- Multiple callers have asked Dave Ramsey about how they can retire early.
- Ramsey is a strong believer in having something productive to do with your life, even in retirement.
- To retire early, Ramsey advises a bridge investment account you can withdraw from at any age.
The popular financial guru has a few tips for those contemplating early retirement, and they're not all about the financial aspect of it.
Dave Ramsey's speciality may be helping people get out of debt, but he receives questions on just about every financial topic. And as the FIRE (Financial Independence, Retire Early) movement has become popular, several callers have asked Ramsey his thoughts on the subject.
Unlike some financial gurus, Ramsey isn't completely opposed to the idea of early retirement. He even has guides on how to retire early. But he also has some reservations about it.
The one question Dave Ramsey always asks about early retirement
When a caller tells Ramsey they want to retire at a relatively young age, like 30 or 40, he responds with this question -- "For the rest of your life, what are you gonna do?"
According to Ramsey, being able to retire early isn't always the blessing you'd think. He believes that if you don't have a purpose in life, it has negative consequences. He frequently brings up a story of a friend to illustrate this point. "Basically, all he did was play golf and fish, and after about two years, he almost died, because he got fat and he got completely out of control."
That's a pretty extreme example. There are plenty of people who retired early without suffering drastic health consequences. And early retirement could easily be good for you if it helps you relax and focus on leading a healthy lifestyle.
It's still a good question to think about, as having things to do after you retire is important. But is it really that difficult to answer? Personally, I've never found it hard to plan a life after retirement. You have more time for hobbies, to spend with family and friends, to travel, and let's be honest, to binge watch new shows.
A three-pronged approach for early retirement
For those who want to retire early, Ramsey recommends a three-pronged plan:
- Start looking for the thing you want to do with your life.
- Invest in 401(k) plans and Roth IRA plans.
- Invest in low-turnover mutual funds, such as an S&P 500 index fund.
In terms of the overall investing strategy, Ramsey advises focusing on tax-deferred retirement accounts first, which he recommends to everyone. He's a strong believer that you should invest in a Roth IRA instead of a traditional IRA, although both types of retirement plans have their advantages.
To retire early, he has one adjustment from his standard advice, which is a bridge investing approach. That's where you invest in a mutual fund that you can withdraw from at any age without a costly penalty. He specifically recommends low-turnover mutual funds. Why low turnover? He explains that "low turnover means they don't sell the stocks inside of the fund very often," and "if they don't sell the stocks, there's no taxation on it until you cash out."
Keep in mind this strategy comes after other steps in Ramsey's program. Before you start investing, Ramsey recommends paying off all debt, with the exception of home debt, and saving a three-to-six-month emergency fund.
Adjust your own investment strategy as needed
Ramsey's advice on early retirement definitely works, although it's not exactly a big secret, either. If you want to retire early, you need to have enough money saved. The way to do that is to maximize your income, save as much as you can, and invest.
The part that requires the most strategizing is how you'll invest, and that depends on how soon you want to retire. With retirement accounts, you're penalized if you withdraw funds before you're 59 1/2 years old.
If you want to retire at 35 or 40, you'll need enough in your non-retirement accounts to last for decades. If you want to retire at 50, you won't need nearly as much, since you'll have less time until you can make penalty-free withdrawals.
No matter when you want to retire, the best thing you can do is plan it out. Calculate how much money you'll need per year, and then use that to figure out a savings target in both your investment and retirement accounts.
Our picks for 2024's best credit cards
Our experts carefully review the most popular offers and select those that are worthy of a spot in your wallet. These standout cards come with fantastic benefits like generous sign-up bonuses, long 0% intro APR periods, and robust rewards.
Click here to learn more about our recommended credit cards
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2024 The Ascent. All rights reserved.