There are necessary Requirements to Retire Early and believe me there are no shortcuts. The happy fact is your retirement outcome is totally up to you. You must take control of your finances and savings rate as early as possible. The younger you start the younger you can retire.
Sure there are things that can happen along your financial independence journey. Things that will slam you and your plans face-first into the ground. Like losing your job, long-term unemployment, or losing your health. But doing nothing while you could be doing something will only make things worse. Get a grip of your financial life and improve your overall lifestyle odds no matter what happens in the unforeseen future.
Even if you have a company or civil pension benefit coming your way after putting in your years of work or service, you still need to follow the requirements to ensure your early retirement.
I know a lot of people who could retire now with a full pension benefit. Yet they are still working in a job they dislike. All because they can’t retire and live on the pension amount. There is a lot that can happen between now and when you become pension eligible. Things that change or employer decisions made that can reduce your pension benefit. Taking control now will increase your chances for early retirement success.
6 Requirements to Retire Early
Requirement #1- Enjoy your paid work
You must earn money to be able to save money. The more you earn in your job or work the easier it will be to pay off all your debts and grow your savings and investment portfolio. That is because if you can enjoy what you do you are more likely to become an expert at it and climb the ladder and hopefully also climb the pay scale. Work that motivates you will be more sustainable over the long-run giving you the time you need to save for your retirement.
Learning a valuable skill or having the right area of expertise will also come in handy if you choose to continue doing it for pay on your terms after you retire. Your goal is to make as much money as you can so you can ramp-up your savings rate. You may decide to also do side jobs or side hustles to reach your income goals. The last part of this requirement is to handle your early retirement enthusiasm. Don’t be overly consumed by your pursuits and remember to live your life and enjoy the ride too.
You will have to live a smart frugal and balanced life to cut out spending waste to optimize your debt elimination and savings rate. Valuing stuff like new cars and other grownup toys means loans and all the costs to have the stuff.
When tempted just ask yourself if it’s worth delaying your retirement for 5 or 10 more years beyond your early retirement plan. This goes for the other little luxuries we think we need until we apply the happiness-factor to it.
Look at your lifestyle and its cost and cut where you can. Push your frugal threshold but don’t break it because you want your budget to be sustainable over the long-haul and hopefully your current lifestyle can be considered a reflection of what your early retirement lifestyle will be. Keep it real, not like an unsustainable crash diet. Make smart choices.
Requirement #3- Track, evaluate, and tweak
Track your financial progress. As debts are paid off redirect money to other debt until all debt is paid off. Then what money that previously went to debt repayment can now go to savings.
Paying off debt not only frees up cash for increasing your savings rate but reduces your lifestyle costs meaning you need even less saved to support and fund your early retirement. Track and evaluate your budget and savings rate along with investment allocation and returns. Tweak as necessary to align with your early retirement plan.
Requirement #4- Ramp-up your Savings Rate to 30% and more ASAP
The whole point of working at something that you can earn the highest income possible and cutting waste out of your budget along with paying off all debt is to blast your savings rate to the highest rate possible. The more you save the earlier you can retire. The sooner you can ramp-up your savings rate then the more you benefit from compounding interest and investment returns to help grow your nest egg.
I know firsthand because in my early years I was only able to save 10% to 15% until the kids were older and my debts were all paid off. At the age of 40 I was able to jump my savings rate to 30% and then soon to 50% of my take home salary. With that and the compounding benefit of the earlier savings my ramped-up rate was able to blast me to retirement within 11 years at the age of 51.
Here is some motivational math. Assuming a 5% real return in investment and using a 4% portfolio withdrawal rate once retired, by starting at zero and immediately saving 50% of your take home salary means you could potentially have enough to retire within 15 years. Tough to accomplish unless you are already making a great salary or are part of a committed couple where you can live on one salary and invest the other but as in my life story start at what savings rate you can, pay off debt, cut spending waste, and then go for it guns-a-blazing as soon as you can.
Requirement #5- Understand what your retirement lifestyle will cost
This is a really important requirement because the amount of money you need to save to provide the required income to fund your early retirement and beyond is tied to this amount.
Figure Out Your Retirement lifestyle Cost
You are living a smart frugal life that you want to live during your financial independence journey to early retirement. Is it the same life you envision as your retirement life? If so you know exactly what it cost.
Figure Out Your Retirement Travel Plans
Do you see yourself doing more exotic worldwide travels than you do now? If so you must add in the extra cost to your budget that needs to be funded.
Get a Handel on Your Retirement Health Insurance
Do you pay very little for your health insurance at work now? Will you need to factor in the increase due to buying your health insurance on your own? Or through an exchange until you are age 65 and Medicare kicks in? If so you must add in extra cost to your budget that needs to be funded.
Will You Have Retirement Lifestyle Inflation?
While in early retirement you will have more time in your life to pursue your passions and enjoy yourself. Do you see spending more for entertainment or are you living your perfect life now and don’t see that as a lifestyle inflation issue? What needs to be added to your budget and covered by your savings?
Look at what you really think your retirement lifestyle cost will be. The less your envisioned retirement lifestyle budget cost the less you will need to have saved to retire early. Once you fully understand this amount you will be able to calculate what you need each month to support it and ultimately your savings total whether on its own or with a pension you might receive.
Factor in the Impacts of Social Security
Always look into the future and calculate the benefit of eventually qualifying for Social Security to help fund your long-term retirement. Add your assumptions into the FIRECalc retirement calculator to see how your funding will do.
Requirement #6- Assess your skills that you are passionate about doing
When you retire early you can live life on your terms. Would you consider using the skills you have that align with your passions to earn extra money in your retirement? Is living a passion-driven retire early and often lifestyle something you would enjoy doing?
I can tell you that just because you retire early doesn’t mean you will want to be unproductive for the rest of your life. Those of us who successfully reach financial independence to retire early are very driven. That ambition doesn’t just turn off or go away after you reach your goals and retire early. You now have the opportunity to pursue your passions on your terms and in many cases they can be profitable.
When you can do things you enjoy and get paid to do them it also takes pressure off of your savings to fund your retirement which in the end reduces the funding risk of early retirement.
The bottom line
Follow the Requirements to Retire Early and carefully plan for your envisioned early retirement lifestyle and you should have a long and happy retirement where every day is an adventure in freedom and you will enjoy the ride that you carefully prepared for.