Thinking of retiring early? These three steps helped me create my Financial Independence / Early Retirement plan.
Financial Independence / Early Retirement Planning
Financial Independence / Early Retirement is a worthy goal, but it requires a lot of planning and preparation. Planning for early retirement is also important because we are good at short-term thinking and not so much at long-term planning.
While the actual retirement plan can be very detailed, the below three key things are required to create the plan.
As in all successful ventures, the foundation of a good retirement is planning.
Earl Nightingale
Steps to Create an Early Retirement Plan
1. Calculate your FI Number
FI Number is the amount of money you will need to retire early. There are many calculators out there that help you get this number. As a rule of thumb, you need 25 times your annual expenses to retire (basically a 4% withdrawal rate).
I went with a 3% withdrawal rate (33 times annual expenses). You may choose to go with a different FI number. However, the important thing is to calculate your FI number.
Let us suppose your yearly expenses are $50,000. This means your FI number is $1,250,000 (25 x 50,000) using the 25x rule.
Your initial FI number may look large, so it is essential to reduce it. The smaller your FI number, the sooner you can retire.
The best way to reduce your FI number is to increase your saving (decrease your expenses). I reduced my FI number by 30% by reducing a lot of wasteful spending. This not only helped me get to the FI number sooner but will also help me manage my spending during early retirement.
2. Determine your FI Path
There are essentially only three paths one can take for Financial Independence / Early Retirement:
– Earning: Earn more money
– Saving: Spend less money (Save more)
– Investing: Invest the savings wisely
You may be good at managing your expenses (Saving). Or you may have a knack for Investing, or you may have a side hustle (Earning). You can choose to focus on one / two / all three.
Initially, I focused on Investing, but over time I have become much better at Saving. I have now realized that Saving is the most important lever to achieve and, more importantly, to maintain financial independence.
3. Have Patience
This may not look like a big item, but it is probably the most important one! The FI journey can be a multi-year effort, and it takes time to see the results of your Earning / Saving / Investment changes. In the first couple of years, the progress can seem to be very slow.
But it is vital not to give up because eventually, the magic of compounding kicks in, and the numbers start looking much better. And then, before you realize it, you are well and truly on your way to financial independence!
This was the most challenging step for me. I wanted to get to FI quickly. However, there is no shortcut (that I know of) to FI.
In Conclusion
Although the FI journey takes many years, the planning process itself is pretty simple: determine your FI number and work towards achieving it.
Good luck on your FI journey…