that means you need to invest in something that can provide you with a sizable monthly cash flow. A great example is investing in a rental property. If you own your house and it has a garage or basement that you can convert into a studio for rent, that can provide you with a monthly income. Even if you only rent it for $1,000 to $1,500, that is still a sizable amount. It is not enough but it is still significant. If you invest in stocks and bonds, the interest that it will earn can also be added to what you need to survive. Once you have sufficient income from these two sources, you can get serious about retiring early.
According to research, early retirement promotes long life and good health. Most of the time, people who work full-time feel stressed because they have to meet a certain amount in order to survive. When you achieve financial independence, you are free from that stress. Whatever you need to survive is already available through the various investments that you have set up.
Introducing FIRE – financial independence, retire early
According to reports, there is a Millennial movement who call themselves the FIRE community. FIRE stands for “financial Independence, retire early” and it appears to be their life’s motto. The idea is said to have been inspired by Vicki Robin – the 72-year-old co-author of “Your Money or Your Life,” a 1992 bestseller.
Basically, the book discussed how one should view every expense that they make. Instead of viewing it as an amount, it should be viewed in terms of time. If you are earning $10 per hour, that would be your marker. The next time you buy a pair of jeans that will cost you $50, you have to ask yourself first – is this purchase worth spending 5 hours of your life working? If you want to eat out and spend $80 for that one meal, ask yourself if the food is worth 8 hours of your time. The answer will help you decide if you should go ahead with the expense or not.
Apparently, this particular mindset will help you control your spending so you can save more of your income. This savings can be used to make your retirement money and investments grow. The faster you can build your savings, the easier it will be for you to achieve financial independence. When you are already financially independent, that is the perfect time for you to retire early.
If you cannot achieve this independence, you might end up facing a lot of early retirement challenges. The most prominent is outliving your retirement money. That means your savings has already run out and you are left with no source of income to support your basic needs.
Important rules when planning to retire early
If you really want to retire early, you need to follow a specific set of rules. Sometimes, people start saving money only to be distracted. Or, they get frustrated and give up because they are making a lot of mistakes.
The thing is, these errors can easily be avoided if you follow the strict rules that will help you become financially independent. Unless you can summon the discipline required to do so, you might find it hard to reach your goal. So what are these rules that will help you retire early?
Set your target
First of all, you need to set a target. This is when you define the specific parts of your retirement goal – which is the date and amount that you need to save up for. Do you want to retire by the age of 30? Or maybe a decade later when you are in your 40s? How much do you think you will need so the money will last you a very long time? Some people use the 4% rule in making their calculations. They set an amount that they need to live a comfortable life each year. This amount should be 4% of your total retirement savings. For instance, if you need $40,000 to survive a whole year, you need to save 1 million dollars. That way, you will only live off the lowest possible interest of your million dollar investment.
Calculate your monthly contributions
Once you have both your target date and amount, you can calculate how much you need to save in order to reach your target. For instance, you need to save $1 million by the age of 50. Let us also assume you are 25 years old and you have an 8% compound interest rate. When you calculate your monthly contribution, you need to save at least $1,100 each month for you to reach your target amount by the time you plan to retire. Stick to this amount so you can reach your goals.
Decide where you will put the money
The best rule to follow is to diversify where you will put your money. Invest your money in various areas where it can grow. You can put money in a retirement account. You can also choose to invest in a high-risk stock. Investing in your home can also be considered a part of your retirement strategy. Your home increases in value over time. You can use this amount to add to your retirement money.
Monitor your spending
Another rule that you need to follow involves your spending habits. If you really want to retire early, you need to be a smart spender. It doesn’t matter if your income is big. If you do not know how to use it properly, it will run out on you. This is why you have to keep a close eye on where your money is spent on. That way, you are sure that your money is not spent on unnecessary things. If there is extra money, make sure it will be used to help you gain financial independence.
Be cautious of your debt
You do not have to shy away from debt even if you have plans to retire early. However, you need to know how to use it properly. First of all, you should have a good reason to be in debt. If it will not help you become productive or profitable, then do not borrow money. If it cannot increase your personal net worth, you should think twice before borrowing money. And if you push through with the debt, make sure you have a repayment plan that will not compromise your retirement contributions.
Draft your retirement budget
You need to create a retirement budget. It is not just about figuring out how much money you need to retire. The popular suggestion is to save up $1 million. However, reports reveal that having a million-dollar retirement fund may no longer be enough. While it is easy to just bump the figure higher, you need to be smart about this. Set a realistic amount that you can reach. If you target an amount that is too high and financially impossible to achieve, you will only end up feeling frustrated. That frustration might make you give up on your dreams of retiring early. So come up with a higher yet realistic amount.
Setup a supplemental retirement income
If you are serious about your intention to retire early, you might want to think of a supplemental retirement income. While it is a dream to not do anything or wake up early to go to work, it can get boring after a few months. You are still young and if you end up retiring in your 40s and you expect to live until you are 80 – that is a very long time of doing nothing productive. This is why you should probably think of a supplemental retirement income. The great thing about this particular income is that you can choose what you want to do. After all, you are going to work because you have nothing better to do. That means you can choose what you love to do – even if it will not earn you a lot of money. Not only that, you can choose the time you will spend doing it. The income is just an added bonus and can make you even more financially independent.