You will likely have to change your lifestyle to retire early. However, that doesn’t mean you have to stop going out to eat, buy only used clothing and give up all hope of ever seeing a first-run movie again. It does involve making some reasonable lifestyle alterations that will allow you to jump off the merry-go-round ahead of your peers.
You get to decide how drastically you want to change your lifestyle in order to stop working for a living. If you change things a little it will take longer, but you will still retire early. If you change them a lot, you get to dive into that backyard hammock first.
Changing lifestyles can also include changing roles, both before and after you retire. If one family member keeps working longer or has a chance to earn additional income after retirement, others may need to take on more household responsibilities. Flexibility is the key.
Develop a Family Plan
Set a savings. The goal is to increase income, reduce expenses and grow savings. Work together as a family to decide what to cut and how to increase income.
Lifestyle changes affect everyone – not just you. If you’ve never done an elaborate budget before, our tutorial Budgeting Basics will help you get started.
Money management software and apps are available to help you keep track of your progress. Some people use a simple spreadsheet, while others take a more high-tech approach. Many of these apps will also help you budget and even issue warnings if there’s a suspicious charge on your account or your bills are due. (For more, see 6 Best Personal Finance Apps.)
Increasing income likely means working harder, either longer hours or more days. Additional income can also come from raises, promotions, a new job or an additional part-time job. You may want to start a new business, whether it be part-time or as a replacement for your current job. The sharing economy offers opportunities through platforms such as Uber, TaskRabbit or Airbnb. You can also consider creating a second revenue stream through real estate; Real-Estate Rents Can Fund Your Retirement explains how.
Reducing expenses is another way to increase your home-based bottom line. The less you spend, the more you have to save. staycation” instead of traveling to an exotic locale can result in significant savings, especially if you invest what you would have spent on that vacation. Consider keeping the car you have instead of buying a new one every four or five years. Saving a car payment every month will add up fast.
One so-called non-discretionary expense – housing – can be more flexible than you think. Reduce housing costs by avoiding or delaying the urge to upsize. Consider staying in your apartment longer or buy a smaller first home and stay in it longer. Living small takes discipline, but it can move you to early retirement faster than almost anything else you can do.
Avoid the whole notion of keeping up with the Joneses. The payoff will come when the Joneses are going off to work and you are sleeping in and spending afternoons in that hammock – or hiking the Rockies. One advantage of retiring young is that your body will probably be up to almost any adventure you’ve ever dreamed of having.
If you have credit score but don’t use it. Stick with one credit card and pay it off at the end of every month.
Consider avoiding credit cards for discretionary spending altogether. Instead use an “envelope system,” in which you place budgeted cash in envelopes marked “groceries,” “dining out” and so forth. When an envelope is empty, you’re done with that discretionary expense for the week or month.
Save More Than Normal
Following the above advice would likely result in more savings than the traditional 10% to 20% experts recommend for normal retirement at age 66 or 67. To speed things up – or at least track better – set a goal to save more of your disposable income.
Many experts say you need to save between 30% and 50% of discretionary income to retire early. Add up your total discretionary spending, multiply by your goal and see how close you came to that number. If necessary, lower the percentage or try harder next time.
The Bottom Line
Seek the advice of a trusted ETFs are typically considered the best vehicles for this type of investment. Finally, keep an eye out for “found” money that can be added to that investment fund. Do you have a tax refund coming? Invest it. Have you just learned about an inheritance? Do you have items around the house that can be sold on eBay? Count everything, because everything counts.