Maybe your job, even your entire sector, has disappeared in 2020's economic turmoil. Or perhaps you are just reaching a point at which you are ready to take the next step in your life. It's possible you want to leave your corporate job for something more creative where you can make your own hours. Or you'd like to focus only on non-income-producing hobbies. Another option is focusing on working in spurts and traveling in between. If you're thinking that early retirement is something that can happen now — or within a few years but before the "magic" age of 65 — consider your options.
Of course, you need to make sure you're financially ready to retire, no matter what your reason is. Here's a multistep process for making sure you are ready for early retirement.
Start by taking inventory of your finances. Calculate your net worth and then calculate your annual spending. Set up semi-automated tracking with an app to verify how much money is going out the door every year.
Establish how much money you'll need to make retirement a reality. Do you have between 25 and 30 times your expected annual expenses saved or invested, plus a year's worth of expenses in cash?
Live below your means. Focus on reducing your biggest expenses — housing, transportation and food.
Increase your positive cash flow. If you think you can reach an early retirement goal in the near future, make the most of your time now to increase income. Take a side hustle to diversify your income streams, for example. Check your investments — are you being sensible about where your money is? You may want to stick to what many experts advise: low-cost index funds, which are designed to diversify your money and minimize risk. Consult a professional to discuss your particular investing strategies.
Max out your retirement accounts while you're working. One of the best ways to optimize your savings is through retirement accounts: employer-sponsored and IRAs. These accounts provide unparalleled tax advantages and investment growth. But be cognizant of restrictions on withdrawals — the rules are different for regular and Roth IRAs, for example, and you don't want to face needless penalties or high tax bills.
Consider paying off your mortgage if you have one. Eliminate consumer debt generally. Getting rid of high interest rates is a no-brainer. The peace of mind of being liability-free is worth it, and it may help you save in the long run if you're not paying interest.
No matter how foolproof your plan may seem, consider what could go wrong. Run your potential worst-case scenarios to make sure that you have a backup plan. But by maintaining a frugal lifestyle, thoughtfully planning, spending in a disciplined way and persistently investing, you have an excellent chance of achieving an early retirement date. Finally, keep in mind that everyone's retirement plans are different, so consult a financial professional to help you with your situation.