Whether you want to retire at 60, 50, or even 40, the ultimate goal of early retirement is the same: to achieve financial freedom so you can spend your time on your terms, doing what you want rather than trading your time for money. With the right investment strategy, early retirement is entirely possible.
Ready to take the first step? This article will show you how to retire early and live life on your terms - in five simple steps.
But first, a quick look at what retirement means in this day and age, and the high-level concept that makes early retirement possible.
What It Means to Retire in the 2020s
The idea of retirement is changing. For previous generations, retirement meant leaving a long-standing job (perhaps even with a pension) for a life of leisure.
But today, with many retirees continuing to work part-time, start side hustles, or take on caregiving roles, the definition of retirement has become more flexible and diverse.
Retirement is no longer just about stopping work at a set age. It’s more about transitioning to a lifestyle that blends purpose and leisure without the need to earn an hourly wage or annual salary.
The Main Challenge of Early Retirement
The primary challenge of retiring early is that your retirement savings need to stretch further. Unlike traditional retirement strategies, like the 4% rule, which ensures your savings will last for around 30 years, your early retirement savings may need to last 40, 50, or 60 years! This can make it difficult to determine how much money you need to retire.
The Solution to the Main Challenge of Early Retirement
To make sure your retirement savings can support you for the rest of your life, you need to build an investment portfolio that generates enough income for you to live on.
This is the secret to retiring early. When your portfolio generates enough income to cover your living expenses, you never have to cash out any of your principal or deplete your assets.
They will continue generating a livable income for the rest of your life, after which they can be transferred to your heirs, creating sustainable generational wealth.
With this goal in mind, let’s break down early retirement into actionable steps.
How to Retire Early in 5 Simple Steps
Whether your early retirement is expected to start 5, 10, or 20 years from now, here are the five steps you will need to accomplish on your early retirement journey.
Step 1: Calculate Your Living Expenses for Retirement
How much will it cost you to live comfortably during your retirement?
Start adding up your estimated expenses, including:
- Housing
- Utilities
- Transportation
- Food
- Medical care and insurance
- Personal care
- Travel, hobbies, and leisure
- Taxes
- Gifts and charitable giving
According to the 80% rule, annual expenses in retirement total around 80% of the annual expenses incurred during working years. This is because some expenses automatically decrease in retirement, such as clothing budgets, transportation costs, and retirement contributions.
However, this rule is highly subject to personal preferences and risk tolerances.
For example, you might decide to relocate to a more affordable or better-weather area in retirement, which could increase or decrease your housing, utility, and transportation expenses. For individuals who are risk averse, you might prefer to pad your expenses to leave room for the unexpected.
Your budget won’t be perfect, but this gives you a starting point. Later in this process, you’ll be able to adjust these starting figures as needed.
Step 2: Find Money to Invest for Retirement
To build a nest egg quickly, you need to funnel as much money as possible into your retirement investments. There are two levers you can pull to help you free up cash for investing: increase your income or decrease your spending. Pulling both will maximize your investment capital.
Here are quick ways to reduce spending without sacrificing quality of life:
- Cancel subscription services you no longer use.
- Cook more meals at home.
- Limit impulse purchases.
- Use coupon codes and loyalty programs for purchases.
- Reduce energy consumption.
- Swap expensive name brands for affordable generic brands in products that aren’t important to you.
And here are a few ways to quickly increase your income:
- Ask for a raise at work.
- Set modest annual cost-of-living price increases if you’re self-employed.
- Take on new clients if you’re self-employed.
- Start a side hustle doing something you enjoy.
Step 3: Build Your Retirement Portfolio
Your retirement portfolio can consist of any income-generating investment vehicle you choose: stocks, bonds, alternative investments, etc. However, real estate is the investment vehicle of choice for many Americans who retire early.
Why Real Estate Is the Best Investment for Early Retirement
There are many reasons why real estate is a perpetual favorite investment for early retirement, including:
- Stable cash flow. Rental properties provide a steady stream of passive rental income, which can support your lifestyle during retirement.
- Long-term appreciation. Real estate typically increases in value over time.
- Leverage. Real estate allows you to use borrowed money to invest (in the form of mortgage loans), giving you more purchasing power and potentially higher returns.
- Tax breaks. Real estate investors can take advantage of tax benefits like property depreciation, deductions, and lower capital gains rates.
- Hedge against inflation. Property values and rents generally rise with inflation, protecting your investment from inflation-based erosion of value.
- Low risk. Real estate is considered less risky than comparable alternatives, like corporate stocks.
- Low volatility. Real estate is generally less volatile than other investment markets, like the stock market.
- Moderate liquidity. Real estate may not be as easy to sell as other investments, but the inconvenience of liquidating real estate holdings can work to your advantage, preventing you from selling your assets without adequate consideration.
- Diversification. Real estate offers an alternative to traditional investments like stocks and bonds, reducing risk by diversifying your portfolio.
- Equity building. As you pay down your mortgage, you build equity in the property, which can be accessed in the future through sales or refinancing.
- Scalability. Real estate investments can be leveraged to help you acquire additional properties (the BRRRR method is a prime example), increasing your income and accelerating your path to early retirement.
- Tangibility. You have a physical asset securing your investment.
How to Build a Real Estate Portfolio for Retirement
There’s more than one way to build a real estate portfolio, but a few general rules apply, particularly when building with retirement in mind:
- Start where you are. You can start investing in real estate on any budget.
- Invest early. The earlier you start investing, the more time your assets have to grow organically.
- Reinvest your profits. This will compound your returns for exponential growth.
- Leverage professional expertise. Investing in professionally-managed real estate syndication and crowdfunding projects can minimize risk while maximizing return potential.
- Use tax-advantaged retirement accounts to hold your investments. You can invest in real estate with your 401(k) or IRA for additional tax breaks.
Step 4: Monitor Your Progress and Adjust Over Time
Review your income, expenses, and retirement portfolio performance periodically to determine if adjustments should be made.
For example:
- If your income changes, you may have more money to allocate toward your investment portfolio.
- If your expenses change, your projections for future expenses may need to be revised as well.
- Once your portfolio generates enough to live on, you’re financially ready to retire early.
Step 5: Enjoy Your Retirement!
With your living expenses comfortably covered by the income generated from your investment portfolio, you can pursue your passions and enjoy your loved ones without the time restraints of full-time work.
And, because you’re not depleting the value of the assets in your portfolio to fund your lifestyle, you can continue to live on the income from these assets for the rest of your life and pass the income-generating portfolio on to future generations!
Retire Early by Investing with Gatsby
Gatsby Investment makes real estate investing easy by offering pre-vetted deals with high return potential. We specialize in real estate syndication, allowing investors to buy into professionally-managed projects with low minimum investment amounts.
Gatsby has provided average annualized returns of 22% since being founded in 2016, outperforming the market and establishing strong returns for our investors.
Explore our available real estate investment opportunities and start building your early-retirement portfolio today!