Retiring early isn’t just a dream—it’s an achievable goal if you take the right steps and remain disciplined. Here’s a simple plan to build wealth, achieve financial independence, and make work optional long before the traditional retirement age.
Step 1: Calculate your Monthly Expenses
The first step to retiring early is understanding your current expenses. Track your spending for at least three months to get an accurate picture of your average monthly expenses. Include housing, groceries, transportation, insurance, entertainment, and discretionary spending.
Step 2: Multiply your Monthly Expenses by 12
Once you’ve identified your monthly expenses, multiply that number by 12 to determine your annual cost of living. For example, if your monthly expenses are $5,000, your annual expenses would be $60,000.
Step 3: Multiply your Annual Expenses by 25
The next step is calculating your Financial Independence (FI) Number—the amount you need to retire comfortably. Multiply your annual expenses by 25. This calculation is based on the 4% Rule, which assumes you can safely withdraw 4% of your savings annually without running out of money. For $60,000 in annual expenses, your FI Number would be $1.5 million.
Step 4: Open a Brokerage Account
To build wealth, you need a place to invest your money. Open a brokerage account with a reputable platform like Fidelity, Vanguard, or Charles Schwab. These accounts offer access to low-cost index funds, ETFs, and other investments.
Step 5: Invest your Money within the Account
Choose diversified, low-cost Exchange Traded Funds (ETFs) or Index Funds that track the S&P 500 or Total Stock Market funds. These funds provide broad market exposure and have historically delivered solid returns over time. Keep investing during market ups and downs—time in the market beats timing the market.
Step 6: Contribute to the Account Regularly
Consistency is key to building your retirement fund. Contribute a percentage of your income every month to your brokerage account. If your employer offers a 401(k) with matching contributions, maximize those benefits first, then allocate additional funds to your brokerage account.
Step 7: Reduce Expenses and Increase Savings
The faster you save, the sooner you can retire. Cut unnecessary expenses, avoid lifestyle inflation, and aim for a savings rate of at least 25% of your income if possible. Side hustles or higher-paying jobs can also boost your savings.
Step 8: Monitor Progress Toward Your FI Number
Regularly review your investments and track your progress toward your FI Number. Use tools like compound interest calculators to project your portfolio’s growth and ensure you’re on track.
Step 9: Hit Your FI Number
Once your investment portfolio reaches your FI Number, you’re financially independent! At this point, work becomes optional, and you can begin planning your early retirement lifestyle.
Step 10: Withdraw 4% Annually for Expenses
In retirement, withdraw 4% of your portfolio annually to cover your living expenses. For a $1.5 million portfolio, this equates to $60,000 per year. Adjust your withdrawals for inflation each year.
Step 11: Live Off Your Investments Forever
With a well-diversified portfolio and disciplined withdrawals, you can live off your investments indefinitely. Focus on enjoying your newfound freedom and pursuing passions without financial stress.
By following these steps, you can break free from the 9-to-5 grind and achieve early retirement. Start today, and your future self will thank you!
