How can I retire early and get financial independence?
To get this number, first multiply your monthly expenses by 12, and then you'll have your annual expenses. You then multiply that annual expense by 25 to get your FIRE number, or the amount you'll need to retire.
- Review your investments.
- Pay down debts.
- Calculate how much income you'll need in retirement.
- Max out your retirement contributions.
- Follow a strategic savings and investment plan.
To get this number, first multiply your monthly expenses by 12, and then you'll have your annual expenses. You then multiply that annual expense by 25 to get your FIRE number, or the amount you'll need to retire.
- Learn How to Budget.
- Get Debt Out of Your Life—For Good.
- Set Financial Goals.
- Be Smart About Your Career Choice.
- Save Money for Emergencies.
- Plan for Big Purchases.
- Invest for Your Retirement Future.
- Look for Ways to Save Money.
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
If you retire with no money, you'll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.
However, you unfortunately cannot begin receiving Social Security retirement benefits at 55. The earliest age you can begin drawing Social Security retirement benefits is 62. But there's a catch. Taking Social Security benefits prior to reaching your full retirement age results in a reduction of your benefit amount.
Set a Savings Goal
But it's considerably more so if you want to retire early. One rule of thumb recommends multiplying your desired annual income in retirement by 25 to come up with a savings goal. So, if you want to have $50,000 a year for 25 years, you'd need $1.25 million.
The Rule of 95 is an alternative full benefit retirement eligibility date to allow members to retire earlier than their schedule-based eligibility date. Under the Rule of 95 members can retire when their age plus their years of service equal 95, provided that they are at least 62 years old.
The first rule of financial independence states that you should never lose money on your path to financial independence, especially after achieving financial independence.
At what age do most people reach financial independence?
A new Pew Research Center analysis of Census Bureau data finds that, in 2018, 24% of young adults were financially independent by age 22 or younger, compared with 32% in 1980. Looking more broadly at young adults ages 18 to 29, the share who are financially independent has been largely stable in recent decades.
- Step 1: Get your own bank account. ...
- Step 2: Create your own budget. ...
- Step 3: Make a plan to pay off student loans. ...
- Step 4: Begin building your credit. ...
- Step 5: Save up for rent. ...
- Step 6: Learn about health insurance options. ...
- Step 7: Figure out transportation.
Americans say they'd need to earn about $94,000 a year on average to feel financially independent. That's about $20,000 more than the median household income of $74,580.
Housing. Housing—which includes mortgage, rent, property tax, insurance, maintenance and repair costs—is the largest expense for retirees.
A good retirement income is about 80% of your pre-retirement income before leaving the workforce. For example, if your pre-retirement income is $5,000 you should aim to have a $4,000 retirement income.
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
Many retirees with little to no savings rely solely on Social Security as their main source of income. You can claim Social Security benefits as early as age 62, but your benefit amount will depend on when you start filing for the benefit. You get less than your full benefit if you file before your full retirement age.
If you're an average earner, Social Security will only replace about 40% of your former income. So if you retire without any savings, you might end up effectively taking a 60% pay cut. At the start of 2023, the average Social Security benefit was $1,827 a month. That's an annual income of a little less than $22,000.
When it might make sense to take Social Security at 62. You need the money now. You have health issues that may shorten your life expectancy, or you don't expect to live past your break-even point. You're receiving early retirement from an employer and the benefits end at age 62.
Social Security can potentially be subject to tax regardless of your age. While you may have heard at some point that Social Security is no longer taxable after 70 or some other age, this isn't the case. In reality, Social Security is taxed at any age if your income exceeds a certain level.
What is the 10 year rule for Social Security?
If you've worked and paid Social Security taxes for 10 years or more, you'll get a monthly benefit based on that work.
Current workers will still receive Social Security benefits after the trust fund's reserves become depleted in 2034, but it's possible that future retirees will only receive 78% of their full benefits unless Congress acts.
The 565,887 retired workers who were 62 years old and receiving Social Security benefits in December 2022 (the most recent data available) received an average of $1,275 that month. That's just $15,300 per year. By comparison, the average Social Security benefit for all retirees that month was $1,825.
What is an 80/20 Retirement Plan? An 80/20 retirement plan is a type of retirement plan where you split your retirement savings/ investment in a ratio of 80 to 20 percent, with 80% accounting for low-risk investments and 20% accounting for high-growth stocks.
You can get Social Security retirement or survivors benefits and work at the same time. But, if you're younger than full retirement age, and earn more than certain amounts, your benefits will be reduced. The amount that your benefits are reduced, however, isn't lost.
References
- https://turbotax.intuit.com/tax-tips/retirement/when-does-a-senior-citizen-on-social-security-stop-filing-taxes/L53Hx1v9W
- https://www.financialsamurai.com/the-first-rule-of-financial-independence-never-lose-money/
- https://www.cbsnews.com/news/retirement-savings-million-dollars-stretch-money-analysis-gobankingrates-years/
- https://www.cbsnews.com/news/want-to-retire-early-moves-to-make-2024/
- https://interactive-wealth.com/80-20-pareto-rule-for-retirement/
- https://smartasset.com/retirement/can-i-retire-at-55
- https://www.ramseysolutions.com/retirement/what-is-financial-freedom
- https://www.thrivent.com/insights/retirement-planning/how-to-retire-with-no-savings
- https://meetbeagle.com/resources/post/whats-a-good-monthly-retirement-income
- https://www.bankrate.com/retirement/what-is-the-4-percent-rule/
- https://ersri.ewaycorphosting.com/node/1185
- https://www.ssa.gov/retirement/eligibility
- https://www.cnbc.com/2024/01/23/how-much-money-americans-need-to-earn-to-be-financially-independent.html
- https://www.nerdwallet.com/article/investing/social-security/social-security-62-vs-67-vs-70
- https://www.fool.com/retirement/2024/01/14/this-is-the-average-social-security-benefit-62/
- https://www.pewresearch.org/social-trends/2019/10/23/majority-of-americans-say-parents-are-doing-too-much-for-their-young-adult-children/
- https://www.fool.com/the-ascent/buying-stocks/articles/heres-what-happens-when-you-retire-with-no-savings/
- https://www.ssa.gov/pubs/EN-05-10069.pdf
- https://www.cnbc.com/select/will-social-security-run-out-heres-what-you-need-to-know/
- https://bettermoneyhabits.bankofamerica.com/en/saving-budgeting/how-to-become-financially-independent
- https://www.nerdwallet.com/article/investing/financial-independence-retire-early
- https://www.visionretirement.com/articles/largestexpensesretirees
- https://www.investopedia.com/how-to-retire-with-no-money-7505220
- https://www.investopedia.com/retire-by-40-here-s-how-to-do-it-4770878