Here's How to Retire Early

For those who want to retire well before the typical age, the Financial Independence, Retire Early — or FIRE — technique is gaining popularity. A Kiplinger article, How to Retire Early in Six Steps, nicely articulates how the FIRE technique can help you reach your goal of retiring young.

It’s all about saving

he first step is to set a high savings rate.

It’s pretty logical, really. The more income you’re able to save, the earlier you can retire.

Currently, the average American saves about four percent of their earnings, well below the 10 to 15 percent that many financial experts recommend. An analysis from T. Rowe Price, cited in the article, notes that nudging your savings toward the higher end of what experts recommend could help you build up 11 times your pre-retirement income before turning 65.

Those who use the FIRE technique often shoot to save between 50 and 70 percent of their income, showing us that a serious shift from spending to saving is necessary. Admittedly, this is a tall order, but if you’re eager to retire early, aggressive saving is essential.

Maximize your income before retirement

Next, you’ll want to do all you can to maximize your income. The article points to an Empower survey that determined Americans consider an annual income in the ballpark of 94,000 dollars to be the point at which financial independence is possible.

The bottom line is that the more you make, the easier it is to save what you’ll need for early retirement. Once you’ve made the decision to retire soon, you may be able to increase your income by working more hours, working an additional part-time job, establishing a side hustle, or seeking a promotion inside or outside your current place of employment.

Reduce spending

Your next move when it comes to utilizing the FIRE technique, is controlling your spending as much as possible. In most cases, a high volume of savings is coupled with a reduction in expenses.

Sometimes, small things like reducing your number of streaming services or cutting back on dining out, may make a significant difference.

In other cases, you may need to take more drastic measures. For example, the article notes that the average American household spends about 70,000 dollars a year and a third of that is spent on housing. Accordingly, you may want to explore downsizing to a smaller home that will cost you less. This may be a particularly good step if your kids are out of the home or soon will be.

Plan carefully

To utilize the FIRE technique, you should next prioritize careful planning. Certainly, the goal of an early retirement will present you with some unique financial planning challenges, one of which is the possibility of outliving your money.

Meeting this challenge begins with one basic question: How much do I need to retire early? The article presents the Rule of 25 as a potential answer. With this, you estimate your expected annual retirement expenses and then multiply that number by 25.

For example, if you need 80,000 a year to meet your likely expenses, you’ll need to save two million dollars, an amount that would permit you to withdraw four percent a year while still maintaining your capital.

Is early retirement the right fit?

The final step you should take with the FIRE technique is simply deciding whether early retirement is right for you. Maybe you have the money and healthcare squared away, but have you considered how you’re going to fill all that time without overspending?

Is your spouse on board? How about your kids and grandkids?

In conclusion, the FIRE technique offers a structured way to plan for early retirement, but it’s crucial to carefully evaluate your financial position, lifestyle goals, and family dynamics before making the leap. Whether your goal is to retire early at 50, retire young, or even retire early at 40, these steps can help guide your journey to financial independence.

SOURCES

https://www.kiplinger.com/retirement/how-to-retire-early