Many Americans share the common dream of retiring early with plenty of money and financial resources to support a healthy and satisfying lifestyle without worrying about work.
Personal finance radio host and bestselling author Dave Ramsey says that vision does not have to be a fantasy — and explains that some mindset adjustments and value changes can translate into a successful and fulfilling retirement for anyone.
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As Ramsey clarifies some steps people can take to make retiring early a reality, he cautions that it won't be easy but adds that in the end, your efforts will be well worth it and you will be glad you did it.
The first step Ramsey recommends is to make a smart and realistic assessment of your overall early retirement goals. If your dreams are ambitious, such as lots of global travel, your desired budget will obviously be quite a bit more ambitious than if you seek a more modest retirement lifestyle.
Second, you should use these well thought out goals to create a mock budget. Specifically, that means being precise about how much money you will need on a monthly basis. This includes expenses such as medical costs, food, phone, internet, car costs, utilities, entertainment and home repair.
Importantly, Ramsey notes that a mortgage payment is not included in this list. That's because the personal finance coach believes that your mortgage should be entirely paid off before you retire. Any debt, Ramsey says, will ruin your plans for early retirement.
Dave Ramsey stresses evaluation of your current finances
Third, The Ramsey Show host offers a list of actions you need to take. Looking at these closely will help you decide which step you are on. These include, in order:
- Being sure you have $1,000 saved for a beginning emergency fund
- Having all debts paid off
- Having three to six months saved for a completely funded emergency fund
- Investing 15% of your income for retirement savings
- Saving for college for any children you may have
- Having your mortgage entirely paid
- Building wealth and giving
The fourth step Ramsey discusses involves another type of investment you should consider: a bridge account.
A bridge account involves investments you should have for available money to draw from between the time you retire and until you are 59-and-a-half years old — when you can take money out of your 401(k) and Roth IRA without penalties.
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For this, you can use a brokerage account, which has two big advantages, even though it doesn't come with the tax-free growth and tax-free withdrawals that Roth retirement accounts do.
One, there are no limits to the contributions you can make and two, you are free to withdraw money from a brokerage account whenever you want. Ramsey suggests low-turnover mutual funds as investments for brokerage accounts.
Other steps Ramsey suggests to make your early retirement dream come true
A fifth step, if you can afford it, is to invest in real estate. But Ramsey emphasizes that doing this is only smart if your own home is already paid off in full. And he says real estate investments should only be paid for with cash.
The sixth step Ramsey mentions is to make changes in your lifestyle. You should ask yourself if you really are ready to sacrifice now to retire early later.
"Honestly, folks, this is where most people get stuck," Ramsey wrote.
Related: Dave Ramsey bluntly speaks on interest rates and mortgages
For example, vacation budgets can often be cut in half by being more modest in your planning. Grocery bills can be cut by buying less expensive items. The same is true as you adjust expectations for clothing, entertainment, eating out, gym memberships and streaming services.
Finally, Ramsey encourages people hoping to retire early to consult a financial advisor.
"Don’t make decisions before you’ve talked them through with a professional who knows their stuff and has the patience to explain it," Ramsey wrote.
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