10 Steps Millennials Can Take to Retire Early

 In Goal Setting, Lifestyle, Money Mindset, My Life, Retirement Planning, Saving + Investing, The Hustle

 

Who wouldn’t want to quit their day job and retire early? If given the opportunity, I know I would!

Even the idea of retiring, (at the very least) part-time is an attractive idea, but I never thought that was a possibility in my thirties. However, many of today’s millennials plan on it. In today’s world, it seems like anyone can become a digital marketing sensation. Potentially, anyone can build a massive tribe of engaged followers. These blogging sensations are making a killing but are still wondering what it takes to retire.

And when I say, “retire”, they’re not thinking of retirement in the traditional sense. They want to create a lifestyle of partial retirement lifestyle where they can travel and work their online business remotely, creating passive income. Doesn’t that sound like a fun and creative way to work part time?

But how do you do it? What are the steps you need to take, without spending your golden years as the best dressed greeter at Walmart?

 

10 Steps Millennials Can Take to Retire Early

1. Know How Much It Will Cost to Retire Early

Your Retirement Price Tag is the sum of everything you want to do in retirement plus your living expenses. You can’t hope to retire early confidently without knowing this how much it will cost you.

This includes things like:

  • Rent or Mortgage
  • Utilities
  • Transportation
  • Food
  • Clothing
  • Insurance: Health, Life, Disability, Car, Home/Renter’s, etc.
  • Travel expenses
  • Activities like golfing, boating, and knitting
  • Savings (it’s an expense)
  • Business expenses (if applicable)
  • Taxes
  • Debt

It’s not an extensive list, but you get the idea. This exercise will also get you to start thinking about what kind of lifestyle you want to design for yourself. Do you want to retire early to become a lifestyle blogger? A travel blogger? You’ll need to know how much that will cost you each month and year.

I use something to help me organize and arrange my thoughts called a Mind Map. I created one to help you organize all the awesome things you want to do.

You can download this week’s freebie here. It’s a simple worksheet to drum up some ideas.

Next, get the actual price it would cost as if you were to retire next month. Add up your costs of the entire year and you’ll come up with an annual cost to retire early. This is your Retirement Price Tag.

Optional: Being a financial advisor, I’d add inflation into the figure. It may cost you $40,000 a year for the next couple of years. But you might find that your expenses in year five ratchets up to $42,500 a year. To account for inflation, multiply each year by a conservative 2% inflation.

Retirement Price Tag x (1.02) = Inflation Adjusted Retirement Price Tag

($40,000) x (1.02) = $40,800

The historical average for the U.S. inflation rate is approximately 2%.

 

2. Know How Much Income You’ll Need In Retirement

Once you know how much it’ll cost you each year to retire early, you can better determine how much income you’ll need. And if your number is adjusted for inflation, you’ll be in good shape in the years to come.

Where will that income come from? You won’t have access to traditional direct income sources like Social Security, pensions, or other retirement funds.

You’ll need to create passive income.

“Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.” — Wikipedia

By choosing the right sources of passive income, you can invest your time the way you want and retire early.

I like to create passive income through a couple of sources. I can create it through my investments, like dividend yielding stocks. And also by creating income through my side hustles like selling courses online, creating ebooks, and blogging.

I prefer side hustles that are fun and don’t lock me into a location. By blogging, creating courses, and growing my investments, I can create income for my early retirement anywhere.

 

3. Create A Debt Reduction Plan

Any debt that you carry into retirement will erode your income. And that’s not good. But coming up with a plan to tackle your credit card and student loan debt can be a challenge, especially if you don’t have a financial background. If you need help creating a debt reduction plan for your student loans, you can hire me or read this.

But if you can organize everything you own and everything you owe, you can start on the correct path towards reducing your debt. To help you develop a debt reduction plan, try using one of Vertex’s debt reduction spreadsheets. It’s free and it does the job.

Additional Reading: Get out of debt with the debt snowball plan by Dave Ramsey.

3 Steps to Creating Wealth — What I learned from Grant Cardone

4. Detox Regularly

This might be odd to hear from a financial advisor, but I don’t like budgeting. Whoa (Finally… I’m out of the closet).

Budgets aren’t for everyone —certainly not for me. Even the word “budget” makes me feel… well, weird. It’s kind of like dieting, isn’t it? Budgeting is uncomfortable, inflexible, restricting, and just hard to stick with.

Yeah, I’m not a fan. I don’t want to live in a spreadsheet or app, tracking every single penny and transaction. It’s overkill and a big time commitment.

However, I do believe in oversight when it comes to money. We are emotional creatures, and as such we tend to make emotional decisions around money. And that can lead to bad money habits that could derail our plans for an early retirement. So every quarter (every 3 months or new season), I would do a money cleanse. You can read more about here.

 

I talk about this a lot, but I used to commute to work. It was a 20 minute ride and one of my morning routines was to put on an audiobook and pick up an espresso drink with a breakfast sandwich. I enjoyed Brueger’s Bagel at the time; it was delicious!

During a money cleanse, I picked up that I was now spending $10 a day on this routine. I had to make a decision. Do I keep this breakfast to go routine for $50 each week? Or do I eliminate it and redirect this money to one of my money goals?

I wanted to justify the spending, so I broke out my financial calculator to see what this routine would cost me over the next 30 years, or I changed my routine and decided to invest the money instead.

$494,023

That’s how much this breakfast on the go routine would cost me over the next 30 years. In financial terms, this is called, “Opportunity Cost”, and it was costing me my vacation home.

I decided to kick the habit and take the money that I was spending and direct it to my early retirement goals. If you want to retire early, I suggest that you perform a money cleanse every three months.

I call this money cleanse, UNBUDGETING. It’s fun, like a treasure hunt —but for money! Click here to learn how to unbudget and download worksheets.

Related: 9 Signs That Your Spending Is On Autopilot

 

5. Create A Savings Plan

Financial Independence is the ability to cover your monthly expenses without having to work. If you continue to work, it’s because you want to, not because you have to. That’s important if you’re planning an early retirement.

How do you achieve this? By creating your own personal “money machine”. I’m talking about a “machine” which has dividends that cover all your financial needs in your early retirement. That machine is your investments. But you can’t even think about investing into your early retirement if you don’t have a savings plan in place.

Unfortunately, there’s no silver bullet for creating a savings plan. It’s complicated by your personal income and expenses. But if you would like to discuss it, click that Start a Live Chat button on my home page.

 

6. Open A Taxable Investment Account

After you’ve created a savings plan to direct money towards your future financial goals, you’ll need to open a taxable investment account. A taxable investment account is one where you don’t have to wait until you’re 59 1/2 to use it. That makes it perfect for those trying to retire early.

Taxable investment accounts start to look nice when you consider the rules around retirement accounts, and all the penalties and restrictions associated with them. They impose fewer restrictions for investors. Taxable investment accounts are very flexible.

Here are some quick benefits:

  • Use it how you want
  • Use it when you want
  • Tax-Loss Harvesting —Helps your investments become more tax-efficient
  • No Required Minimum Distribution (RMD)
  • More control in your early retirement

I use taxable investment accounts to fund goals that are 5 to 10 years out. This would be goals like a down payment on a new car or home, a big trip, or to grow extra cash for future opportunities.

If you need help opening the right kind of taxable investment account for your early retirement goals, reach out to me. My company, Clear Path Financial Planning, is a fee-only firm. We’ll make sure you’re not paying high fees.

Join my tribe

7. Open a Roth IRA

The Roth IRA is one of my favorite types of retirement accounts. Like a taxable investment account, you fund a Roth IRA with after-tax dollars. Because of that, the IRS allows your money to grow tax free. When you retire, you’ll pay no taxes.

But there are some caveats; for example, income limits. The IRS has a set of rules that individuals must meet to be qualified to invest in a Roth IRA. If you make a good living for yourself, chances are you may not qualify .

Still, there are some amazing benefits if you can take advantage of a Roth IRA:

  • No age limitations
  • Withdraw what you put in, tax-free and with no penalties.
  • Roth IRA withdrawals are tax-free in retirement
  • Multiple purposes: You can use up to $10,000 to buy your first home, tax-free and without penalties

Read more: Roth IRAs and its limitations

 

8. Increase Your 401(k) Contributions

A 401(k) is an incredibly powerful savings tool for creating a secure retirement. It offers a couple of really important advantages to you, especially if you make good income.

First, all contributions and earnings made to your 401(k) are tax deferred. That means the money you contribute doesn’t get taxed until the it’s withdrawn during your normal retirement years (after age 59/12). It also has the potential to lower your income for tax purposes by the amount you contribute to it. Saving money on taxes while saving for yourself is a smart money move.

I especially like doing this when working with high earning, early career professionals. It lowers their taxable income, and that can lower their monthly student loan payment, thereby maximizing student loan forgiveness!

Second, most employers match dollar for dollar up to a certain percent of what you contribute. This is free money, and who doesn’t want some of that?

Let’s get back to how this helps you with your early retirement goal. While taxable investment accounts and Roth IRA’s help you fund your early retirement, your 401(k) will ensure that you continue to have money in your normal retirement years. This is Phase 2 of your retirement plan: funding your normal retirement years.

The goal is to create multiple income streams that start at different points in your retirement.

 

9. Get A Side Hustle

A side hustle is a way to make some extra cash that’s separate from your main or primary job, which can increase your chances of being able to retire early. Especially in an age where most people are starting out with massive student loan debt, it provides additional income to help fund your early retirement goals.

I have had a few side hustles that have blossomed into their own businesses with each producing six-figures of income. But it’s important to direct that extra income to fund your goal of early retirement and not use it to inflate your lifestyle.

Here are some ideas for side hustles to spark your interest:

  • Start a blog or podcast
  • Affiliate Marketing
  • Online Surveys
  • Create Courses
  • Become a Virtual Assistant (VA)
  • Child care
  • Dog walking
  • House Sitting
  • Pet Sitting
  • Proofreading / Editing
  • Coach sports
  • Yard work
  • Sell stuff you find for free or cheap on Facebook, Craigslists, etc.

Further reading: 5 Side Hustles You Can Start Today

 

10. Track Your Net Worth

Q: What’s the best way to confidently track your progress towards being able to retire early?

A: Your Net Worth.

You can’t trust your bank and investment balances to determine whether you’re making good strides towards retiring early. You could have banked a million bucks, but if you owe $500,000 in miscellaneous debt like a mortgage, student loans, car notes, and credit card debt… well, you’re not in as good of a shape as you thought you were.

If this is sounding new to you, your net worth is everything you own (assets) minus everything you owe (liabilities). I view net worth as the blood pulse of your financial life.

Net Worth = Assets – Liabilities

If you find that you have a negative net worth, don’t get discouraged. It takes patience and a strategy to rise up over a six-figure negative net worth. For example, it’s not uncommon to graduate from college with over $100,000 in student loan debt. If your liabilities cast a big shadow over what you have saved, let’s talk about it.

 

Conclusion

There’s a lot to consider and work towards if you want to adopt a retirement lifestyle at an early age, but it is possible. Many successful bloggers are young and are living that dream. Blogging can create a lot of passive income from affiliate links and selling ad space. If you can sell a course or product on top of it, that’s just icing on the cake.

Now I want to hear from you. What passive income projects are you working on right now that will set you up for an early retirement? How old will you be when you retire?

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