How to Retire Early

So you would like to retire early? Achieving financial independence and retire early is a great financial goal — aka, the FIRE movement. To get started, you want to make sure you have a solid financial foundation in place — e.g., get rid of your debt, build your savings, start your savings, etc. Ultimately, the key enabler for financial independence is to build assets that can generate income to replace the income from your job so that you can retire early.

Early Retirement Plan

These steps will help you get started on your financial independence journey. As you learn more about the process, you can make adjustments to suit your specific needs. Keep in mind these are very high-level steps, for a more in-depth guide to financial success, check out our 12 Steps to Financial Freedom and Personal Finance Success Plan.

1. Determine How Much You Need

The first step is to determine what you need to live your desired lifestyle. Is it $100k a year or $50k a year? All things being equal, it is much easier to retire early if you only need $50k compared to someone who needs $100k.

To get started, you want to start a budget and keep track of your expenses. After you keep track of your spending for a month, you will have a good idea of your monthly living expenses. Once you do it for about a year, you will have accounted for all the expenses that only occur once every three months, six months, or a year, and your number should be really precise.

2. Cut Your Expenses

The number from Step #1 is just the starting point. In the beginning, it is much each to cut expenses than it is to increase your income. To help you achieve financial independence and retire early, it is vital to lower your expenses. Reducing your expenses has two purposes:

The money you saved can be used toward paying down your debts and building your income-generating assets.
The lower your expenses are, the easier it is for you to generate enough passive income to retire early.

To help you get started with expense reduction, take a look at 40+ Ways to Save Money, Lower Your Bills, and Cut Expenses.

3. Pay Down Your Debt

Debt is like a big ball and chain that slows you down for achieving any type of financial success. Before you even start to think about investing or buying income-generating assets, you need to focus on freeing yourself from this weight. Paying down your debt has two benefits:

It reduces your expenses because you don’t have to pay any more interest to your lender.
It makes you more financially secure, enabling you to invest without worry.

To help you manage and pay down your debt, check out How to Get Out of Debt Fast.

4. Increase Your Income

The ultimate goal of early retirement is to get to the point where your passive income is consistently more than your living expenses. Right now, you want to earn more in your job, as well as start to build your passive income. More money from your job means that you can invest more, but you want to see your passive income increases yearly with respect to your regular job income.

To help you get started with passive income and earning more, take a look at

5. Grow Your Income-Generating Assets

Each year you want to grow your income-generating assets and sources of passive income. Your ultimate goal is to have 100% of your passive income covers your living expenses (aka, FI Ratio 100). If you are not familiar with the lingo, check out How to Calculate Your Financial Independence Ratio.

As you start your journey, you can set a 20 years plan to achieve financial independence and try to increase your FI Ratio by about 5% a year. For example:

Year 1: Passive Income = 5% of your living expenses
Year 10: Passive Income = 50% of your living expenses
Year 20: Passive Income = 100% of your living expenses

If you stay on track, you will eventually get to the point where your passive income exceeds your living expenses — congratulations! You just reached financial independence, and you can retire early!

Retirement Accounts and Early Retirement

If you plan to retire before you turn 55, there are a few important things to consider. Most common retirement plans impose an early withdrawal penalty if you take money out from the plan before you turn 59 1/2 with a few exceptions:

Current employer’s 401(k) plan – You can withdraw money from your current employer’s 401(k) plan if you leave your job on or after you turn 55. Money in former employers’ 401(k) plan and money that has been rolled over into an IRA are not eligible for this exception.
Roth IRA contributions – You can withdraw the money you contributed to your Roth IRA without penalty; however, you will be penalized if you withdraw any earnings before you turn 59 1/2.

In general, investing in a retirement account has tax and other financial benefits so I am not advocating that you avoid investing in an IRA or a 401(k). That said, if you plan to retire before you turn 55, you need to have enough income-generating assets and passive income sources to carry you from the early retirement date through the date you turn 59 1/2.

What to Do Next

At this point, you have enough passive income to cover all of your living expenses, so you could quit your job if you really want to.

But wait!

The key to success is having a sustainable source (or sources) of passive income. You should evaluate all your income sources and figure out what is the likelihood of losing that passive income stream. If thee are high-risk income sources, you should probably keep working and growing your passive income to the point where you feel it will be fully sustainable. After all, you don’t want to quit your job only to have to look for another job in 5 years because you fell short.