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5 Steps to Take to Retire Early


Early retirement is a goal for many people. The idea of leaving the rat race at 50--or even 35 or 40--is almost universally appealing. However, early retirement isn't something that just happens. You need to get your priorities straight, make a plan, and be diligent over time if you want to make an early retirement dream a reality. If you are serious about retiring early, here are five steps that will get you closer to saying goodbye to regular employment:

1. Identify your current financial position. Every major financial plan begins with the state of your current finances. To determine where you stand in preparation for retirement, answer these three basic questions:

1) What will your annual retirement expenses be?

2) What amount of money will you need to save to cover these costs?

3) How much will you need to save to get to that amount?

Once you have answers to these questions, you will have a great sense of how close (or how far) you are from early retirement.

2. Determine the annual savings shortfall. Select a potential retirement date and divide the amount you need to save by the number of years until your planned date. For example, if you would like to retire in 20 years and need to save an extra $500,000 to meet your retirement costs, you will need to save an extra $25,000 a year. Once you know this number, you will get a sense of whether your retirement plans are realistic or not. If the number seems unreachable, don't lose heart yet, but know that you may need to postpone retirement for longer than you had originally hoped.

3. Give your budget a complete scrub. Now comes the hard work. You need to find extra savings in your budget. If you're like most Americans, you will need a two-pronged strategy to find it all: You will have to earn more money and cut spending.

Begin with your income. List ideas for making extra money, both in your career as well as from outside activities. Consider every possible source and assign each a potential value for how much it can grow your annual income.

Next, look at your expenses and see where you can cut. This can be a difficult exercise for many people, but you can help yourself immensely if you focus on the best ways to save money. These are the ideas that will save the most people the most money, and they will likely result in the best results for you.

You must be willing to sacrifice during this process. For most people, early retirement doesn't come easy. The sooner you want to retire, the more you have to sacrifice now. If you aren't willing to make tough choices, you probably won't reach your goal. Your retirement has to be a priority if you want to reach it before the age of 65. Decide now what is most important to you--having more fun now or retiring early in comfort. If retiring early is really that important, prepare to make the necessary sacrifices.

4. Rinse and repeat. Did this budget exercise get you where you want to be? If so, congratulations. Put the plan into place, and best of luck with your future retirement. But if you're like most Americans, there's probably a difference between what you need and what you have.

You have two choices at this point: Set your retirement out farther into the future so that your newly created savings level gets you there on time, or go back and see if there's more income or savings on the table. It might be helpful to have a trusted and financially successful friend review your plans and identify new options for earning and saving.

5. Decide and implement. Once you've exhausted your potential sources of income and ideas for saving money, it's time to decide your path. Can you retire in the time frame you hoped or will you need to postpone the plan a bit? No matter what your decision, set your course and begin your plan. Then review your progress every year to see if you are on track to meet the plans you set for yourself.

These simple steps may ultimately not get you all the way to early retirement. But if you implement them, they will get you much closer than you would be without them.

FMF writes at Free Money Finance, a personal finance site that helps readers grow their net worths. He shares practical tips that have helped him accumulate a significant net worth and can do the same for others, including making extra income using the best cash back credit cards and investing wisely in index funds.

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