How to retire early: the top 6 strategies

For many, retiring at age 62 isn’t enough. For those who want to live life on their own terms sooner, they’re motivated by early retirement.

There are several benefits to retiring early, including:

• Younger, potentially healthier years in retirement
• More opportunity for travel and other adventures while you’re more physically fit
• More time to pursue your dreams, like starting a new business

However, for members of Generation X who haven’t saved enough, and millennials who carry heavy debt, early retirement can seem like an unattainable goal.

But it doesn’t have to be.

Whether you’re a millennial (born 1981 to 1996) or a Gen Xer (born 1965 to 1980), there may be a strategy that helps you to retire early. Each generation faces a different financial reality, so each needs an early-retirement strategy that’s tailored to that reality.

• Millennials generally have the most working years remaining before retirement, so they have the longest time to benefit from the power of compound interest to grow a big nest egg. On the other hand, they’re the generation with the largest student loan debt.¹ If they haven’t started saving—or saving seriously—for retirement, they may face a steep climb to accumulate wealth.
• Gen X is further along the path to retirement, with its oldest members turning 59 this year. That gives them less time to catch up on their savings. On the other hand, they may have more options to do so—and more accumulated wealth.

Discover why Gen Xers are lagging behind Boomers by downloading our whitepaper here.
 

Six ways to help you retire early

Here are six strategies that can help you to retire early. Which ones you might use, and how you might use them, depends on your years to retirement and your personal financial situation.

1. Maximize your retirement savings.

Putting the most into retirement savings is one key to achieving early retirement, whatever your age. If you’re over 50, the government can help by allowing you to contribute up to $30,000 to your employer’s 401(k) and $7,500 to an IRA.² Millennials, and those Gen Xers not old enough to receive a tax break as large as this, should at least put enough into their employer plans to receive their full employer match.

2. Tackle high-interest debt.

Just as savings is your friend, debt is your enemy. This is especially true of high-interest debt, such as credit cards or personal loans. What you’re paying in interest charges can easily exceed what you can make on savings, so it can be helpful to pay off your high-interest debt and redirect that money into larger retirement contributions.

3. Diversify your income streams.

Relying heavily on Social Security is not a path to early retirement. Start collecting it early (at age 62) and you’ll receive the minimal monthly benefit for the rest of your life. Instead, it’s typically a great idea to diversify your income streams beyond just your retirement fund. For example, acquire property that can generate rental income. Continue some freelance or project-based work. Or add dividend-paying investments to your portfolio.

4. Be frugal and watch what you spend.

Any money you don’t spend today can continue to generate returns on your savings until you need it. That’s a huge incentive to be frugal both before and during early retirement. An entire movement has grown up around this idea, called Financial Independence, Retire Early (FIRE).³ FIRE proponents may save up to 75% of their yearly income and spend as little as 3% of their retirement savings annually. It’s not easy but, if you’re highly motivated, you might consider FIRE.

5. Invest aggressively.

Bet you weren’t expecting that suggestion. So, the first thing to say is that that strategy clearly isn’t for everyone—or even for most people—and you should first get the advice of a financial professional who understands your financial position and risk tolerance. But aggressive investing is another pillar of the FIRE method. Millennials have the longer time to retirement, even early retirement, so they can be more aggressive in their choice of investments. They have the greater chance of seeing their portfolios eventually recover from any downturns. Gen Xers generally want a different balance, with a mix of stocks and bonds appropriate for their level of risk tolerance.

6. Consider where you’ll retire.

When you’re deciding how much money you need to retire, it’s important to remember that the cost of living varies from place to place. Retirement in New York City will likely be more expensive than in, say, Sarasota. If early retirement is your goal, consider trading away an expensive dream locale to help achieve it.

How millennials can retire early

Make repaying student loan debt and any credit-card debt a priority. Save early to get the most from compound interest. Plan for a longer life expectancy and a potentially lengthy retirement. Think about how your career path or participation in the gig economy might affect your ability to save now, retire early and continue to work part-time during retirement.

Early retirement for Gen Xers

Gen Xers hoping for early retirement need to plan for healthcare costs, especially those that the government won’t pick up until you likely qualify for Medicare at age 65. Catch-up savings may be essential to your early-retirement goal. Consider this if you’re supporting both children and elderly parents.

Also remember that you’re not in this alone. Your financial professional can show you how to use these suggestions, and more, to create an early retirement plan that’s tailored to you.