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How to Retire Early: A Millennial's Guide to Early Retirement

Retiring early may seem like a pipe dream, but it’s easier than you think with the right planning.

Justin Cupler

Contributing Writer at Tally

July 23, 2021

The financial independence retire early (FIRE) movement has gripped the younger generations. They don’t want to follow earlier generations’ paths of working on someone else’s terms through their younger years. This has led some millennials to retire in their 30s and 40s, leaving them to enjoy their younger years on their terms. 

If you’re wondering how to retire early, we have a handful of quick tips you can use to join the FIRE movement and successfully retire — or partially retire — early. First, we must properly set your early retirement expectations by determining a feasible retirement age for most workers.  

Feasible early retirement age

The average retirement age in the U.S. is 61 years old, although over half of workers expect to work beyond age 65. That said, the commonly accepted threshold for early retirement is anyone who retires before age 65. 

The FIRE movement has pushed this age as low as the 30s or 40s, but this requires a hefty income and saving at least half of your pay for retirement. 

On average, though, it takes a worker 28 years to reach the $1 million mark in their retirement account. So, on average, if you fall into the LeanFIRE category, it’s feasible for most workers to retire in 28 years. This would put your retirement as early as 48 years old if you started at 20.

How to retire early

Financial independence and early retirement is a personal finance goal for many millennials, as they look to exit the grind of working on someone else’s terms and doing what they prefer. 

Here are quick tips for building your savings so you can have ample retirement income to make this dream a reality.  

Live below your means

The first step to an early retirement plan is living below your means. This means not keeping up with the Joneses and focusing on supporting yourself and your family in a way that leaves ample leftover money for investing and paying down debt. 

There are several ways you can live below your means. You can work on slashing expenses, finding ways to increase your income or both.

Here’s how to approach each method. 

Cutting expenses

Trimming your expenses can seem like you’re deciding just how much fun you’ll allow yourself to have, but it doesn’t have to be that way. Run through your monthly expenses over the past three to six months and determine which expenses are wasteful. 

For example, that streaming service you use maybe a few times a month may not be worth it. The same goes for that trial service you signed up for and forgot about but are now paying a $2-per-month fee for that you never noticed. This isn’t about making life less enjoyable — it’s all about trimming the fat. 

You may also want to review your cellular plan, home cable, internet and phone package, and other services with various subscription tiers. See what tier you’re paying for and if you’re maximizing its benefits. If you aren’t maximizing the benefits, you may want to drop to a lower tier to save money.

It may seem tedious to get this granular with your finances, but investing just $2 per month can leave you with $2,440 after 30 years at a 7% return. That’s the power of compounding interest and long-term investing. 

Cutting these expenses now will also get you used to living a certain way, which can help early retirees make it through retirement before their Social Security benefits kick in. 

Increasing income

Increasing your income is the other side of the early retirement planning coin. If you can’t seem to cut enough expenses to make early retirement feasible, you can frontload your younger, more productive years with extra work to earn more income. You can then apply this extra income toward your retirement fund or paying off debts. 

In this new world of remote working and the gig economy, finding extra income is relatively simple. Some ideas for quick side-gig cash include: 

  • Ride-sharing

  • Food delivery

  • On-demand task completion

  • Freelancing

  • Mystery shopping

Though none of these side hustles are get-rich-quick strategies, they can provide you with some extra cash to pay off debt or to put in your retirement accounts.  

Combination of both

You can put your retirement plans into high gear by combining these methods: trimming expenses and increasing income simultaneously. This will also give you more flexibility to keep some of the borderline expenses you may struggle to cut. 

Pay off high-interest debt

Paying off high-interest debt is another task that should be near the top of any prospective early retiree‘s to-do list. By high interest, we’re talking about any debt with an interest rate that’s higher than your investments will return. 

Most experts say you can expect a 7% return on your retirement investments, though there are some variables you may want to speak with an investment professional about. This means any debt with an interest rate of 7% or higher should be on your payoff list. 

These will be credit card debts in most cases, but they may also include personal loans and higher-interest car loans. 

There are various ways to repay these debts quickly and systematically, including:

By paying off your debts, you’ll free up even more cash to invest in your retirement. Plus, once you enter retirement, having zero debt will help you better manage your fixed income. 

Calculate your retirement savings needs

Before you can plan for early retirement, you need to know just how much money you’ll need to make it the rest of your life without having to work.

Figuring this out requires you to determine the type of life you want in retirement. Some Americans are fine with retiring and spending most of their days relaxing at home and doing low-cost activities. However, others may prefer to maintain their lifestyle or live an even higher lifestyle than during their working years. And then, some fall somewhere in the middle.   

Regardless of what type of retirement you want to live, the rule of thumb in the FIRE movement is to have 25 years’ worth of expenses in your retirement accounts. This is commonly referred to as the 25x Rule, which is based on you using a 4% withdrawal rate from your retirement savings. 

For example, if you expect to live out your retired life drawing just $30,000 to $40,000 per year from your retirement savings, which places you in what’s typically called the LeanFIRE category, you’d want to save $750,000 to $1 million. 

Alternatively, if you want to live a more adventurous retirement, known as FatFIRE, and need to draw $125,000 per year to do so, the 25x Rule puts your necessary savings at $3.125 million. 

When calculating your expenses, there are a few easy-to-overlook variables you may want to consider.

Retirement location

Keep in mind that you can also change your locale to help turn a LeanFIRE budget into a FatFIRE lifestyle, as some foreign countries offer easy-to-obtain long-term retirement visas and an extremely low cost of living. While $30,000 to $40,000 may be a relatively simple life in the U.S., it can be an upper-middle-class lifestyle or better in places like Indonesia or Thailand. 

Healthcare costs

If you plan to retire early, you’ll be without employer-sponsored health insurance, but your Medicare eligibility won’t kick in until you’re 65 years old. This leaves a coverage gap from the moment you officially retire until you turn 65 that you should cover with self-paid health insurance. 

Look up various policies on the health insurance marketplace and factor in their premiums. You should also look at your healthcare expenses — deductibles, uncovered procedures, over-the-counter medications, and coinsurance — for the past few years and assume these will be the minimum you’ll pay yearly until Medicare kicks in. 

Generally, Medicare premiums will be less than private insurance, as the average Medicare Part B monthly premium in 2021 is $148.50. Remember, though, your medical needs will change as you get older, as the average 18- to 44-year-old spends $2,985 per year on healthcare, but this jumps to $6,406 from 45 through 64 and $11,316 from 65 years old and on. 

Your health will also play a role in this. If you have a chronic condition that requires maintenance, like diabetes or asthma, your costs can increase greatly. 

Your home

If you own real estate outright or are on pace to own it by the time you retire, there’s no immediate need to figure out what to do with it. However, if you’re on pace to still have a mortgage payment in retirement, you should start thinking about whether it makes sense to keep that payment into retirement.

Your mortgage is often the largest monthly payment you make and can be a huge draw on your budget. Once you retire, this draw can become proportionally greater.

If that draw is too great or it simply makes no sense to maintain your large mortgage, it may be in your best interest to sell your home and downsize into something more affordable. 

For example, if your home has a $300,000 market value and $150,000 remaining on a mortgage with a $1,500-per-month payment, you can sell it and use the $150,000 proceeds to purchase a smaller, less expensive home with little to no mortgage payment. 

Social Security benefits

Though it’s projected to be out of funds by 2034, Social Security will have the cash flow from the workforce to cover about 79% of the benefits it owes through 2090. So, you can still figure these benefits into your retirement plans but do so with a conservative skew. 

Using the Social Security Administration’s estimator, you can determine your estimated Social Security benefit amount based on previous contributions and last year’s salary. This will show you your estimated monthly retirement benefits at various retirement ages. 

Since you’re planning to retire early, you can click the “Add a New Estimate” button and add the age you plan to stop working. This will show your estimated benefits at 62 years old after retiring early. Multiply this number by 0.79 to account for the potentially reduced benefits, and this is what you can expect from Social Security starting at age 62. 

Partial retirement

Many FIRE practitioners don’t fully retire, as many aim to quit their full-time gig and work on their terms. Many will continue to work a part-time job or perform freelance work during their younger retirement years to stay busy, to help stretch their retirement savings and to fill in the gaps before Social Security kicks in.

If this is in your plans, you can subtract the amount you plan to make each month from your yearly draw from your retirement accounts.  

Maximize your retirement account contributions early

Because of their significant tax benefits, the IRS limits how much you can contribute to your IRA and 401(k) each year. 

You make contributions to an IRA with after-tax dollars, but you get tax benefits on the account’s growth. With a traditional IRA, taxes are deferred on the account’s growth until you start making withdrawals after turning 59 1/2 years old. In a Roth IRA, the growth is 100% tax-free, even when you start making withdrawals. 

As for a 401(k), you contribute pre-tax income, reducing your current tax burden. Plus, the interest that accrues is tax-deferred, meaning you won’t pay taxes on the growth until you retire and start taking withdrawals. Since you’ll usually be in a lower tax bracket in retirement, this means you’ll pay less in taxes than if you paid them today. 

On top of these tax benefits, there’s also the potential for an employer match. Many employers will match your contributions up to a certain percentage of your salary. For example, if you have a $50,000-per-year salary and are enrolled in a 401(k) with a 100% match on up to 4% of your salary, your company will match up to $2,000 per year in 401(k) contributions with no additional yearly taxes. 

So, it’s in your best interest to at least maximize your employer match and take advantage of the free money. But it’s also beneficial to aim for the maximum allowable contribution in your IRA and 401(k). As of 2021, the annual contribution limits are $6,000 for an IRA and $19,500 for a 401(k). Folks ages 50 and up can add catch-up funds to their yearly contributions, bringing their IRA contribution limit to $7,000 and their 401(k) contribution limit to $26,000.

Depending on your budget, it’s not always possible to immediately hit that maximum contribution. However, you want to start investing into this account as early as possible — as the earlier you start, the more you can take advantage of compounding interest and build your nest egg. 

You can start by contributing as much as your budget allows, then increase your savings rate by 1 percentage point each year until you reach the annual maximum. Alternatively, you can dedicate the majority of every raise you get at work to your contributions until you reach the maximum. 

Calculate your retirement savings gap

With you contributing the yearly maximum to your 401(k) and IRA, you should now figure out if this will be enough to retire on based on the retirement savings needs you calculated earlier. 

Using an investment calculator, like Bankrate’s calculator, you can enter the number of years until you plan to retire, your monthly 401(k) and IRA contributions, and your expected interest returns to see if you will have enough saved to live the lifestyle you want. 

For the interest return, most 401(k) accounts return between 5% and 8%. We suggest using the more conservative 5% return. 

If you’ll fall short of your retirement goals, use the calculator to determine how much more you’d need to invest to build wealth and reach your goals. You can then contact an investment professional to speak about investing that additional amount into the stock market and other investment accounts. 

How to retire early — start accumulating wealth early

The trick to retiring early is to start building your net worth as early as possible. This includes paying off all the high-interest debt that eats away at a lot of the income you could be saving for retirement. 

Here at Tally, we can help you accomplish this step with our credit card debt repayment app, which offers a lower-interest line of credit1 for those who qualify. With this lower-interest line of credit, you can pay off your credit cards quicker and reduce the amount of interest you pay in the process. Plus, our app allows you to make just one payment per month to Tally — we’ll use these funds to make the payments on all your credit cards.  

Besides repaying your high-interest debt, the path to accumulating wealth and reaching your early retirement goals includes trimming your expenses, determining how much retirement savings you need, maximizing your retirement savings early, and determining and closing any savings gap with the stock market and other investment accounts.

With these tips, you’ll be on the path to being financially independent and retiring early.

1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.