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Oct. 15, 2017, 1:57 p.m. EDT

How to retire early: A 5-step plan

Cut spending, invest carefully, live simply — and comfortably

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By Andrea Coombes, MarketWatch

AFP/Getty Images

Wish you could retire right now? Give up the rat race, embrace a life of independence, reduce your stress, and have more time for what you value most — your family, education, travel? That might seem like a fantasy but early retirement is within reach of most Americans, if they would only take the steps to make it happen.

That’s not a sales pitch. It’s true. Sure, you might not have the resources of Sam’s Club /zigman2/quotes/207374728/composite WMT -0.73%  Chief Executive Officer Rosalind Brewer, who is 54 recently announced plans to retire; or the Google /zigman2/quotes/205453964/composite GOOG +7.27%  -sized plans of former Chief Financial Officer Patrick Pichette, who announced his retirement at age 52, but don’t let that deter you. You, too, can retire the way you want, when you want.

While many think of retirement planning as a complex process, it doesn’t have to be. Below, we outline the key strategies learned by people who have done it — people who, without being millionaires, managed to retire in their 30s, 40s and 50s. If you’re eager to join the ranks of the financially independent, get going by following the steps below.

Step 1: How much do I need to save?

These days, a better term for “retirement” might be “financial independence.” That is, retirement isn’t connected to a specific age, and it may entail continuing to work or volunteer. It’s all about doing what you want, when you want.

And anyone can do it. Financial independence, after all, is a simple concept: you need enough money to create income to support your lifestyle for the rest of your life. That points to the crux of retirement planning: How much you need to save depends entirely on how much you spend.

“Your spending rate is the single biggest factor determining when you’ll be wealthy enough to retire,” says Mr. Money Mustache, also known as Pete, the operator of the blog MrMoneyMustache.com . He and his wife retired when they were just 30 years old.

The first step to financial independence is figuring out where your money is going now. Monitoring and, if possible, reducing, your current spending has two important benefits: it frees up more money to be put aside in savings, and it reduces the amount you need each year to live on, thus lowering the total amount you need to save.

To track your spending, sign up for a free online service such as Mint.com or check to see whether your bank or credit union offers an online tally of your spending. Alternatively, just create your own spreadsheet or simply get out pencil and paper. However you do it, figure out where your money is going and how much you spend each month. Can you reduce any unnecessary expenses? In addition to cutting out small expenses that you can do without, it’s important to periodically compare costs and shop around on larger expenditures, such as home and car insurance and cellphone bills.

Certainly, your spending will change once you retire. You’ll stop sending money to savings. You won’t be spending money on commuting. Other costs may rise. Perhaps you’ll want to travel more, or you may encounter higher health-care costs (more on those below).

Still, getting control of your spending as soon as possible will go a long way to determining when you can retire. For example, Mr. Money Mustache says he and his wife saved $600,000 and paid off their mortgage before quitting their full-time jobs. His family of three (they have a young son) now lives on about $25,000 a year.

Billy and Akaisha Kaderli, who blog at RetireEarlyLifestyle.com , are now in their 60s, but they retired more than 20 years ago, when they were both 38. They travel the world, living on less than $30,000 a year.

A recurring theme among early retirees: Even if they are traveling the world, their lifestyle is simple. If they own a car, it’s just one, and it’s far from new. (Your car costs more than you may realize. Early retirees often talk about car costs and the importance of reducing them. If your car costs $500 a month for loan payment and insurance, that adds up to $6,000 a year. If you assume a federal and state tax bill of 30%, you have to earn about $8,600 a year just to pay for your car — and that’s not even counting gas and maintenance costs)

The Kaderlis’ method for tracking spending — outlined in their book “Your Retirement Dream is Possible” — is based on figuring out their costs-per-day figure. Each day, the Kaderlis enter their previous day’s spending into a spreadsheet; they keep a running total, which they divide by the number of days. The daily average can fluctuate quite a bit; to smooth out the numbers, they continue to track their spending into the next year. So, their spending for Jan. 1 is the first day, and after 365 days, Jan. 1 of the second year is entry number 366. They’ve learned that, despite sometimes large daily fluctuations, their spending over each year is remarkably constant — and that has helped ease their minds over spending.

For his part, Mr. Money Mustache says he doesn’t keep a detailed budget. At the end of the year, he and his wife create a spending report from their credit-card statement (they purchase most items via credit card to earn the rewards; they never carry a balance on the card) to see where their money went over the year (they then post their spending details to their blog).

Another early retiree couple, Skip and Gaby Yetter — they quit full-time work in their early 50s and blog at TheMeanderthals.com — work with a U.S.-based financial adviser as they travel the world. But they, too, say that their early retirement, which included selling their three-bedroom, waterfront home in Marblehead, Mass., north of Boston, has fostered an awareness of just how consumer-focused they’d been. “As we rid our lives of accumulated things, we began to realize how much happiness we found in living simply,” writes Skip Yetter in their book “Just Go! Leave the Treadmill for a World of Adventure.”

One note: There is always an element of uncertainty in financial planning at any stage of life. For example, you could lose your job or face a debilitating illness. So, like any other financial planning, it’s necessary to embrace a little uncertainty.

Another example: you don’t know how long you’ll live, and thus it’s impossible to say how long your savings need to last. A number of early retirees interviewed by MarketWatch rely at least to some extent on the “4% rule”: In your first year of retirement, you withdraw 4% of your total savings; in each succeeding year, you withdraw the same dollar amount, plus inflation.

In other words, a rough rule of thumb is that, before you retire, you should save 25 to 30 times’ your annual spending.

While the 4% rule has come under attack in recent years — many financial experts argue that it’s too optimistic a number given the outlook for lower financial-market returns in the future — early retirees say it worked for them even in years when the markets performed poorly, such as the market downturn in 2009. The key is flexibility; that is, being able to trim costs so that you can withdraw less in years when the market is down.

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