If you want to retire early, you will need to open a brokerage account in addition to your 401(k). You cannot withdraw the money from your 401(k) until you are 59.5 years old without incurring a 10% penalty in addition to full income taxes on that money. Which would essentially mean giving up almost half of every dollar you withdraw early.
So, step 1: open a brokerage account. You can put money in and take money out of brokerage accounts whenever you want, as often as you want, with no penalties. A brokerage account allows you to invest like your retirement account but keeps that money under your control rather than locking it up. Why have a retirement account at all? Well, most are tax-advantaged, so it makes sense to max those first usually.
Step 2: figure out your number. Most people calculate the number they need to retire (early or not) by using some multiple of their current salary. Let’s say your current salary is $40,000 - traditional wisdom says you’ll need at least 25x’s that to retire, or $1,000,000. That’s a very quick and easy shortcut to the question “how much do I need to retire”. (you use 25x’s because history tells us you should be able to withdraw 4% annually and not deplete your principal during an average retirement)
Now, while that’s a good shortcut number, it’s not necessarily the best number. Instead, I would focus on how much you SPEND every year, not how much you make. If you only need to spend $2,000/month to cover expenses and have some fun money, or $24,000 annually, you don’t need to save $1,000,000 before retiring, you only need to save $600,000 (assuming the same 4% withdrawal) - way less than our shortcut provided.
Or maybe you’re making $40k a year, but spending $45k (going into debt every year to cover all of your expenses). If that’s the case, you need $1,125,000 to retire - more than our shortcut provided.
Hopefully that illustrates why it’s more important to focus on spending, not earning, when calculating your retirement number.
Step 3: research various investments. Know what you’re getting into. Know the pros and cons of every investment you buy. Each person invests differently, and for the most part, that’s okay, as long as you understand the risks and rewards and then shape your plan around those risks and rewards.
Me personally? I favor income-producing assets over equity assets. I like investments that pay me a dividend or royalty check every month/quarter vs a stock price that rises. I understand that over a longer period, on average, my income-producing investments will appreciate at a slower rate when compared to equity assets. But I also understand that over a longer period, on average, my income-producing assets will have less volatility. That helps me to not panic sell, that helps me to sleep better at night, and so I’ve traded a little bit of reward for a little bit of lower risk. That’s how I shaped my plan.
My plan won’t work for everyone. Someone else may want to be all equities and think I’m silly receiving dividends every month. They may not blink at 10% gains and 10% drops in the same week. You should do what makes sense for you and your plan.
There have been numerous studies done that show it doesn’t really matter too much what you invest in, so long as you are diversified, don’t panic sell, and stay invested. The vast majority of wildly different portfolios will usually end up in about the same place over a couple decades as long as you buy and hold. Period.
If you’re not sure what to invest in, but want to get your money into the market now (the old saying is “time in the market is better than timing the market”), then just buy a target date mutual fund from Vanguard. This is a great investment. The lowest fees anywhere. You are instantly diversified with thousands of US and global stocks and bonds. Every year Vanguard rebalances the mix for you automagically and over time they move you from mostly equities to mostly bonds, so your target date fund gets less risky as you get older. It’s the single best placeholder - and for a lot of people will be the only investment they ever need - while you do more research on other investment options.
Finally, step 4: If you plan on retiring super early (in your 30s or 40s), I highly recommend you set up some alternate sources of income. This is usually called passive income, though it’s rarely truly passive. This can come from a hobby (making and selling things on etsy or ebay), a royalty (designers and musicians make money every month from work they did in the past), a part-time gig (“job” sounds not-retired, so let’s use gig) that you love doing and happen to get paid for, etc. The 4% safe withdrawal rate is usually only applied to traditional retirements, those lasting about 20-30 years max. If you want to retire at the age of 30 or 40, one would hope you plan on living longer than 20-30 years and therefor you need to make your money last longer.
Having some sort of (even really small) income to supplement your investments will help a lot. For example, if you can rent out a spare room in your house, or cut lawns if you like being outside, or work at the library if you like being inside, etc making just $300/month, that’s the same as having an additional $72,000 invested in a fund paying a 5% dividend. When you think of small income drips in that way, you can see how powerful even “gig”ing a few hours a week can be.
Hope that helps. Please let me know if you want any more information on any of the above. Walls of text don’t go over well on tumblr, and believe it or not, this is the short version of all this. So ask away!