The Roadmap to an Early Retirement
Early retirement can have many benefits. The trademark burnout from over-work can leave many people with lifelong ailments, stress and pure exhaustion. Furthermore, if you have always dreamt of having more time on your hands than early retirement is the way to go.
Some of the best ways to start planning an early retirement is to make a solid plan that should enhance your earnings to 25-30 percent that of your annual earnings. Remember this number should be dependent on the lifestyle you want to keep after the planned retirement.
Early retirement is not an easy game. It requires a huge amount of self-discipline, planning and thorough understanding of what and how you plan to achieve your goal. So, if you have figured out the basic here are the fundamentals you should really keep in mind.
What is early retirement for you
Early retirement has different meanings for everybody. For some it is complete financial independence for every having to work again for money, for some it involves leaving a corporate job in pursuit of something more meaningful and flexible, some think of it as a procedure to fulfill all outstanding crunch financial requirements such as outstanding mortgage and debt. So, having a clear idea of what would amount to an early retirement is an absolute necessity. If you plan to retire at 55, you should have assets that will provide solid earnings for 35/40 years, if you plan to retire earlier, e.g. at 45 years, then you have to consider a much more solid plan that will provide income for longer periods. Some of the most widely used strategies to obtain this are delaying the usage of Social Security benefits till the age of seventy1 in order to maximize the benefits. The other method employed by some is utilizing the 401(k) Early Retirement Provisions where the 401(k) funds are withdrawn earlier at the age of 55 without paying an extra penalty.
Defining your net worth
Understanding your net worth is the starting point to set out towards your financial goals. If you are in the red zones where your liabilities exceed your income, then you need to tweak things to get back in order. Figuring out your net worth sounds difficult but all it takes is a couple of hours of careful estimation and perhaps an excel spreadsheet. All you need to do is figure out the worth of your assets2: car, house, property, savings, jewelry, art, and your liabilities, debts, mortgages and loans etc. If your assets are more than your liabilities you are in the green zone, however if the case is the other way around then you need to up your savings game or work out extra sources of income.
Estimating your required numbers
The biggest question an early retiree has to ask, “realistically: what’s the ideal number for my early planned retirement?” All of the planning and hard work will depend on this. Furthermore, how do you plan to achieve that number? Because, obviously the traditional method of slow, but safe and secure earnings through paper investments (T-Bills, Certificates of Deposits, Saving Certificates) are out of the question if you plan to retire at an early age. So, the other options are either through Extreme Frugality, Active Investing and Leverage. All these options are subject to their own set of prone and cons, frugality might be disrupted with health issues, loss of job etc. Active investment requires a huge learning curve and a loss can turn leveraging into a disaster, but for people planning on early retirement: without taking risk it is impossible to achieve the goal. So, start searching for options to get the maximum out of your assets, learn skills that will give you an extra hand, understand thoroughly how much you will require and most importantly “mind the inflation3”.
Live with a tight belt
Unless your born with a silver spoon, chances are you are planning to utilize your hard earned money for your planned early retirement, one of the best ways is to plan your savings, to cut down expenses, to lean in on the big chunks of expenses which can be used to save up4. To get started would be to always drive used, buying used vehicles could save a lot of money. making a monthly expense report and zoning in on the useless expenses which could be cut-down. Remember, saving is going to benefit you, so cutting down on something today will benefit you in the long-term.
[1] “What age is considered early for retirement/Webpage/Dana Anspach/14 November 2019/thebalance.com/Accessed on 31/March 2020.
[2] “Your personal net worth/Webpage/Corporate/schwabmoneywise.com/Accessed on 31 March 202.
[3] “How to retire early: 6 essential strategies you must now/Webpage/Todd Tresidder/financialmentor.com/Accessed on 31 March 2020.
[4] “How to live below your means without feeling deprived/Webpage/Jean Lee/14 March 2019/nerdwallet.com/Accessed on 31 March 2020.