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6 Tips and Investing Strategies to Retire Early (and Without Penalty)

Ready to quit work or begin a financially independent lifestyle? Laura covers six tips and strategies to help you amass enough money to retire early and on your terms.

By
Laura Adams, MBA,
Episode #561
6 Tips and Investing Strategies to Retire Early (and Without Penalty)

Megan M. says, “My husband is a teacher who makes around $50,000 per year and loves his job. I’m an engineer and make about $120,000 per year. We currently live off of my husband’s salary except for our car and mortgage payments. While I enjoy my job, I’d like to retire early, perhaps in my 30s. How should that affect my choice to contribute to a Roth or a traditional IRA?”

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Thanks for your great question, Megan. I love hearing from a growing number of young people who are planning for an early retirement. There’s a growing movement called FIRE, which stands for financial independence, retire early.

No matter if you’re fed up with a high-pressure job, want to travel more, or just dream about a different lifestyle that doesn’t require full-time work, being ready for retirement sooner rather than later is a wonderful and wise goal. 

I’ll cover six tips and strategies to help you amass enough money to make a transition to a less lucrative career or to quit working altogether and enjoy an early retirement.

6 Tips and Investing Strategies to Retire Early

  1. Calculate your savings target. 
  2. Invest consistently. 
  3. Watch your investment fees. 
  4. Minimize taxes. 
  5. Know the retirement withdrawal rules. 
  6. Understand 72(t) payment plans.

Before covering each tip, let’s consider what early retirement is and whether it’s a goal you want to achieve.   

What Is Early Retirement?

The concept of retirement as a time to spend your days in a rocking chair after you stop working for a company is completely outdated. Now, retirement is when you no longer have to work. But many who retire early still choose to work.

Maybe you want to “retire” and work part-time if you enjoy it. You might choose self-employment or volunteer work that keeps you involved in your community. Or you might take a sabbatical to travel and work remotely. 

The idea is that retirement doesn’t have to be the end of income-producing work. It can be shifting from work you must do, to work that you truly want to do. If you want to join the FIRE movement, use these strategies to make early retirement a realistic goal.

1. Calculate your savings target.

To know if and when you can retire early, you must figure out the amount of savings you’ll need. A good place to start is to know the total of your living expenses, such as housing, food, insurance, medical bills, and transportation.

Remember that once you’re retired some expenses may end, such as commuting, buying work-appropriate clothes, and saving. But you may have larger expenses, such as travel and hobbies, or costs that are no longer picked up by an employer, such as health insurance, life insurance, and a smartphone.

Using financial tools, such as Mint or Quicken, you can track your expenses to get an idea of your typical weekly, monthly, and annual expenses by category. There’s no way to know exactly how much you’ll spend in the future, but you need an estimated budget in order to calculate an early retirement savings target.

There’s no hard rule, but a good guideline is to save 10 to 15 times your annual budget by your mid-60s. For example, if you live on $100,000 per year and will receive Social Security retirement benefits, a good savings target is between $1 and $1.5 million.

But in order to retire early, perhaps at age 30 or 40, you’ll need much more savings to ensure your nest egg can last for a 45- or 55-year retirement. You won’t have Social Security retirement benefits to back you up because age 62 is the earliest you can start collecting it.

How much you need to begin an early retirement depends on a variety of factors, including:

  • Your desired retirement age
  • How much you plan to spend or withdraw
  • How much you earn during retirement
  • Your average post-retirement investment return

Since the math can get complicated, the best way to create an early retirement savings goal is to work with a financial advisor. You might also use a retirement planning calculator, such as the free ones found at Personal Capital or AARP.

As your income, debt, and lifestyle changes, reevaluate how much savings and income you’ll need for an early retirement and whether you’re on track to achieve it.

See also: How to Retire With Enough Money and Income

2. Invest consistently.

The real trick to retiring early is investing early and often. The more money you set aside the better off you’ll be.

Never wait for the “right” time to invest because it doesn’t exist. No matter what’s going on in the financial markets, your money can’t grow if it’s sitting on the sidelines. Every day of investment growth matters, especially when you want an extra-large nest egg to retire early.

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