You’ll see most people throw around the concept of financial independence, retire early, or FIRE. You should expect to have at least 25-30 times your estimated annual expenses either saved or invested before you consider retiring. To achieve this you’ll have to live below your means, increase your income or max out your retirement accounts every year.

You should also aim to pay off all high-interest debts, mortgages or other loans. You want to be debt free as soon as possible and only retain debt as a means to build credit and a credit history.

What is Early Retirement?

The ability to retire early isn’t as widespread as people think and it takes time and incredible discipline to stay on track to earn, save and invest as much as possible. The term early retirement is different for most people and the first step in reaching early retirement is to define what it means to you.


At the most basic definition early retirement simply means you retire earlier than the normal age range for people who retire. The average retirement age is 61 but many still wait until 65 and many still work beyond 65. Many of these retirees go back to work after they’ve retired and work a part-time job to supplement their income.


Each person has their own definition of what early retirement is. You should look at “early retirement” as the point in your life where you are financially independent and if you quit your job you could live the rest of your life without worrying about money.


Typically that entails figuring out how much money you’d need to retire in the first place. Then you can work back from there.

Is Retiring Early a Good Idea?

There really aren’t too many “pros” when it comes to retiring early. Many of the benefits to retiring early are all tied to mental health. The answer to this question ultimately comes down to your goals and how you view life. In most cases, if you can afford it, retiring early is a good idea.

Pros to Retiring Early

  1. It can be great for your mental health.
  2. You can spend more time on “experiences”, like travel.
  3. You can explore hobbies, other careers and things you didn’t have time to do before.

Cons of Retiring Early

  1. You shouldn’t plan to rely on social security when you do hit retirement age.
  2. You will have to manage your retirement savings to last longer than the standard 20-30 years planned for.
  3. You will most likely have to find, and pay for, your own health insurance coverage.
  4. You could see penalties on investments or retirement savings by pulling out early.

Early Retirement Penalties

There are a few early retirement penalties you may have to incur if you take money out of your retirement plans early. Typically these penalty fees are for 401(k) or IRA accounts.


An early withdrawal is any distribution you take before you reach 59.5 years old. You may be subject to a 10% tax penalty in addition to any state and federal taxes. This means you could lose around 20-40% of your savings in your 401(k) or IRA before you see any of the money.


If you have a Roth IRA account you can take out funds, without penalty, up to the amount you invested into it. If you take out from your earnings you will be subject to taxes and fees.

How-To Guide to Retiring Early

Define Early Retirement

The definition for early retirement will change based on who you talk to and the goals of that person. For example, someone can view early retirement as age 35 where another person views it as age 55. For the most part, many retirees define early retirement as the time where they don’t have to work to live.

Before you can make any plans or determine the target number for retirement you need to decide when you plan to retire.

Take Inventory of Your Finances

You won’t know how much money you need to retire with unless you have a hold on your finances.

The two numbers you’ll want to figure out:

  • Annual Expenses
  • Total Net Worth

If you’ve already been monitoring your finances then you should have a rough idea of what these are already. If you don’t have these numbers you should review all of your bank statements and calculate where all of your money is going. There are several apps out there that help you track and monitor where you’re spending all of your money. Having a detailed inventory makes the next steps much easier and will get you a lot closer to where you need to be.

Establish the Target Number

Now that you know when you want to retire and have a rough idea of how much money you’ll need per year to live the life you want to live, you can start to figure out a target number.


The general rule of thumb is to have 25-30 times your annual expenses saved before considering retirement. For example, if your yearly expenses are $10,000 then you’ll want to have $250,000 to $300,000 in a savings account. This means you will have enough cash on hand to live for at least 25 to 30 years, depending on when you want to retire this number may be higher. If you plan to retire at 35 then you should expect to have around 50-60 times your annual expenses in a savings account or investments.

If you’re not sure how to calculate how much you need to retire then you should speak to a financial planner. Generally you’ll want to speculate if your financial situation changes, like a recession or a new bill is added to your expenses.

Live Below Means

It’s very difficult to build wealth if you’re not putting more in savings and investing than what you’re spending. You will need to take a step back and evaluate your finance inventory to see where you can cut back. At this point you should have started creating a budget. If you’re working towards early retirement it is imperative to live well below your means and invest aggressively.


You’ll want to reduce your expenses as much as possible and typically that starts with the biggest expense, most likely a mortgage or loan payment. If you’re able to clear out large expenses you can then move the money you’re spending on those into a savings or investment account.


The goal for this step is to make sure you’re only spending what you have on needs and not wants. For example, if you’re paying $250 for cable and you’ve established that you don’t need cable you can free up $250 per month to save or pay off another bill.

Leverage Your Income

The best way to retire early and pay off debt is to increase your income. Managing your expenses and making cuts to spending is a continued effort and almost always a short-term solution. If you increase your cash flow you can pay off debt and invest at a much faster rate.

There are several ways to increase your income but for most people it comes down to a simple pay raise. However, if you’re looking to retire early you’ll need to be more aggressive and take advantage of other income streams like passive income, buying real estate or being aggressive with investing.

Max Out Retirement Plans

If you’re not maxing out your retirement plans and putting as much money away as you can then there is no hope you can retire early. The best way to optimize your savings is to use retirement accounts like a 401(k) or a Roth IRA. If you’re currently employed you should be maximizing your contributions to any employer sponsored plans.

The only concern with maximizing your retirement plans is the withdrawal limits later on in life. It doesn’t allow you to make larger purchases. However, if you’re looking for more stable income in terms of monthly payments then these plans are critical to retiring early.

Invest Money

A common investment for people looking to retire early is to follow Warren Buffet’s plan of low-cost index funds. They are designed to diversify your money and minimize risk and most come with a “theme”. You should be able to find a fund that meets your goals or affiliations.

If you have any money left over after paying your bills, adding to savings and adding to your retirement accounts you should be investing. This money should be invested in the stock market or other higher risk investment options to build wealth fast.

Pay Off Debts

In your preparation for retirement you want to pay off as many debts as you can, especially student loans and mortgages. These debts can take a very large chunk of your retirement income to maintain payments or pay off completely.


The only debt you want to take with you into retirement is recurring debt and that typically is utilities, health insurance and any other needs that you have to have. Keep in mind the goal is to have as small of an annual expense as possible.