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I thought we’d go over How to Retire Early because of a recent trending hashtag on Twitter: #millenialretirementplans.
You’ve heard a million times how millenials won’t ever be able to retire.
Social security will run out.
Pensions don’t really exist anymore.
You’re not saving enough in your 401k, your IRA, and whatever other retirement funds they’ll invent in your lifetime.
It’s enough to think the only way to retire is to get a government job and suck it up for 30-50 years.
It’s frustrating.
Enough to want to burn the system to the ground.
Make it so everyone gets a government check.
The truth is if you’re around 30 years old, you can have enough money to retire before you turn 45.
In this system.
No one is scheming to hold you down.
No one is coming to rescue you.
Forget how to retire early for a second, why would anyone want to retire when they’re young?
Everyone knows once you stop working, it’s the beginning of the end…
The retired US citizens I know spend most of their day watching either Fox News or the Weather channel.
Why you should retire
Flip the script on traditional retirement.
It’s not something that old people do before they die.
What is retirement really?
Not needing to work for money anymore.
Right now you are trading 8-10 hours of your day, 5 days a week, 50 weeks a year for a salary.
Imagine how freeing it would be to not need your job anymore.
What would you do with your time?
Volunteer?
Travel?
Spend more time with family and friends?
Improve the relationships that really matter to you?
Work on hobbies and projects that you find interesting?
Do something creative.
Retirement isn’t something that you need to “put in the time” to hope to achieve.
The retirement I’m talking about is freedom.
Freedom to live your life.
To do whatever you want with your time.
No more boss telling you what to do unless you want to keep working for someone.
Because time is the only thing we can’t get back.
How to retire early
Schools today don’t teach you about money and finances in school and it’s a shame.
The fact is the only thing that matters is your spending to income ratio.
It doesn’t actually matter how much money you make.
You can work minimum wage or you can make $250,000 a year and it’s the same equation.
It doesn’t even matter if you have debt.
You can keep paying it off in “retirement.”
As long as the bank or government is still getting their money they don’t care if you’re retired.
Your main goal is to spend less than you earn.
The more as a percentage you’re able to save the quicker you can retire.
I first came across the math behind early retirement on the Mr. Money Mustache blog.
I found it fascinating.
This is the math that everyone should’ve learned in school.
You can see from the chart that if you save
How to Retire Early and Live on Fixed Income
Figure out your retirement number.
First pick a number that you can live happily on.
This example will use $40,000 a year.
Take your spending number ($40,000) and multiply that by 25.
Your total goal for savings is $1,000,000.
$1,000,000 sounds like a lot to you because you’re thinking you have to make a million dollars.
But you don’t.
You don’t actually have to save $1,000,000 over your life to get to a million in your account.
Because your money will make you more money.
That’s the mindset shift I want everyone to make.
It’s the reason I started this company.
Once you have your retirement number invested you can live off dividends and sell some shares every year.
Use the calculator below to figure out how much you need to save and for how long:
How to retire early: Investing
The main ways to be financially free are either to have a large chunk of money invested that you can withdraw from as needed or you set up systems that pay you every month.
Index funds
Investing in Vanguard Index funds is a very popular, tried and true method in the FIRE community.
It’s how Mr. Money Mustache and his wife retired in their early 30s.
They used a mix of Vanguard stocks to build their investments.
Warren Buffet recommends investing in an index fund that tracks the S&P 500.
Robo-advisors have come along to help invest too.
These are apps that automatically invest for you.
The key to index investing is to get broad exposure and keep your fees as low as possible.
Luckily, with the growing popularity of index fund investing fees keep going down.
Dividend paying stocks
Focusing on dividend paying stocks is a way to invest in order to replace your income.
When businesses have profits they decide to either reinvest into the company for growth, or they take some of that money and pay their shareholders.
That payment is a dividend.
Companies pay out a dividend rate for every share owned.
You can set your broker to automatically reinvest your dividends.
When you do that any dividends you receive will automatically be used to buy more shares in that company.
So now your shares earned from dividends are earning more shares.
Your ownership in the company is compounding.
Eventually you’ll be getting enough payments in dividends that you won’t have to touch your shares.
Real Estate
Focusing on rental income is another tried and true method to replacing your income.
Basically you want the profits from rent coming in to replace your current income.
Going back to the $40,000 a year example means you need $3,333.33 per month.
It sounds like a lot but let’s break it down so you can see how to get there relatively quickly and with a lot less money invested than $1,000,000.
If you can make $333.33 per front door you need to own 10 properties.
Instead of investing $1,000,000 in stocks you save and come up with $50,000 for a down payment.
You’re just getting started so you buy a triplex.
That’s 3 units.
Here’s the first catch:
You live in one and rent out the other 2.
So you find a property that the 2 rental units cover your mortgage and expenses, a little extra for property management in the future, and $333.33 profit per unit.
Here’s the other catch, you’re not using all $50,000 on this property.
Through the FHA loan you only need 3.5% for a down payment.
That means a $10,000 down payment can buy you a property worth about $285,000.
If you’re keeping score you have 2 units out of 10 and $40,000 in cash.
Remember now you can save even more money!
How?
Because these 2 rentals are paying your mortgage.
You’re living rent free.
Now you repeat the process 2 more times, but now you’re looking for quadplexes, 4 units each.
Hire a property manager and let them take care of the day to day.
That brings you to 10 units which covers your living expenses.
And you still have $20,000 of your original savings!
Debts
You know the dread of being in debt.
That’s one of the reasons people believe millennials cannot retire.
How can someone retire early using debt?
Be the bank instead of the one taking out the loan.
I saw an ad on Twitter the other day for a new app.
The woman said she didn’t have money in her checking account because she gets paid during the next week.
But she used this app to get an advance on her check.
Now she’s happily going out with the girls.
You don’t have to be a payday loan shark for people to want money in the short term.
Some people borrow money to start businesses or for a down payment on a home.
There are quite a few peer-to-peer lending apps that you can join as an investor.
Because you’ll be getting paid each month with loans the amount you’ll need to invest will be similar to investing in dividend stocks.
A couple of differences though: once your loan is paid you’ll have to find a new loan. And with loans you get paid monthly instead of 4 times a year.
Living on fixed income
If you’ve worked a couple years at a job without getting a raise you have a taste of what it’s like to live on a fixed income.
When dividends come in make sure they get moved into your checking account.
$40,000 minus dividends for the year is the amount of money you need from selling shares for the year.
You could do this once a year if you’re good with budgeting your money.
Here’s how:
Send everything to a savings account.
Then have that savings account automatically transfer money into your checking on the first and the fifteenth.
When you look at your checking account it’ll look just like it did when you depended on your job for money.
Wrapping up
You work hard for your money.
Your money should work just as hard for you.
That’s what I truly believe.
If you put your money to work you can eventually have enough to be free.
No more stress from your boss.
Free to do whatever you want with your time.
Free to make a real impact on people’s lives.
You’ve taken the first step by educating yourself.
Take the challenge and really start putting your money to work.
Your future self will thank you.
If you would like to learn more about dividend investing, sign up for my course that walks you through the steps of how to start dividend investing.
If you’re not ready to take that plunge I also have a course on Beginning Stock Market Investing.
Even if you go the passive index fund route you should know a little about stock market investing.
Why?
Because even when you buy the index you’re still buying ownership of real companies.
I don’t want you to lose sight of that.
If investing becomes play money and just a money making scheme in your mind you will be tempted to take it all out in the next economic downturn.
This strategy only works because you’re investing and your money is making money.
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