Most Americans leave the workforce between the ages of 63 and 65 years. However, a growing number of people are not interested in waiting until their golden years to retire. The FIRE (Financial Independence Retire Early) Movement has gained mainstream attention as the blueprint for accelerating retirement savings.
FIRE adherents cut down their expenses during their working years- often saving 70% or more of their income. While reaching FIRE is most achievable for high-income earners, middle and low-income households can also apply FIRE principles and retire early.
If you are interested in retiring in your 50s or earlier, taking the following steps can help you remain liquid throughout your decades of retirement.
Pay off your debts
Most retirees are advised to pay off their debts, as they anticipate a reduction in income. In the case of early retirement, paying off debt quickly has a different purpose. When less income is devoted to debt payoffs, more money can be invested in higher yield investment vehicles.
Becoming debt free also reduces the risk that a financial emergency will derail your early retirement plan.
There are several ways to aggressively pay off debts:
Debt snowball: In this method, you pay off your debts based on their total amounts. You would put as much of your disposable income towards your smallest debt while paying the minimum on all others. Once the smallest debt is completely paid, you use that minimum and all other extra income on paying off the next highest debt.
Debt avalanche: Debt avalanche follows a similar process as the debt snowball. The main difference is that you tackle the debt with the highest interest rate, regardless of the amount. This generally means you will pay towards unsecured debts, such as credit cards and car loans before secured debts such as your mortgage.
While the avalanche method saves the most time and money, the quick wins of the snowball method can be more motivating for some people.
Imagine your desired lifestyle
No two early retirement lifestyles are the same. Some people opt to downsize and travel, while others want to maintain the same standard of living.
No matter what you are envisioning for your life after retirement, you need to have a realistic concept of what it will cost you.
Many people base their living costs on a percentage of their nest egg. The traditional rule of 4% per year doesn’t work for retirements that can last four to five decades.
Instead, some adherents of the FIRE movement estimate their lifestyle costs using a formula known as the FIRE number. Savings goals are set at 33 times the expected annual costs.
When determining your post-retirement lifestyle, think about your current income, financial obligations, and savings goals that are realistic for you.
Consider your income options
Most traditional retirement vehicles do not allow tax or fee free withdrawals until the account holder is 59 and a half years old or older. As a result, early retirees must draw their funds from other sources.
Passive income streams such as dividend paying stocks and real estate can bring in a reliable source of funds. Many early retirees actually continue to work. However, they take on flexible roles, such as consulting, self-employment, or part-time positions. Since their living costs are covered by savings and investments, earned income can go towards building retirement funds or paying for non-essential expenses.
Talk to professionals
Early retirement reduces the timeframe individuals can save while lengthening the period that retirees will rely on that money. This combination makes working with a financial professional essential.
Financial professionals can suggest investment vehicles and strategies that align with your retirement goals. They can also show you financial projections based on best and worst-case scenarios so you can plan accordingly.
Since early retirement can also impact your children and other beneficiaries, consulting with a financial planner is also advised. These professionals have access to advanced estate planning software that can house and track all of your legal documents and end of life plans.
Assess your healthcare needs
Healthcare is one of the biggest costs for retirees, and one of the only costs that increases over time.
While younger people generally pay lower healthcare costs, leaving the workforce can mean losing insurance coverage. Unexpected medical costs can make a significant dent in retirement savings.
Some FIRE adherents purposefully retain part-time work for health insurance benefits. Others are covered by a spouse’s policy. Some households opt to pay for insurance coverage at cost. However, as policies can cost thousands of dollars monthly, this expense must be included in any financial calculations.