Everyone has dreamed about it: financial freedom and early retirement, for example, to live
a simpler life with more time for yourself, your hobbies, family or to travel. But do
you really know how much money you need and how you can achieve early retirement ? If
not, then this is the perfect video for you. I will show you how much money you need to
retire early, how you can achieve it yourself with a simple strategy and what hidden rules
and hurdles you will face if you want to retire early.
But first of all : Hello and welcome back to our channel ! And if you are new here : We
are the finance nerds and on this channel we are helping hardworking people like you
to get more out of your hard earned money by showing you how to use your money in the
most effective way. And if you like the video and get value out of it, hit the like button.
First and foremost, I want to bring some clarity to what it even means to retire early. When
we talk about early retirement, we mean any age before 65. On average, a man retires at
age 64 and a woman retires at age 62. But that's not exactly our goal. Our goal is to
retire at an age of, say, 55, 45 or even earlier and achieve financial freedom. In due course,
anything earlier than 45 becomes very difficult and requires very early preparation or a very
high income. In this video we focus on how the average person with a normal job can achieve
early retirement. And before we talk about how much money you
need to retire early and how you go about it, I want to talk about the hidden rules
and what happens when you retire early.
What are the rules for early retirement ?
If you retire early, one thing to keep in mind is that your pension benefits will be
determined by the age you are when you retire. Even if you retire at the age of 62, you must
expect a reduction of 30%. Conversely, if you retire later, for example at the age of
70, you will receive greater benefits. We have linked you the calculator below in the
description, with which you can determine your pension benefits.
What Happens if you take early retirement ?
I want to make you aware of one thing in particular when you retire early and which you should
definitely be aware of. We made another video where we show you all the things no one talks
about when it comes to early retirement. Just click on the button in the upper right corner.
If you retire before you're 59 1/2, you'll pay a 10 percent early withdrawal penalty
on most tax-deferred accounts like traditional IRAs and 401(k) plans.
And you will also have to pay income tax on the amount you withdraw from traditional accounts
funded with pre-tax contributions. As an example, if you withdraw $30,000 before
age 50 1/2 from an IRA and you are in the 15 percent federal tax bracket, you pay $4,500
and have only $25,500 left. Just keep that in mind, and it also makes
perfect sense to consult with an expert if you really plan to retire early.
Now let's talk about how retiring early works and how much you really need.
First of all, here's what I mean: Retiring early doesn't necessarily mean you stop working.
Many who have reached this level actually continue to work, but under different conditions.
Retiring early therefore means that you receive income from investments or other passive income
sources that potentially allow you to quit your job.
Now let's take a step-by-step look at how to determine for yourself exactly how much
money you need to retire early.
There are ultimately only 2 ways to retire early. Admittedly, in reality there are several,
however we will focus on what works for everyone. Either you start saving money very early or
you start later and therefore need to save a larger amount.
The basic idea is to live well below your means, save a lot of money and invest that
money well. And this process you go through until you reach your money goal, which you
need to retire early. But how much money do you really need now
to retire early ? For this there is the so-called 4% rule. The
first thought you need to have is how much money you need to have in your investment
portfolio to be financially free. The theory then is that if you take out 4% a year on
your portfolio then you won't run out of money. Based on this rule, you can calculate the
size of your portfolio at 25 times what you need in a year. For example, if you need $80,000
a year, multiply that amount by 25, which in this case is $2 million. This $2 million
is the amount you need to have in your portfolio to cover your annual living expenses.
The amount you need to retire early is very much dependent on your personal circumstances
and goals, so it's hard to say what amount you'll need, but I'll help you determine that
amount, respectively, in the description you'll find a very good calculator that will help
you do that. All you need is your current situation, your
investments, your savings and your idea of retirement. Based on this information, the
calculator will give you the exact data you need.
Once you've done that, it's even more important to know how to achieve it, and that's what
we'll take care of now. As I mentioned earlier, the basic idea is
to live below your means, save a lot of money, and invest that money well.
And there are 3 strategies you can use to do just that and retire within 20 years using
these strategies. Lower your living expenses
If you have a goal of retiring within 20 years, you should be able to save between 25% and
50% of your net income. Of course, this is also very much dependent on how much you earn.
To achieve such a savings rate you need much more than just a few saving tips. You should
therefore make some changes in your budget and rethink your spending and prioritize differently.
To help you, you can watch our video on how to create your perfect budget within 10 minutes.
Increase your income
Of course, it is much easier to save more if you also earn more. Therefore, one should
also consider building up other sources of income. The possibilities these days are endless
and even with a little time investment you can achieve worthwhile results.
In addition, the combination of lowering your living expenses and increasing your income
is very powerful, putting you on the road to early retirement much faster. The best
way to do this is with a side hustle. A side hustle is a source of income that you can
build while working and takes little time. There are countless ways to do this and if
you'd like I'll make another video about what the options are and which ones are really
worthwhile. Just write "Side Hustle" in the comments.
Profitable investing
Only by investing, you will probably reach your goal at least in a short period of time.
If you just save your money and keep it in the bank, you will lose the power of compound
interest and inflation will also make it worth less over time. I recommend investing in ETFs
or mutual funds and setting a fixed rate each month that you pay into your portfolio. The
advantage is that you invest widely differentiated and thus lower the risk.
There are many providers and investment platforms. We have linked our top providers in the description
and you are welcome to read about the providers and choose one that meets your needs.
And if you want to learn more about investing, we have linked you to a video in the top right
corner on how to invest your first $1000 in the form of a clear step-by-step guide for
beginners. If you enjoyed the video and now want to know
more about how to take control of your finances, click on the video to the right or check out
the video description. There you will find more videos and resources to help you have
more money at the end of the month and to reach your money goals faster.
And hit the like button if you are willing to take control of your finances.
See you in the next video.