If you are intrigued by success stories about early retirement where people could retreat and become retired before they reached 40 (a goal of many in the FIRE movement), and are now enjoying their free time traveling, working on passion projects, and having hobbies they always wanted but didn’t have time for, then you are probably wondering “How do people achieve early retirement?”
Perhaps, you would like to get to that early retirement yourself and enjoy a newly discovered freedom, so you are wondering what are the ways to fund your early retirement and how do you achieve that?
What Does Early Retirement Mean?
In Canada, the official retirement age is 65, which is when adults become eligible to receive government pensions. However, the idea of early retirement has changed significantly in the past decade with younger generations dreaming of retiring as early as their thirties. In this case, early retirement would mean not working from 9 to 5, or not working conventionally but finding a type of passive income source. Among Millennials and a part of Generation Z, plans of retiring by 30s and 40s seem to have become an ideal among professionals in various sectors. Whether stress is to blame or a strong desire for a carefree life, early retirement is among emerging financial trends.
How Much Money Do You Need for Early Retirement?
There is no unique answer to this question, but there is a universal formula that you can use to estimate how much money you need to retire early. Multiply your yearly expenses 25 to 30 times. The amount you get is the amount you need to retire early. How is this formula created and what is it based on?
The formula is based on a concept known as the safe withdrawal rate, which is an important factor for early retirees. If you retire early your withdrawal rate shouldn’t be more than 4%. In case you do retire early you are most likely to invest your money in the stock market or a different type of financial market. Your withdrawal rate is thus based on an average annual return generated through your investment. Calculating the average withdrawal rate is not enough to get you to early retirement, so here are the ways you can use it to fund your retirement.
1. Calculate Your Expenses and Make a Retirement Plan
To start planning your early retirement, you need to have a firm grasp of your expenses and your budget, savings, and other funds you may have. You also need to plan your lifestyle according to your budget as any radical changes may lead to chipping off a part of your retirement fortune, which may lead to losing your money and not having enough when you won’t be able to work. Make sure to create a retirement plan that suits your financial possibilities. What is important for you to track when it comes to your monthly and yearly expenses is food, utility bills, rent or mortgage, health insurance, clothing, any type of subscription, and other expenses like entertainment. You also need to count in the taxes and keep in mind that you may have additional expenses that you also need to count in your calculations. Let’s say that you get 50,000$ a year in expenses. You need to multiply that number by 25 to 30, and the amount you get is the amount you need for early retirement.
2. Save Money and Take Account of your Savings
If you calculate that you need $4,000 a month in expenses, in case you start spending more than that, you will have trouble keeping up with your retirement plan. To make sure that you can retire early, you also need to start saving money. Those savings would be preferably placed in an account where your savings can grow or be invested in a financial market. Saving is important as you can create better conditions for your retirement by cutting back on some redundant costs and putting away a part of your monthly earnings so that your current lifestyle is not suffering. You can also find a side job or an additional source of income, while the money you generate this way can be placed in your savings account. By putting some money aside, you may be able to retire earlier than you planned.
3. Invest Your Money for Maximized Returns
One of the most common ways of assessing an early retirement as proven in numerous examples is investing in financial markets. The most popular choice is usually investing in stocks and relying on yield returns. You may choose to diversify your profit channels by investing in prominent projects, businesses, and stocks so that you can make more money towards achieving early retirement. Annual rates for traditional savings are reliable but are lower than rates that you can get through returns from investing in stocks. That way, your money is working for you, while you need to do thorough research before investing to make sure that your investment will pay off in the long run.
Some people also choose to invest in real estate via their primary residence. This is especially popular in hot real estate markets like Toronto, where house valuations continue rising at record paces. While you’ll always need a house to live in, companies like Alpine Credits offer home equity loans you can use to cash out profits.
4. Cut Back on Redundant Costs
Most commonly early retirement comes with some sacrifices as you may need to cut back on some redundant costs that most of us have. For instance, you may be spending 20$ on coffee every day, every month, and year-round, which would be 365 x 20 spent only on your daily caffeine infusion. You may choose to have less expensive coffee choices or make your coffee at home under a predetermined budget. You can also cut on subscriptions and expenses that you can live without or switch to more cost-efficient choices for the same services and products that you may be using daily. It will take some discipline, however, your motivation to retire early can prevail.
5. Maintain Your Retirement Budget
Once you create a plan for early retirement, you need to stick with your budget and set some boundaries on your monthly expenses. You can find an extra profit source or side hustle to earn more money to add to your budget. However, you will need to stay within the frame of your expenses during your retirement once you get there, especially in case you get retired in your early 30s and stop working from 9 to 5.