It’s a new year, and everyone’s got an eye toward improving their lives in some way. Some are focused on the here and now, making choices like trying to eat better, exercise more, or meditate. Others focus instead on the health of their financial future, with renewed dreams of retirement. The FIRE movement (that’s “Financially Independent and Retire Early”) has gained significant traction recently, especially among Millennials. So if you’re one of those who wants to retire early, how do you go about doing it? Here are a few helpful tips.

Map out your retirement income needs.

Retiring early starts with knowing how much money you’ll need in retirement. Depending on how early you want to retire, this number could be anywhere from 70% to 100% of your current income. What’s important is that you map out a retirement budget, going line-by-line to make sure you’ve captured all of the expenses you’ll need to cover.

Know how much you need to save to get there.

Great, so let’s say you’ve decided you need $80,000 per year to get by in retirement. If you’re trying to retire early, you’re probably hoping to get out before you can start drawing on CPP and OAS payments, which means that, unlike other folks that tell you to factor these in, I’d argue you shouldn’t include them when planning to retire early. You can’t receive CPP until 60 at the earliest, and you can’t receive OAS until 65. If you’re trying to retire by 50, does it really make sense to include those?

No, no it doesn’t. Just think of them as icing on your cake.

Now, coming back to that $80,000 income. A widely-accepted rule of thumb says that your real return on investment (that is, the amount your money grows after inflation eats away at it) will be around 4% each year. In order to live off your nest egg’s returns without eating into your nest egg itself then, your $80,000 income needs to be at most 4% of your nest egg. Which means your nest egg, in this case, should be at least $2 million.

Sounds like a lot, right? Well, that’s because it is. If you retire at 50, you might live the retired life for another half-century. You need a crap-ton of money in the bank to make sure you don’t run out of money before you kick the bucket. Which brings me to my next point.

Start saving. Now.

Like now. Stop reading this blog and go put money in an investment account somewhere. Compound interest is the most important tool in your toolkit, and you’ll need to give your money as long as possible to grow unimpeded if you hope to retire early.

That means you’ll need to stop procrastinating on opening up that RRSP. It means you’d better be maxing out your employer pension contributions, if you have that luxury. And it means sinking as much as you can possibly afford each month into your investments.

Let’s come back to our above example. Let’s say you’re 30 years old, have managed to scrape together $50,000 in savings so far, and are able to earn an inflation-adjusted 6% return on your investments (that just means we subtract the inflation rate from your actual return, which means that we’re measuring everything in today’s dollars, not what a dollar will be worth in the future). If you want to retire at 50 with $2 million saved up, take a guess at how much you’ll need to save each month.

Go on, I’ll wait.

To get to your retirement goal of $2 million invested, you’ll need to save an average of $4,000 each and every month. But if you waited just three years to start saving? That number catapults up to $5,300 a month. On the flip-side, if you decided to wait until 55 to retire, you’d only need to save $2,600 a month.

In all cases, you’d be saving far more than the average Canadian, but that’s what it takes to retire early. And you can see the difference that time makes on the value of your investments, which is why, if you want to retire early, you absolutely need to start saving now.

Invest your money wisely.

The road to early retirement is not paved by socking money away under your mattress. Compound interest only works for you if you put your money in an investment that actually earns some returns. In the above example, the return we used was 8% before inflation – about the historical return of the overall TSX. That means you’ll want to consider investing your money in equities of some sort. A single percentage point decrease in your rate of return has a serious impact on your monthly savings amount.

For example, say we took a 7% return instead of 8% in our example. Well now, rather than saving $4,000 a month, you’d need to save $4,600. If you put your money in bonds paying 3% interest a year? That number balloons up to $7,300 a month.

And if you put your money in a GIC paying you 1% per year? …just, please don’t. GICs are not for retirement savings.

When you invest, make sure you put your money in a fund or investment that minimizes fees. Mutual funds often charge an annual fee – called an MER – that is calculated as a percentage of the money you’ve invested. That fee can be as low as 0.25% for a simple index mutual fund, to as high as 3% for an actively-managed global large cap fund. These returns eat away at your annual return just like inflation does, so you’ll want to keep them as low as possible.

Understand the sacrifices you’re going to make.

If you think saving thousands of dollars each month is going to be really tough, that’s because it is. If it were easy, everyone would be doing it. Getting there requires making a series of lifestyle choices that probably go against the grain of almost everyone around you. It means:

• Less eating out on a monthly basis
• Less frequent shopping for new and expensive clothes
• Driving a used, but reliable car instead of that new Mercedes
• Living in a smaller home than you might want right now
• And so on.

The point is that you’ll need to make tradeoffs between living in the now, and saving for a future that includes early retirement. The choices you make need to strike a balance between those that you’re comfortable with, or else you won’t stick with your game plan.

Wrapping it Up

Retiring early isn’t for the faint of heart. It takes careful planning, savvy investing, sacrifices, and the income to actually hit the numbers you’re trying to hit. But for those with the right mindset, who make maximizing their savings into a sort of game, it doesn’t have to be painful. It can even be fun. If you fall into that group, then I say cheers to you – may you achieve your retirement dreams and hit financial independence as early as possible!