What Does It Really Take to Retire Early?


It seems like every week, there’s a new headline about millennials and money—most of them pretty depressing, like how we’ve been priced out of homeownership or won’t be able to retire until well into our 70s.

But here’s a more encouraging trend: the FIRE (financial independence retire early) movement. It’s what’s inspiring many of us to up our incomes, double-down on savings and investments—and kick the 9-to-5 grind decades early.

The best part? Anyone can join in. Here’s the blueprint for success.

1. Calculate what you’ll need to live on.

Joe Udo, a former engineer who retired at 38, ballparked his family’s needs at $55,000 a year post-retirement, which included everything from their mortgage and groceries to life insurance. Keep in mind you may have some needs today, like a professional wardrobe, that you can disregard in your post-work life. Likewise, you may need to account for new expenses, like individual insurance policies.

From there, think about the rate at which you’ll withdraw (or "draw down") from your nest egg so you don't run out of it. Experts generally recommend 4 percent per year in retirement—which is Udo’s plan. Although Certified Financial Planner Andrea Blackwelder warns that number could change for a “50-year-plus” retirement scenario. “Imagine what sustained rampant inflation and loss of purchasing power would do to a 4-percent withdrawal rate,” she says. (Answer: That’d no longer be enough to support the same lifestyle.)

Still, it helps to propose a rate now so you can calculate a target amount to save before retirement, and devise a plan to get there. Which brings us to...

2. Live (way) below your means.

"The cheaper the lifestyle you’re accustomed to, the less money you'll need to accumulate before calling it quits," says Steve Adcock, who retired this year at 35. "We cut out yearly cell phone upgrades, cut back restaurant meals and talked about each and every discretionary purchase we made to determine if working longer was worth the cost."

Making budget and lifestyle tweaksfrom trimming your cable package to not upgrading your starter home when your income increases—can seriously pad your savings. You don't have to go all-out minimalist though. Just avoiding lifestyle inflation (e.g. spending more as you make more) goes a long way. Putting that savings in the bank, though, is not enough—especially with the average annual yield on savings accounts below .10 percent. So...

3. Invest wisely.

Smart investing is easily the most important piece of the early-retirement puzzle, and compounding returns and low-cost investments are your greatest allies. Think: mutual funds and exchange-traded funds (ETFs) that help you grow your wealth gradually over the long haul.

"If you try to pick individual stocks and go for a home run, you’ll likely lose more money than you gain,” says Kristy Shen, who retired at 31 after building a seven-figure portfolio of index funds with her husband. Now, she’s able to live entirely off steady investment returns without touching the principal—and says she isn’t worried about market downturns because her portfolio is well-diversified with a range of stocks and bonds.

Don’t forget that if you’re planning to live off some of your retirement funds before you’re 59 and a half, you want to contribute some money to a regular brokerage account, too—you’ll typically be penalized if you tap tax-advantaged retirement accounts like IRAs and 401(k)s early, though you can withdraw the funds you contributed to a Roth IRA penalty-free. 

4. Diversify your income streams.

Bringing in some extra cash from a side gig now can help you reach your retirement goal faster—but the real payoff comes from creating passive income streams that continue generating returns throughout your post-work life. This income can help tide you over until you can withdraw cash from dedicated retirement accounts penalty-free, or simply lower the rate at which you tap your savings and investments so they last longer.

Last year, Udo’s passive income streams—from rental properties, his blog and dividend-yielding stocks—covered about 85 percent of his expenses. This year, he’ll be able to cover more than his expenses, which will help him preserve and continue growing his nest egg.

5. Funnel cash windfalls toward retirement.

From tax refunds to raises to bonuses, windfalls can give your early retirement goal a big boost without affecting your lifestyle. Blackwelder suggests automating regular contributions to your savings and investment accounts, too. “If we can use automation to trick ourselves a little bit by keeping it out of our hot little hands, we have a better chance of getting it where it needs to go."

6. Recognize the milestones you hit along the way.

The road to early retirement requires a lot of self-discipline, so it helps to find ways to stay motivated, like breaking up a big goal into smaller targets—like hitting $50,000 or $100,000 net worth.

Adcock and his wife kept themselves on track with small treats, like going on a mini-golf date night, when they hit a new milestone. “The key is to keep you rewards small,” he says. “If your rewards actually set you back, then they aren’t rewards; they’re detriments.”