Conventional wisdom–and the threshold for social security benefits–tells us that retiring before your sixties isn’t within reach for most people. Even setting aside a fraction of your paycheck can be a luxury: About 20% of American workers do not save any of their income, and only 16% of them manage to save more than 15% of their annual income. Between student loans and wage stagnation, many millennials are skeptical that they can even retire by their sixties, let alone earlier.
But if the prospect of an earlier retirement is alluring, there’s hope for you yet if you’re willing to make some lifestyle changes. In recent years, some Americans, many of whom are millennials, have flocked to the FIRE movement–an acronym for “financial independence, retire early.” For some extreme devotees, that has meant retiring as early as their mid-thirties, but for others, it can mean calling it quits in their forties or fifties. If you’re a millennial whose current projected retirement age is seventy-something, early retirement for you could be at a comfortable 62, as social security benefits kick in. Whatever your target, there are a number of things you do–or double down on–if you covet an early retirement.
Define what retirement means to you
Early retirement in 2019 may not be your grandparents’ version of retirement. Those who retire early don’t necessarily do so with the intent of never working again. Some want to focus their energies on a passion project or more fulfilling work, but do so without worrying about finances; others may simply want more control over their schedule and the flexibility to spend more time with their family. In fact, a number of early retirees have monetized their financial journey through blogs or book deals.
Figure out what you might seek in early retirement, whether it’s a reprieve from your draining day job or a life outside of an urban area. If you’ll still work in some capacity, the additional cashflow can make an early retirement less daunting. “It’s not that you plan on retiring at age 40 and not doing anything that will earn you income for the rest of your life,” says Nick Holeman, a financial planning expert at Betterment. “Normally, it’s that you’re retiring to something instead of retiring from something. It might be a full-time job, just something that doesn’t pay as much and that you feel more passionate about–or it might be what was once your side hustle, but now you can devote more time to it.” That money may not be significant, but it can provide some cushion.
Experts typically recommend thinking about how much you plan to spend per year and accounting for about 30 years post-retirement, give or take. (If you plan to spend about $40,000 a year, for example, you’ll need at least a million dollars in the bank before you retire.) Depending on what retirement might look like for you, you can determine a retirement age and annual spending number that makes sense for your lifestyle.
“Everyone needs to have a target, or a concrete goal in mind,” Holeman says. “Having that is the first step toward getting enough motivation–it requires having those things in order for you to really commit to saving as much money as you need for an early retirement. If you don’t set that target for yourself early on, you’re just saving for this nebulous thing.” Along the way, it’s also important to set milestones so you can record your progress–and make that target number feel more attainable.
Live below your means
Much of the early retirement game comes down to, well, savings. Some early retirees are former tech workers who reap the benefits of their years making a six-figure salary, but it’s possible to build up your retirement nest egg even with a more modest income. According to Carrie Schwab-Pomerantz, a senior VP at Charles Schwab, the typical recommendation is to start saving 10%-15% of your income from your twenties onwards. If early retirement is on your radar, she says, you’ll need to increase that percentage–say, to more than 20%. (Since you won’t start receiving social security benefits until the age of 62, you also want to account for additional costs like healthcare.)
Some people go to extreme lengths to exit the workforce early, but you don’t necessarily have to live like an ascetic to retire earlier. You may also be comfortable retiring a bit later on the spectrum of early retirement if it means living a bit more extravagantly. For most people, major expenses usually fall into one of three buckets: housing, transportation, and food. Holeman says you can decide how frugal you want to be based on your retirement goals, though he points out that many people find themselves house-rich and cash-poor. People who are single can afford to live more sparingly, by shacking up with more roommates, but even married couples with children can make certain changes–living further from the center of a city, for example, or moving to a cheaper city altogether. For urban dwellers, in particular, it may be more realistic to cut back on transportation and food spending, by opting not to lease expensive cars or eating out less frequently. Schwab-Pomerantz also encourages people to avoid using their credit for some time and live off cash to develop better financial habits.
“It’s not about living this life of deprivation and cutting back on things and being miserable,” Holeman says. “It’s about being intentional about your money–being intentional about who you hang out with, what you guys do, and what you spend money on, so you can spend your time and money on the things that do bring you happiness.”
While mounting student loan debt is a legitimate source of stress–and a sizable drain on millennials’ finances–Holeman believes that many people feel adrift because they lack financial literacy. “A lot of people just feel so discouraged,” he says. “They feel like they have no agency or control and feel helpless with their money.” Working toward a goal like early retirement can both be a catalyst to educating yourself on your finances and provide something of a community in people who have similar goals.
Ask for a raise–and max out your workplace benefits
Of course, diligent saving alone won’t guarantee you can retire early. If saving is one prong of the path to early retirement, earning and investing are the others. Side hustles can prove a lucrative source of additional income, but the siren song of early retirement is as good a reason as any to ask for that raise or promotion–or find an employer that will compensate you in a way that aligns with your goals.
But even after you negotiate a raise or secure a new job, it’s important to watch your spending. “People tend to spend whatever is coming in, and we’re all guilty of that,” Holeman says. “But if you can be conscious of that and set rules–you’re going to save 50% of each raise or three-quarters of your bonus, or you commit to investing all your tax refunds instead of spending it–little things like that can prevent lifestyle creep.”
As for investing, many financial experts will tell you slow and steady is your best course of action. Finding the hot new stock might be one person’s ticket to early retirement, but don’t bet on it. “Don’t be your own enemy when it comes to investing,” Holeman says. “A lot of people try to trade all the time and pick individual winning stocks, and that is a loser’s game. Over the long run, all the data shows that you’re not going to outperform the market.” Holeman and other experts recommend sticking with low-cost index funds and investing with an eye toward potential hidden fees.
Many people also make the mistake of not maxing out on their 401(k) contribution and taking advantage of employer match, Schwab-Pomerantz adds. “A lot of people work for a company and don’t utilize the 401(k) as best as they could,” she says. “They don’t save up to the company match, so they’re walking away from free money.” Beyond that, they don’t necessarily monitor their 401(k) or think about where the money they’ve saved is going. “People misunderstand that you have to put [your money] in investment vehicles,” she says.
Once they are saving for retirement, one mistake people make is dipping into those savings before they have retired. When it comes to your children’s education, in particular, it may be tempting to reduce the burden on them by helping them pay for college with money from your retirement account. But Schwab-Pomerantz warns against doing so, even if that decision is at odds with your parental instincts. “Our inclination as a parent is to take care of our kids first, but with retirement, you don’t get a second chance,” she says. “You’re doing a disservice to yourself and to your family by using up your retirement savings.”