How to Retire at 42: Achieve Financial Freedom

Retiring early isn’t just a pipe dream; with careful planning and the right tools, you can make it a reality. In this post, we’ll break down the key strategies you can use to build a retirement plan that fits your life goals, including flexible spending, investment strategies, and incorporating different types of retirement income. With Money Eva, you can customize your financial journey every step of the way.

1. Master Your Savings-to-Spend Ratio

A common misconception about early retirement is that it requires extreme frugality throughout your life. The reality is much more nuanced. While your savings-to-spend ratio years plays a crucial role in determining your success, you must adapt it to reality.

Finding Balance: Higher Spending Now, Lower Later?

Life has seasons, and your spending should reflect that. For example, you might want to allocate more money for travel, dining, or hobbies during your working years while dialing back during retirement when your lifestyle changes. Money Eva makes it simple to model these scenarios by allowing you to customize spending patterns over time.

Hit the gold pencil button to enter "edit" mode, where you can easily add an "Expect Monthly Cash Flow" step. The cash flow tracks inflation rate by default, and by setting start year and end year, you can flexibly configure the cash flow to reflect your lifestyle.

Planning for Life Events

Raising a child? Money Eva can help you plan for those higher-cost years by letting you increase spending temporarily, while ensuring you’re still on track for retirement. By adjusting your savings-to-spend ratio dynamically, you’re building a plan that’s truly aligned with your life.

Example of setting up a cash flow for 12 years of child support after early retirement, by tracking "From", "To", and inflation.

2. Tackle Investment and Inflation Rates

The two biggest factors impacting your retirement savings are your investment return rate and inflation rate. Let’s take a closer look at how to handle both.

Why Model an Elevated Inflation Rate?

Inflation is one of the biggest threats to your retirement plans. Even modest increases in inflation can erode your purchasing power over decades. We recommend modeling an elevated inflation rate in your retirement calculations to account for worst-case scenarios.

Check out our previous post, "Visualizing the Impact of Inflation on Retirement Savings with Money Eva," for a deeper dive into this topic!

Setting an Investment Rate Target

Once you’ve modeled inflation, it’s time to determine your target investment rate. Remember, higher returns often come with higher risks.

Here are typical market investment return rates:

All Equity Portfolio: 6-10% annually (high risk, long-term growth).
50/50 Equity & Bonds: 4-7% annually (balanced risk/return).
All Bonds Portfolio: 2-4% annually (low risk, steady income).
Other Options (e.g., REITs): 3-8% annually (varies by asset class).

Money Eva’s flexible calculators allow you to find the sweet spot—balancing risk and reward to hit your retirement age goal. You can even test different rates before and after retirement to see how they affect your timeline, so you’re always in control.

In this example, an aggressive investment approach during working years (expected return from 5.5% to 6.5%) is projected to extend the savings from age 83 to 89. However, this comes with elevated risks. You may find it worthwhile to simply work an extra year to offset the risk.

3. Incorporate All Sources of Retirement Income

Your retirement income doesn’t come from one source, so why settle for a one-size-fits-all retirement calculator? With Money Eva, you can easily customize the equations to account for tax-free, tax-deferred, and government pensions. Here’s how:

Tax-Free and Tax-Deferred Savings

Money Eva uses an intuitive math model, and it supports accounts like TFSAs/RRSPs in Canada, and IRAs in the US. By incorporating these into your calculations, you can realistically model the tax-free/deferred ratio, and see how tax-advantaged savings boost your retirement funds.

TFSA vs RRSP: Max Your Retirement Growth : u/FinEducation

Unsure where to save? See how RRSP, TFSA, and non-registered accounts stack up for retirement growth.

Money Evau/FinEducation

Government Pensions

Often times, an early retirement implies lower amount of government pensions. Using the cash flows in Money Eva, you can customize government pensions, like US Social Security or Canada’s Old Age Security (OAS) and Canada Pension Plan (CPP), based your personal situation. This ensures you have an accurate picture of your financial future when projecting your financial freedom.

You may also elect to start early or postpone government pensions, based on your life expectancy projection. With Money Eva, the exploration of community calculators is there for you:

When should I take Social Security? : u/calculators

Find out when to start Social Security benefits. Calculate breakeven ages for taking benefits early, on time, or delaying for maximum lifetime value.

Money Evau/calculators

Ready to Start Your Journey?

Retiring at 42 requires careful planning, but with Money Eva’s tools, you’ll be equipped to tackle any financial scenario. Whether you’re modeling flexible spending, targeting the right investment rate, or incorporating every source of retirement income, Money Eva puts you in the driver’s seat.

Start building your personalized plan today and take control of your financial future. 🌟