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If the FIRE movement (financial independence, retire early) teaches us anything, it’s that you can retire in five to ten years if you really want to. How to Retire Early – Tips for Investing and Saving Your Money

But “possible” doesn’t mean “easy.”. As you think about how to retire in your 30s, 40s, or 50s, keep these things in mind.

The Math: How to Retire Early

As someone planning to retire in my early 40s, people always ask me first about the math behind it. Yet the math actually proves it’s the easiest part of early retirement planning.

How Much You Need to Retire Early

When you ask how much you need to retire, what you really need to know is how much you plan to spend each year in retirement.

As a general rule of thumb, you need a nest egg of around 25 times your annual spending to retire. That number comes from the 4% rule, which posits that if you withdraw no more than 4% of your nest egg each year in retirement, statistically it should last at least 30 years.

Early retirees need their nest egg to last longer than 30 years, so they should plan on a 3.5% withdrawal rate (see Certified Financial Planner Michael Kitces’ explanation for more details). That means you need a nest egg around 28.6 times your annual spending (100% ÷ 3.5% withdrawal rate = 28.6).

But your annual spending in retirement doesn’t necessarily equal your current annual spending. It could be lower without your commute, lunches out, and workplace wardrobe, or if you plan to retire somewhere with a lower cost of living. Or it could be higher if you plan to jetset around the world in retirement.

Plan out exactly what you want your life to look like post-retirement. Please budget the anticipated annual costs.

And yes, you can bend those withdrawal rate rules with cash-flowing investments like rental properties or passively managed businesses. But for the average person, a withdrawal rate of 3.5% makes a safe baseline target.

Timelines to Reach $1 Million on  How to Retire Early – Tips for Investing and Saving Your Money

For some reason, we all fixate on $1 million as a magical figure. Who doesn’t want to be a millionaire, after all?

So as a convenient example, here’s how much you’d need to invest each month to reach $1 million, at a 10% return (the historical average return of the stock market):

• $1 Million in 5 Years: $12,914 per month
• $1 Million in 10 Years: $4,882 per month
• $1 Million in 15 Years: $2,413 per month
• $1 Million in 20 Years: $1,317 per month

If you find those numbers dishearteningly high, don’t despair. Invest now and gradually increase your monthly investments by increasing the gap between your spending and earnings.

You can toy around with numbers for your own financial and timeline targets at The Calculator Site.

Mind the Gap: Your Savings Rate on How to Retire Early – Tips for Investing and Saving Your Money

You build wealth by saving and investing money. The more you invest each month, the faster you build wealth.

To retire early, you want to maximise your savings rate: the percentage of your monthly income that you save and invest.

You can grow that gap between what you earn and what you spend in two ways. You can spend less, or you can earn more (and not succumb to lifestyle inflation). Or, ideally, you can grow your savings rate in both directions by spending less even as you boost your income.

The latter option is where the real meat of retiring early and achieving financial independence lies. It’s not about the calculations or worrying about health insurance, which will be discussed later, but rather about consistently reducing your spending and increasing your income. Building your life and budget around this journey over years is crucial.

Core Tips to Spend Less on How to Retire Early – Tips for Investing and Saving Your Money

Financial experts publish entire books every year about budgeting, spending less, and saving more.

Even so, here are a few core tips that I’ve found particularly useful.

Focus on “The Big Three” Expenses

The average American spends the bulk of their budget on just three expenses: housing, transportation, and food. Start by optimising them for the greatest gains in your savings rate.

That doesn’t have to mean moving into a van by the river. You can buy or rent a slightly smaller home, house hack, or look for a job that provides free housing. How to Retire Early – Tips for Investing and Saving Your Money

As for transportation, consider sharing a car with your spouse. My wife and I deliberately chose a city and neighbourhood where we don’t actually need cars at all. But before we went carless, we started by experimenting with sharing one car.

Stop eating lunches out at work, and instead pack leftovers from dinner the night before. Look up ways to save money on groceries, and so forth.

Forget ways to save a few cents here or a dollar there, like couponing. Focus your attention on just these three big expenses before optimising the little ones.

Optimize Your Taxes on How to Retire Early – Tips for Investing and Saving Your Money

If we added a fourth spending category to make it The Big Four, it would be taxes.

There are many ways to maximise your taxes. The more of your income you keep (and invest), the faster you can retire.

You can start simple by contributing to tax-advantaged accounts, which are investment accounts that offer tax benefits, such as 401(k)s, traditional IRAs (Individual Retirement Accounts), and Roth IRAs. Bear in mind that, as someone who wants to retire long before age 59½—the minimum age to withdraw funds from retirement accounts— you need to plan your retirement account strategy with more nuance than most Americans. Read up on FIRE tax strategies before maxing out retirement account contributions.

As an aggressive investor, you should also aim to minimise your capital gains taxes. Make sure to research ways to reduce and avoid capital gains taxes.

You can also move to a state with a lower total tax burden. High-tax states charge several times the total tax rate of the lowest-tax states.

Or better yet, move abroad. As an expat, I can take advantage of the foreign-earned income exclusion to avoid most federal income taxes. Uncle Sam waives taxes on your first $108,700 of income in 2021, and double that for married couples. I invest those tax savings, which compound over time and add up to a substantial sum in the long run.

Choose Your Partner Carefully

You don’t need to marry a hedge fund executive or an English duchess. But your spouse’s spending habits and lifestyle goals directly impact your ability to retire early.

It took years for my wife and me to form an uneasy truce around money and years more before we actually came to a full agreement and started rowing in the same direction. She likes to spend, and I want to save and invest to retire early.

No matter what some FIRE gurus insist, retiring early does usually involve some form of sacrifice. You can boost your savings rates with tricks like house hacking, but that won’t get you all the way to the 50%, 60%, or 70% savings rate you need for extreme early retirement. At some point, you need to give up certain luxuries like frequent dinners out and spa days.

Not everyone is willing to make those sacrifices. If retiring early is a priority for you, make sure your partner shares your goal, or prepare to paddle in opposite directions and get nowhere.

Automate Savings & Investments

Willpower and discipline always fail you sooner or later, despite your best intentions.

So? Don’t rely on them. Automate the behaviours you want to guarantee.

You can do that with automated savings apps such as Acorns or Chime Bank. Or you can set up automated recurring transfers from your checking account to your savings account scheduled for each payday. Better still, have your direct deposit split into each account.

I set up weekly recurring transfers from my checking account into my robo-advisor account. All my stock investments operate automatically, requiring no manual intervention.

You can similarly set up automated recurring investments with your real estate crowdfunding investments.

Core Tips to Earn More on How to Retire Early – Tips for Investing and Saving Your Money

Unlike defence, where spending less helps, offence alone can’t guarantee more earnings. Instead, you’re better off picking one or two strategies and committing to them.

On the simplest level, you could negotiate a raise or promotion with your current employer. Alternatively, you could look for a job in a similar field at another employer willing to pay you more or provide better benefits.

With a little more effort—and potentially greater results— you could level up your skill set and pursue a higher-paying career. That could mean as little as a new certification or two, or as much as a new degree.

If you like your current job and feel you’re earning a market or above-market salary, you could take another route and start a side hustle to boost your income. I have several, including freelance writing and real estate investing.

Your side hustle could include starting your own business on the side of your full-time job. It involves more work than picking up gig economy work, but it also comes with a much higher upside potential, such as the ability to build a sustainable income stream and achieve financial independence faster.

Then comes your passive income from investments. Counterintuitively, I recommend investing more aggressively to retire early, not less.

The difference between a 35-year-old looking to retire in five years and a 65-year-old looking to retire in the same time frame is that the younger retiree can easily pick up work again if they run into some sort of financial catastrophe. That offers an edge to people pursuing early retirement, in that they can leave their money in higher-return investments like stocks and real estate rather than retreating to lower-return assets like bonds as they near retirement. Read more about FIRE (Financial Independence, Retire Early) investing strategies to dig deeper.

Regardless of how you earn more annual income, observe one cardinal rule to retire early: invest your extra income rather than spending it.

Plan for Health Insurance on How to Retire Early – Tips for Investing and Saving Your Money

Most people don’t become eligible for Medicare until they reach 65. In a country where people traditionally get health insurance through their employer, that spooks many would-be early retirees away from even trying.

But over the past decade, Americans have seen more options open up for medical insurance without employer coverage, which makes sense given the boom in the gig economy. These options include individual health insurance policies, health savings accounts (HSAs), which allow individuals to save money tax-free for medical expenses, and marketplace options available through the Affordable Care Act, which provides a platform for purchasing health insurance. Please explore all available options for health coverage without employment.

Don’t necessarily discount the idea of getting health insurance through a part-time job either. Although it may seem paradoxical, post-retirement jobs can often be an ideal solution.

Your Second Act: Post-Retirement Work on How to Retire Early – Tips for Investing and Saving Your Money

When most people in the FIRE (Financial Independence, Retire Early) community talk about “retiring”, they don’t mean storming out of their job in a blaze of glory to go spend the rest of their lives on a beach somewhere.

Instead, they mean ditching the obligation of work. They can and sometimes do quit their high-octane career jobs. But even if they do, they go on to find fun or meaningful work elsewhere.

That could mean starting your own business, from simple bed-and-breakfasts to ambitious startups. Or it could mean gig work, such as consulting or working for a nonprofit to change the world for the better. Or it could simply mean fun, laid-back work like pouring beers at the local brewery part-time. How to Retire Early – Tips for Investing and Saving Your Money

As a young retiree, you’ll likely keep earning active income long after you “retire”. So you don’t need to reach complete financial independence in order to quit your soul-sucking day job — you just need enough passive income to supplement your (potentially lower) pay cheque.

Start thinking in terms of lifestyle design to map out your own perfect life. Try on a few post-retirement job ideas, such as freelance writing, consulting, or part-time teaching, to kickstart your thinking about your own second act.

Final Word on How to Retire Early – Tips for Investing and Saving Your Money

Early retirees can’t count on age-based government benefits like Social Security to boost their post-retirement income or Medicare for health care coverage. When you retire decades before the typical retirement age, you need a more comprehensive retirement plan—and more retirement savings—than people who retire in their 60s and 70s.

Start investing now to build passive income streams. When in doubt, speak with a financial advisor, but the fundamentals aren’t as complex as you fear. Create a free broking account, ideally with a robo-advisor, and let them manage your investments for you.

Pick up one or two of the best books on financial independence and retiring early. You’ll find the mindset and day-to-day discipline of spending less are the hardest parts of pursuing FIRE, not the financial planning or investing, as these require consistent effort and commitment to change your spending habits and prioritise savings.