How do I retire early?

There are three things you need to do to retire early: 1) Manage your expenses and reduce or eliminate debt, 2) accumulate capital, and 3) save and invest wisely. It's easy, but requires patience and self-control.

1) Managing Expenses.

Controlling your expenses and reducing or eliminating debt is the first step towards early retirement. Most families spend almost all of their income and save very little. It's not uncommon for families to spend 20-30% of their income on debt service. (Even the Federal government doesn't do that.) Credit card debt at 15-20% interest is the number one reason folks remain poor. If you don't pay your credit card bill in full each month, start making plans to do so today.

Just about everyone spends 20-50% more than they need to for their day to day expenses. Do you ever buy food at 7-Eleven? It's probably much cheaper at the supermarket. Do you buy your clothes at the fancy department stores in the mall? You can get the same items at Marshall's or SteinMart for half price. Think of what you could save if you bought generic rather than name brand. It really adds up.

2) Accumulating Capital.

Once you've got your spending and debt under control you should begin generating a surplus (i.e., your expenses are less than your after-tax income.) Retire Early's Generation-X Retirement Planner can show you how quickly this surplus can grow into some real money. Talking full advantage of tax protected vehicles like your employer's 401k plan or even an IRA will make your nest egg grow even faster.

It's really amazing how fast your accumulated capital can grow, especially if you're getting a good rate of return. Even a 7% return will double your money in 10 years. Prudent investors can do better than 7% over the long term.

3) Invest wisely with low fees and commissions.

If you've been wise and frugal enough to accumulate some capital, it would be a shame to lose a large piece of it to excessive fees and commissions. Unlike dentistry or brain surgery, investing is one of those activities that you really are better off doing yourself. More than 85% of investment professionals under perform the market averages after you adjust their stated returns for the fees and commissions you pay up front. (See, "How much should I be paying in fees ?") Unfortunately, it's almost impossible to identify the 15% of investment advisors that outperform the market ahead of time. The investment world is a lot like baseball, last year's batting champion tends not to repeat.

You can easily add 1% to 2% to your investment returns over time by making your own decisions and minimizing what you pay in fees and commissions. Adding 2% to your investment return might allow you to retire 10 or 15 years earlier. The small amount of time you spend learning about investments and managing your own portfolio could be your most highly compensated hours of the year.

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