How to Retire Early

by Catherine Rein
(last updated April 24, 2009)

I would love to be able to retire before age 65. I hope to be able to do it, too. I'm pursuing several strategies to get me there, including cutting my expenses, saving and investing and looking for ways to generate passive income.

To retire early you don't necessarily have to have a huge amount of savings. I know that sounds crazy. We've been told for years that the only way to retire is to have millions of dollars saved up to live on. The key to early retirement is having enough income coming in to cover your expenses. If you can either increase the amount of income you have (not necessarily coming from employment) or decrease your expenses and debt payments, you too can have a realistic shot at early retirement. Consider the following areas if you are thinking about early retirement:

  • Manage Expenses and Reduce Debt. You should focus on cutting expenses and reducing debt. The higher your monthly expenses, the more likely you'll need to keep working to meet those debt requirements. If you truly want to retire early, it might make sense to downsize your home and pay off cars, credit cards and other forms of debt.
  • Generate Passive Income. This can include numerous strategies, including rental income from real estate, dividend income from stocks, stock options and some businesses generate passive income. In general, you want to invest some of your savings in methods to generate income after retirement.
  • Save, Invest and Insure. Keep in mind that retiring from traditional employment will mean not only a loss of income, it might also mean a loss of benefits including health care, life insurance and disability insurance. In order to retire early you'll need to have savings and investments to replace your income and separate insurance policies to replace those you would have from an employer.

The typical rule of thumb is that you can draw 5 percent of your savings every year in retirement. So if you've saved $200,000, you should be able to use $10,000 each year for your retirement.

You should be sure to look into insurance policies to protect against the unexpected. Nothing will prevent your retirement faster than having huge medical bills or losing your income due to disability. Be sure to protect yourself with health insurance, disability income insurance and long-term care insurance.

Author Bio

Catherine Rein

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