Invest Wisely, Retire Early: A Guide To Financial Freedom

Retiring early is a dream for many, but it requires a lot of work and dedication. The FIRE (Financial Independence, Retire Early) movement has gained traction in recent years, with people aiming to retire in their 40s, 30s, or even earlier. To achieve financial independence and retire early, you need to make some significant changes to your budget and savings strategy.

- Adjust your budget: Cut your expenses as much as possible and aim to live on a small portion of your income. This may involve getting creative with transportation, utilities, food, and housing costs.

- Calculate your retirement spending: Determine your monthly spending and consider what expenses will go up or down during retirement. Add up your final monthly expenses, multiply by 12, and then increase that number by 10-20% to have some wiggle room.

- Estimate your total savings needs: A rule of thumb is to save 25-30 times your planned annual spending before retiring. This is based on the expectation that your retirement nest egg will continue to grow and that your spending will increase with inflation.

- Invest for growth: Consider investing in a balanced portfolio geared towards long-term growth, including stocks, bonds, and real estate. While it may seem counterintuitive, taking on more risk can pay off, as you have a longer time horizon for your investments to recover from any short-term losses.

- Keep expenses in check: Stick to your retirement budget and avoid increasing your spending, especially on recurring expenses, as this will increase your chances of running out of money and having to re-enter the workforce.

Retiring early is not just about leaving your job; it's about achieving financial independence and having the freedom to choose how you spend your time. It requires discipline, sacrifice, and a detailed plan, but it can be achievable with the right strategies and mindset.

Save 25-30 times your expected annual expenses

Saving 25-30 times your expected annual expenses is a good early retirement strategy. This is based on what’s known as your expected withdrawal rate, which is the percentage of your investment growth that you would be able to withdraw per year to live on.

Based on the Trinity Study and many others, a safe early retirement withdrawal percentage is between 3-4% adjusted for inflation (meaning you can also take out an additional 2-3% per year depending on inflation).

Here’s how to calculate how much money you need to retire early:

First, figure out how much money you are spending each year by tracking your expenses.

For example, if you spend about $50,000 per year, then you need to have somewhere in the neighbourhood of ( $50,000 x 25) $1,250,000 to ( $50,000 x 30) $1,500,000.

While it’s impossible to account for every variable, where you want to live and whether you want to have kids will have profound impacts on how much money you need to walk away.

If you want a mansion in the Hamptons and an apartment in New York City, you are going to need millions and millions of dollars, which means you will likely need to make some huge trade-offs in your life while you are trying to save that money.

The less money you can live on, the less you need to retire early.

It’s important to note that your number will change and should change as you change. No matter where you are starting from today, it’s likely going to take you 1, 2, 5, 10, 20, maybe 30 years or more to have enough money to walk away. Over the years, you’ll want and need to refine your walk-away number calculations as the cost of your lifestyle evolves.

To calculate your own number, you can use an online tool to calculate your current expenses or project your future expenses.

Cut back on your three biggest expenses

Housing, transportation, and food are the three biggest expenses for most households. Here are some tips to cut back on these expenses:

Housing

• Downsize to a smaller home: Consider moving to a smaller house, a condo, or even a tiny home. This can help reduce utility and maintenance costs.
• Pay off your mortgage early: Consult a financial advisor to determine if it makes sense to liquidate long-term savings assets to pay off your mortgage sooner.
• Share housing: If you live in a high-cost area, consider buying a house and renting out rooms, or renting a room yourself.
• Relocate to a lower-cost area: Move to an area with a lower cost of living, which can help reduce property taxes and home maintenance costs.

Transportation

• Opt for a used car: Buying a used car can be more affordable than purchasing a new one. Look for a safe and reliable vehicle within your budget.
• Choose economical vehicles: Select vehicles with good fuel efficiency and lower insurance premiums and registration fees.
• Utilise senior discounts: Take advantage of reduced rates for public transportation.
• Carpool or use ride-sharing services: When possible, share rides with others or use services like Uber or Lyft.

Food

• Cook at home: Preparing meals at home is generally more cost-effective than dining out.
• Take advantage of discounts: Look for senior discounts at restaurants and grocery stores.
• Plan your grocery shopping: Create a meal plan and shopping list to avoid wasting food and impulse purchases.
• Buy in bulk or use coupons: Stock up on non-perishable items when they are on sale, and use coupons to save on groceries.

Increase and diversify your income streams

Once you've cut down your expenses, the next step is to increase your income. The more money you make, the more money you can save and invest.

There are two places you should start: optimising your full-time job and starting a side hustle.

Optimise your 9-5

Whether you currently love or hate your full-time job, it's where you're making money right now, so you should optimise it so you're making as much as you can. Negotiate a raise and work remotely so you have more control over your time and more time to make money on the side. Make sure you're maximising all of your employee benefits, including commuter benefits, HSAs, and all retirement investing account opportunities.

Start a side hustle

Anyone can make a few hundred extra bucks a week on the side. You can make extra money doing anything – mowing lawns, walking dogs, shovelling snow, babysitting, coding online, tutoring, making deliveries, chauffeuring people, flipping on eBay, selling a product on Amazon, participating in focus groups, or a whole host of other things.

But not all side hustles are created equal, and some can make you a lot more money than others. The best and worst thing about side hustling is that you can make money doing anything.

If you're side hustling for someone else, the money you can make will always be limited by the number of hours you have in the day. It's tough to get off your 9-5 job and hop in a Lyft to drive all night. While you might think you're working for yourself, you're actually working for Lyft. Sure, it gives you flexibility and freedom, but no matter how much you drive for Uber or Lyft or deliver for Doordash or Instacart, you’ll always be limited to your own hours.

So you need to think about side hustles that you can do and build a business from. This doesn’t mean you have to hire your own employees, but you can probably make more money if you do. Profitable side hustling is all about the money/time trade-off, so you will make a lot more money if you’re the person at the top.

Some side hustles will take a lot more time to get off the ground than others – for example, if you have an amazing idea for a new mobile app, but you don’t know how to code, it’s going to take a lot of time to get that idea off the ground. But mowing lawns in the evenings or on the weekends doesn’t require anything more than the ability to mow lawns.

This doesn’t mean that if you’re busy you can’t find time to side hustle, it just means that you should calibrate the difficulty of your side hustle based on the amount of time you have.

While you can make money doing pretty much anything, it’s a lot easier to make money doing something you love or at least like – not only are you more likely to stick with it, but it also won’t feel like work.

Set daily, weekly, monthly, and annual savings goals

Setting daily, weekly, monthly, and annual savings goals is a crucial step in achieving early retirement. Here are some detailed tips and strategies to help you set and achieve your savings goals:

• Calculate your daily savings goal: Determine your expected annual expenses and divide that number by 365 to get your daily savings target. For example, if you expect to spend $50,000 annually, your daily savings goal would be approximately $137 per day ($50,000/365 days).
• Make it a daily habit: Treat saving money as a daily habit, just like brushing your teeth. Each day, transfer your daily savings amount into your investment or savings account. This consistent and disciplined approach will help you stay focused and motivated.
• Start small and increase gradually: If saving $50 or $100 a day seems daunting, start with a smaller amount that you're comfortable with. You can begin with $5 or $10 a day and gradually increase it over time. The key is to get started and build momentum.
• Utilize technology: Take advantage of mobile apps and online tools to automate your savings. Set up automatic transfers from your checking account to your savings or investment account. Many apps allow you to set daily, weekly, or monthly transfer schedules.
• Break down your goals: Divide your annual savings goal into monthly or quarterly milestones. For example, if you want to save $10,000 in a year, aim for $833 per month or $274 per week. This helps make your goal more manageable and allows you to track your progress.
• Visualize your progress: Create a savings thermometer or use a savings tracker app to visualize your progress. Seeing your savings grow can be motivating and encourage you to stay on track.
• Set short-term and long-term goals: In addition to your daily savings goals, set short-term and long-term goals to keep yourself motivated. For example, you might aim to save $1,000 in the next three months or $10,000 in the next year. Celebrating these milestones will help you stay committed to your savings journey.
• Cut back on expenses: Analyze your spending and identify areas where you can reduce costs. Look for ways to save on housing, transportation, food, and entertainment. Negotiate lower rates on your bills, cut back on unnecessary expenses, and find creative ways to save money.
• Increase your income: Consider ways to bring in extra income to boost your savings. This could include asking for a raise, taking on a side hustle, or selling unwanted items. Increasing your income will help you reach your savings goals faster.
• Stay accountable: Share your savings goals with a friend or family member who can hold you accountable. Consider joining a like-minded community or finding an accountability partner to stay motivated and inspired.
• Review and adjust: Regularly review your savings progress and make adjustments as needed. Life circumstances change, and your savings plan should be flexible. Evaluate your goals and ensure they align with your current financial situation and retirement timeline.

Create a simple investing strategy

Investing is a key part of any strategy to retire early. Here are some tips for creating a simple investing strategy:

• Focus on stocks, bonds, and real estate. These asset classes have performed well historically, so you should invest in them consistently.
• Have both a short-term and long-term investing strategy. Your short-term strategy is for money you'll need in the next five years, while your long-term strategy is for money you'll need in 10+ years.
• Only invest in what you understand. This will help you avoid making risky investments that you don't fully grasp.
• Make sure your money is working as hard as it can for you by investing in a tax-efficient way. This means investing in your accounts the right way.
• Consider using low-cost index funds. These can be a good bet if you're looking to grow your money without taking undue risks.
• Don't be afraid to take some risks. Retiring early means you have a shorter period to save and a longer period when your savings need to support your spending, so you'll need strong investment returns.
• As you approach your planned retirement date, shift a small amount of your savings into safer, more liquid assets. That way, you can access them without worrying about selling investments at a loss.

Frequently asked questions