How to retire early

There is no shortcut to saving money for retirement. But some people have found ways to make the hard work faster.

Instead of planning to retire in their 60s, they recharge their batteries, reduce spending and optimize investment to become financially independent and retire early – a process called FIRE.

For Justin McCurry, retirement came more than 30 years prematurely. McCurry saved $ 1.3 million and retired nine years ago when he was 33 so he could spend more time traveling with his wife and three children. But it took him years of careful planning and saving to get there.

McCurry, who writes about FIRE strategy and offers early retirement advice on his website Root of Good, focused on reducing their debts and started saving money in college. By attending an affordable state school and graduating early while working, he was able to leave college with a good chunk of savings. He also bought an apartment which he rented out and eventually sold at a profit.

“It’s a long-term mindset,” McCurry said. “It will take a decade or two to reach FIRE.”

While some people use high salaries in technology, finance or medicine to launch them toward financial independence, McCurry, a former civil engineer, said his income peaked at about $ 70,000 before he retired.

“Financial independence is well within the reach of an average college graduate,” he said. “If you only earn double the minimum wage, it’s much harder. But for the vast majority of college students, it’s within reach, even for people who earn less than $ 100,000.”

Being financially independent means that only income from your investments is enough to cover all your expenses. Although there are basic principles to getting there, everyone will have their own variables depending on income, lifestyle and risk tolerance.

“One of the biggest principles is just to start saving. The earlier, the better, says McCurry. “Even if you do not have all the math ready. Start saving now instead of next month or next year.”

This is how you start working towards your financial independence.

Find your “FIRE number”

The road to early retirement begins with your “FIRE number” – the amount of money you need to have saved to live the lifestyle you want after you stop working.

To find that out, first determine the annual budget you plan to live on in retirement, McCurry said.

“Maybe you want to live on the same amount you live on now,” he said. “Maybe it’s more for you to travel. Maybe it’s less because you plan to move from an expensive city or even abroad to a cheaper place.”

Next, you need to determine your withdrawal rate, or how much you will deduct each year from your portfolio to live on when you retire.

“The 4% rule is good if you retire at age 65,” McCurry said. “But if you retire early, you should think about 3.5% and if you retire in your 30s or 40s, you can take an even more conservative figure.”

Then, he said, take your pension budget and divide it by your retirement rate of 3% or 4% to get your magic number.

“It will tell you what your savings goal should be,” he said.

For example, if you plan to live on $ 40,000 a year in retirement with a withdrawal rate of 3.5%, you would need to save $ 1.142 million – that’s your FIRE number. You can explore and adjust all variables with an online calculator like this one on Networthify.

For those who want more income in retirement, the number will be higher. Rita-Soledad Fernandez Paulino, the 35-year-old founder of financial coaching firm Wealth Para Todos, has a magic number of $ 4 million. That’s enough for her and her husband and children to live on about $ 120,000 a year when they retire early.

“My number is higher because my husband has this idea that people who are passionate like that they only eat frijoles and that they do not eat out,” Paulino said in an interview with Delyanne Barros on CNN’s Diversifying personal finance podcast. “And my husband thinks we will not retire prematurely if we have to sacrifice, like no longer eating at restaurants and being food lovers.”

Supercharge savings

The powerful accelerator that takes you to your magic number is your savings ratio, where most people who run FIRE live far below their means and save more than half of their income.

The earlier you start, the better, because the sunshine that makes your savings grow increases interest.

“Contribute to your 401 (k) and drive your content up to 8% or 10% from 6% or 7%,” McCurry said. “Your paycheck does not drop much when you do, but it will increase a lot along the way due to compound interest.”

The first year of college can be important in creating your savings habits, McCurry said. Even though you may be in the lower part of your income, you may have the most disposable income at that time, before obligations such as higher education, car payments, a home or a family take a larger share of your salary.

“If you focus a lot on saving goals early, you can load your retirement savings and planning ahead.”

There are decisions to be made along the way about what you want to prioritize and even perhaps sacrifice to be able to make your savings goals. For example, Paulino and her husband have decided not to spend money on a 529 plan to save on their children’s college expenses. Instead, they invest in real estate that the children will inherit.

“It’s a decision we’re made that some people would say, ‘Oh my God, you’re not paying for your child’s college? Instead, you focus on retiring early !? ” she said to Barros. “Ultimately, children learn most from our actions. So if they see that you are intentional with your dinero, they will learn to be intentional with your dinero as well.”

Eliminate expenses and increase revenue

Aiming to save half or more of your salary often requires sacrifices.

“It would be perfect for an academic to continue living as a college student for three or four years after graduation,” McCurry said.

But it does not have to be a life of austerity, he said, just one where you make deliberate choices about where your money goes. Stay at home or with roommates longer than you want, to save on housing costs. Cook instead of ordering. Budget your major purchases and vacations. The most important thing is to eliminate wasteful expenses and save the rest.

Regardless of your income, it will be possible to have a high savings rate only for those people who have almost no debt. This is why many who work against FIRE start by paying off their debts first, or live a car-free life.

Part of having more money to save is to continue to get pay raises. McCurry said you may even need to earn another degree, certificate or skill to get to the next salary level.

“The people I’ve seen succeed and beat FIRE at a young age, they get pay raises or they change jobs regularly,” McCurry said. “A job of $ 50,000 a year is good to start, but after two years if you do not get a raise or promotion, look for a new job.”

Optimize investments

If you skip a few dinners and raise promotions, you will not FOUR alone. The money you save also needs to grow. When you have significant savings, the adjustments you make to your investments will have a greater impact than any changes in your spending or savings habits.

Investments working against FIRE should be, frankly, boring, McCurry said. Avoid individual stocks or volatile investments and focus instead on index funds – diversified equity funds that follow the major indices.

“You should not see your portfolio go wild up and down. You are aiming for a steady 8% or 10% return per year, not a risky 50% or 100% return per year that could disappear next year.”

The temptation to invest heavily in potential unexpected cases – such as crypto or real estate investments – can be great. But McCurry said that if something promises to double your money, it has a lot of risks involved. Maybe more than you would be willing to resist when working towards your goal.

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