If you want to figure out how you may be able to retire early, you could start by defining what early retirement really means to you. Full retirement benefits traditionally kick in at age 65 for things like Social Security — but "early retirement" could mean somewhere in your 50s instead.
It could also be even earlier, depending on your desires and goals. Some have managed to "retire" as early as their 30s — although part of those in this group still earn an income through hobbies or investments like rental properties. It might be helpful to think about early retirement as a different form of financial independence.
This might mean that you won't have to earn a set amount of money from a job that delivers a steady paycheck. Instead, you could be financially free to make choices that aren't dictated by working a certain job in a specific location for a certain amount of money.
Before you work toward early retirement or financial independence, consider defining what that actually looks like for you.
Consider the Lifestyle You Want
How much might you need for early retirement? Answering that question could get complicated — as you'll have to account for many more years than the average person who might plan on retiring in their 60s. You could, however, narrow in on an estimated figure by creating a mock budget to help you see how much life after work might cost. It's important to account for necessary expenses and discretionary spending when considering your financial future.
While this list is not all-inclusive, it could be helpful to evaluate the following:
- Rent or mortgage costs
- Living expenses, including utilities, groceries, insurance premiums, health care, transportation, etc.
- Services, including subscriptions, memberships, etc.
- Entertainment costs, including hobbies, activities, travel, etc.
- Additional investments, including buying a home, continuing education, etc.
Depending on your individual needs, there could be other categories that you might also want to consider. Some people's definition of "early retirement" might mean saving enough to get by on their current income (or less), while others might pursue a more abundant lifestyle.
Consider New Income Streams
Early retirement doesn't have to mean you will never work again. It may just mean saving up enough to quit your job and pursue other passions that could still earn you money. After all, you might have a lot of free time if you retire early. You could make the most of it by starting a business, doing part-time work or working on a freelance/contract basis to pursue work you really love.
Creating specific income streams could also be a specific part of your plan to retire early. Many people accomplish this by purchasing properties to rent out while they're still working. An additional income stream like this could help fund your lifestyle after you retire. Think about potential income streams you could develop now or in the future — these could help shape your early retirement preparations.
Are Your Financial Ducks in a Row?
Once you've decided on your financial goals, consider how you could meet them. You could do this through saving and investing. Investing could be helpful because it gives your money the potential to earn compound interest, where the interest earned on a sum of money starts earning interest itself. The effect could be impressive, but only if there's enough time for the investment to earn interest and then compound. So when it comes to investing, it could pay to start early.
Early retirement might be less risky if you don't have financial liabilities like debt. And if you only use your month-to-month budget to project when you can retire — meaning you only account for your regular expenses right now — you may not have enough for an emergency situation or unexpected cost down the road. Consider putting a plan in place to pay off debts like student loans, and think about how big financial costs like home ownership fit into your early retirement goals.
If you have been thinking about how you may be able to retire early, now might be the time to start preparing. With smart saving and planning — combined with potential new income streams — you could meet your retirement goals much sooner than expected.