Many Americans intend to retire later in life, after working for 40 years or more; according to a 2018 Gallup Poll, the average person planned to retire at age 66 or older.
However, a growing movement is sweeping the country. FIRE — short for “financial independence, retire early” — has many people buckling down and saving extra money so they can leave their jobs much sooner than their peers.
They might be onto something bigger than the luxury of extra free time. A 2017 Dutch study found that retiring early can actually be good for your health and help you live longer, the New York Times reported.
PEOPLE spoke to Ramit Sethi and Suze Orman for their advice on how to decide if retiring early is the right choice for you — and if so, what you need to do to make that happen.
Rule 1: Know How Much Money You Need When You Retire
“Most people have no idea how much they actually need,” says Ramit Sethi, financial advisor and author of I Will Teach You to Be Rich. “Use a free retirement calculator – just Google it, and plug in your current numbers, and within 60 seconds, you will be more informed about where you are today, and how much you will need in retirement.”
Rule 2: Stay Positive
“If you’re starting later in life, the numbers might seem overwhelming,” Sethi says. “Of course, the best time to start was yesterday. The next best time is today.”
Marc Royce Ramit Sethi
Rule 3: Ramp Up Your Retirement Contributions
“Only some people take advantage of their company’s 401(k) match,” Sethi says. “If they offer a 401(k) match – you have to take advantage of it. That’s free money your employer’s giving you.”
Retirement accounts, he says, not only often earn you more money than you would have otherwise thanks to your employer match, but they also “save you money” on taxes, he says.
“Try to increase your contributions as aggressively as you can,” he says. “The more you contribute to your retirement accounts, the more you earn, and the more you save on taxes.”
Short-term goals like saving for a new home or trying to fund your kid’s college account are worthy and necessary, but if you have extra money you can invest in retirement accounts, do it. (Many advisers recommend having that money come directly out of your paycheck, so you can’t think about missing it.)
“Over the course of your lifetime, investing through a retirement account can be worth over $100,000 more to you than not investing in a retirement account,” he says. (Many people, Sethi says, just put extra money in a savings account, or invest in a normal, taxable account. But you can earn more money if you put it in a Roth IRA or 401(k).)
Rule 4: Open a Health Savings Account
“It gives you incredible tax advantages. Most people think it’s just to buy toothpaste or contact lenses. But you can actually invest your money in a Health Savings Account,” Sethi says. “A flex spending account, you have to use by the end of the year. HSA can grow.”
Rule 5: Be Debt Free
As tough as it sounds, get rid of your credit card debt. “You’ve got to pay that off — fast,” especially if you want to retire early, Ramit says.
Consider picking up a side gig, he says.
“Don’t only focus on cutting back. Remember that you can earn more. You can earn more by negotiating your salary, or you can start a side business,” Sethi says. “There are lots of different ways to increase your income. There’s a limit to how much you can cut, but no limit to how much you can earn.”
Rule 6: Have a 3-Year Reserve
Financial guru Suze Orman, who is still working at age 68, is candid about not being a proponent of early retirement.
“Everyone in the FIRE movement hates me, and I don’t care,” says Orman, author of the new book The Ultimate Retirement Guide for 50+.
Her concerns and rules might help those considering FIRE figure out if it’s in their future.
Normally, Orman advises having an eight-month emergency savings fund, but if you’re retiring early, you have to have a bigger contingency plan; she recommends three years of savings.
Another caution Orman offers: things really do cost more money when a person is older (and thus may need to pay for formerly independent tasks like driving, or mowing the lawn), so you should factor in those possible added expenses when considering your retirement cushion.
She also points out that some retirement and nursing homes facilities can cost around $10,000 per month. Plus, the older a person is, the more prescription medications they need.
Orman’s biggest concern? When you officially retire and will no longer earn any income, your Social Security stops accumulating.
“Remember, Social Security is calculated on your highest 35 years of employment. If, all of a sudden you don’t have any more income coming in, that’s a zero. Rather than getting $3,000 or $4,000 a month for Social Security when you’re 70, you’ll be lucky if you get $1,000.”
Also, if you fully retire – and aren’t working at another job – and don’t have any earned income, you can’t put pre-tax (or after tax) money into retirement accounts.
“Where else can you contribute money that compounds and compounds, and when you take it out it’s tax-free?” Orman asks. “What you’re giving up when you retire early – and we have to be clear, you retire and you do not work. (Not if you go get another job somewhere else and have money coming in.) But if you really retire and stop working, you have to live off something. The income from the money that you have — you’re drawing money out, versus putting it in. Really? Really?”
Orman says she still hasn’t touched any of the money in her own retirement accounts – and it’s continued growing and growing.
“I looked at my account last year and said, ‘How is it possible that I made this much money?’” she says. “It could get to the point where it generates more income for you than you ever generated working. And that can go on for the rest of your life. Your working career has a limited amount of time … Your investment money, your retirement accounts, there’s no limit as to how much money they can earn for. If you start taking money from your retirement accounts, or from the money you saved while you’re younger, you’re not just taking $1 out to live on; [it could be a] future $5 or $10. You have to calculate the future growth of that money.”
Finally, Orman advises to keep in mind that people are living longer. Many people live into their 90s.
“Are you sure that your money is going to last you another 50 years?” she asks.
Marc Royce Suze Orman
Rule 7: Don’t Have a Mortgage
If you own a home, and you want to stay there for a while, pay it off before you retire, Orman advises. You don’t want the burden of a mortgage hanging over your head during retirement.
Rule 8: Have a Life Plan
Early retirement sounds great – in theory, says Orman. But, she asks, have you really thought about what your days will look like?
“There’s only so many times you can take a vacation and go here and go there before you are bored as hell,” Orman says. “What are you going to do with your life? What is going to give you purpose in your life? I had a man over for dinner the other night. He’s 71, extremely wealthy — he owns five homes and four boats. He has more money than he knows what to do with. He said, ‘I retired two years ago. I don’t know what to do with my life. I’m not as happy as I was when I was working.’”
Orman says she doesn’t keep working for the money — she works because it’s her passion.
“You think Oprah continues to work to make money?” she asks. “I have more money than I’ll ever spend in my lifetime. That is not what makes me get up every morning. It’s my passion to help others.”
Rule 9: Have a Will, Trust and Good Insurance
“Nobody thought Kobe Bryant would ever die,” Orman says. “Nobody thinks they’ll ever be in a car accident, injured, disabled or get sick. But it happens, and all of a sudden you need an aide you didn’t need before. Do you have enough money in your retirement for all of those contingencies?”
“Plan for the worst, and hope for the best,” she says. “If all of the ‘what ifs?’ of life are covered and you’re fine, okay, retire and find a purpose for your new life. If they’re not, you better think twice.”