5 Steps to Early Retirement

For some people, early retirement is a choice. For others, it’s a necessity. Regardless of which group you fall into, there are some steps you can take to help make early retirement a reality and live the life you dream about.

1. Know your goals

Before you know exactly how much money you need to save, you need to know your goals for retirement. Do you want to live in a small home in a small town? A luxury condo in the city? Travel around as much as possible (when it’s possible)? What sort of lifestyle do you see yourself living after you retire? Do you want to retire entirely or are you planning on leaving a corporate job to follow your creative dreams? Will you still earn a bit of an income, but on a very part-time scale?

The answers to those questions can help you determine how much money you need to save now—and how aggressively you need to save—to set you up for early retirement. Establish what you want your daily retirement life to look like so you can better plan for it.

2. Have a retirement budget

The information that you came up with about the type of lifestyle you want to live will help you create a workable retirement budget. How much of your budget do you want to spend on groceries and utilities? How much do you need to save for home repairs or renovations? Will you want to downsize your living space?

Anticipate any healthcare costs that could come up. You can’t plan for everything, but remember that healthcare costs tend to increase as you age. Be prepared financially for those charges.

3. Pay off your mortgage

The fewer expenses you have in retirement, the better for your cash flow. Not having a monthly mortgage drastically reduces your expenses when you’re no longer earning a steady income. As a bonus, when you pay off your mortgage early (without fees for paying it off too quickly) you’ll likely pay less in interest. So you’ll be saving yourself even more money.

Knowing that your home is paid off entirely gives you a great deal of financial freedom and security in your retirement years.

4. Have a financial plan

You need a financial plan that sets out your goals, expenses, income and debts so you know where your finances sit. Any major purchases should be checked against this plan, keeping you on track as you move toward your goals.

Review and revise your plan as necessary—if you’ve been set back by any major expenses, see if there are ways you can limit your spending in other areas. Or see if there are ways you can earn additional income while you’re still working.

Remember that if you’re saving for long-term wealth, you’ll need to live below your means. Reduce your expenses where possible and increase your income.

5. Generate passive income

Cutting expenses can help you save some money, but diversifying your income streams to include passive income, such as real estate, can be more lucrative. Your passive income can be developed to cover your monthly expenses, which enables you to become financially independent much more quickly.

Regardless of why you’re looking to retire early, having a solid plan in place and following the above steps can help you reach the financial independence you need to feel comfortable leaving your job.

It’s important to live in the present even while you’re looking to the future. You’ll have to sacrifice some things to stay on track financially, but don’t give up everything. Treat yourself sometimes and celebrate when you reach your goals.