Dreaming of Early Retirement? Here’s How to Make It Happen According to Dave Ramsey

This article was originally published on ChaChingQueen.com, a site my wife and I own. AI was used for light editing, formatting, and readability. But a human (me!) wrote and edited this.

Dave RamseyPhoto byRamseysolutions

Many people dream of retiring early to enjoy more freedom, pursue passions, or spend time with family. This aspiration has sparked a growing movement in personal finance circles. 

This concept, known as Financial Independence Retire Early (FIRE), has gained popularity in recent years. I’m living proof that it’s definitely possible, I retired at 42. But truth be told, it requires discipline, strategic planning, and a mental shift. 

Dave Ramsey, known for his straightforward approach to personal finance, provides clear steps for reaching early retirement. He emphasizes debt-free living and smart investing as key principles for financial independence. 

In this article, we'll walk through Ramsey's approach to early retirement, step by step. We'll cover everything starting with understanding what early retirement means, all the way to making lifestyle changes and planning for healthcare costs. 

At the end, I’ll share my personal insights as a Chartered Financial Analyst (CFA) who retired young, bringing an additional level of financial expertise to the discussion.

Remember, early retirement isn't just about having enough money to stop working. It's about having the freedom to pursue your passions, spend time with loved ones, and live life on your own terms. 

What are your thoughts? Do you agree with Ramsey's approach? Let us know in the comments! 

Understand What Early Retirement Means

Early retirement typically refers to retiring before the age of 65, which is when Medicare eligibility begins in the United States. Ramsey emphasizes that retirement is more about financial readiness than age. 

It's about reaching a point where your passive income can cover your living expenses, allowing you to choose not to work anymore. This could happen at 40, 50, or 60, the key is having the financial stability to make that choice. 

Understanding this concept is crucial because it sets the foundation for your early retirement goals and helps you assess the feasibility of your plans.

Determine Your Goals for Early Retirement

Ramsey stresses the importance of knowing what you want out of retirement to create a solid financial plan. Your goals will directly influence how much money you need to save and invest. 

Some people dream of traveling the world, others want to start a business, and some simply want more time for hobbies or family. Ramsey advises taking time to think about what your ideal retirement looks like. 

He suggests writing down your goals, being specific, and attaching dollar amounts to them. For example, if you want to travel, estimate how many trips you'd like to take each year and how much they might cost. 

These goals will serve as your motivation when the journey gets tough, and they'll help you create a more accurate retirement budget.

Create a Mock Retirement Budget

Ramsey recommends creating a mock retirement budget as a practical exercise to understand what your finances need to look like for early retirement. He advises starting with your current expenses and adjusting them based on how you expect your lifestyle to change in retirement. 

Ramsey emphasizes the importance of factoring in things like healthcare costs, which can increase as you age. He also stresses considering inflation, the cost of living will likely be higher in the future. 

Ramsey suggests including both essential expenses (housing, food, healthcare) and discretionary spending (travel, hobbies, entertainment) in this budget. While this budget will evolve as you get closer to retirement, it provides a starting point for your savings targets.

Evaluate Your Current Financial Situation

Ramsey suggests using his 7 Baby Steps framework as a guide to evaluate your current financial situation. This involves assessing your emergency fund, debt situation, and retirement savings. 

He recommends starting with your emergency fund, do you have enough saved to cover 3-6 months of expenses? Next, look at your debt situation. Are you carrying credit card balances, student loans, or other debts? 

Then, examine your retirement savings. Are you currently contributing to a 401(k) or IRA? How much do you have saved so far? Ramsey also advises considering other assets like home equity or other investments. 

This evaluation will help you identify how far you are from your retirement goals and what areas need the most work. 

For an expert analysis of Ramsey's Baby Steps, read my detailed breakdown: "A CFA's Take on Dave Ramsey's Baby Steps: A Young Retiree's Comprehensive Analysis".

Get Out of Debt

Ramsey emphasizes becoming debt-free as a crucial step towards financial independence. He points out that debt can be a major roadblock on your path to early retirement, draining your current income and potentially delaying your plans significantly. 

Ramsey recommends using the "Debt Snowball" method to eliminate debt faster. This involves paying off your smallest debts first while making minimum payments on larger ones. 

As each debt is paid off, you roll that payment into the next smallest debt, creating a "snowball" effect. Ramsey argues that this method can be psychologically motivating as you see debts disappear one by one, helping you maintain momentum in your debt payoff journey.

Increase Your Income and Reduce Expenses

Ramsey strongly advocates for increasing your income and reducing expenses to accelerate your path to early retirement. He suggests considering side gigs or investments to boost your earnings and increase retirement contributions. 

On the expense side, Ramsey advises cutting down on unnecessary costs like expensive vacations or luxury items. He emphasizes that these sacrifices now can significantly speed up your retirement timeline. 

This approach helps create a larger gap between income and expenses, allowing for more aggressive saving and investing.

Invest 15% of Your Income in Retirement Accounts

A cornerstone of Ramsey's retirement strategy is investing 15% of household income into retirement accounts. He recommends utilizing tax-advantaged accounts such as 401(k)s and Roth IRAs. 

Ramsey emphasizes the power of compound interest in these accounts, which can significantly grow your wealth over time. He advises maxing out employer-matched 401(k) contributions first, then moving on to Roth IRAs. 

If there's still room in your 15% after these, Ramsey suggests going back to the 401(k) or exploring other retirement account options. This systematic approach to investing builds a strong foundation for your retirement income.

Utilize a Bridge Account for Early Withdrawal

Ramsey points out that retirement accounts often come with penalties for early withdrawals. To address this, he recommends setting up a "bridge account." 

This is typically a regular brokerage account that can be accessed without penalties before reaching the age for penalty-free withdrawals from retirement accounts. 

Ramsey advises using this bridge account to cover expenses in the early years of retirement, bridging the gap until you can access your other retirement funds penalty-free. 

This strategy ensures you have the liquidity to cover expenses while still taking advantage of tax-advantaged retirement accounts.

Invest in Real Estate

Ramsey sees real estate as a valuable tool for diversifying retirement income. He suggests investing in rental properties to provide steady, passive income during retirement. 

But he is cautious about debt and advises paying for properties in full to avoid risk. He believes that owning real estate outright can provide a reliable income stream and potential appreciation over time. 

Ramsey often reminds his followers that while real estate can be a great investment, it's important to understand the market and the responsibilities of being a landlord before jumping in. 

Make Serious Lifestyle Changes

According to Ramsey, achieving early retirement often requires significant lifestyle adjustments. He advises cutting down on discretionary expenses like dining out, entertainment, or new cars. 

Ramsey emphasizes that these short-term sacrifices can lead to long-term financial freedom. He encourages his followers to find creative, low-cost ways to enjoy life while saving for the future. 

Ramsey often says, "If you will live like no one else, later you can live like no one else." This mindset shift is crucial for freeing up more income for savings and investments.

Plan for Social Security and Healthcare Costs

Ramsey stresses the importance of planning for Social Security and healthcare costs in retirement. He cautions against relying too heavily on Social Security, suggesting it should be viewed as a supplement to your retirement savings rather than a primary source of income. 

Regarding healthcare, Ramsey emphasizes the need to factor in potentially high costs, especially for the years before Medicare eligibility. 

He recommends including these costs in your retirement budget and considering options like health savings accounts (HSAs) to help cover medical expenses in retirement.

Meet Regularly with a Financial Advisor

Lastly, Ramsey recommends having regular meetings with a financial advisor as you plan for early retirement. He believes that their guidance can help you adjust your plans and make tough financial decisions as you get closer to retirement.

Ramsey suggests staying involved in your financial planning while also using the expertise of professionals to improve your strategies. Look for advisors who can explain complex ideas in simple terms.

Regular check-ins with a financial advisor can help ensure your retirement plans stay on track and adapt to changing circumstances.

A CFA's Perspective: Insights from a Young Retiree

While Ramsey's Baby Steps provide a solid foundation for financial education, my personal journey as a Chartered Financial Analyst (CFA), retiring at 42, offers additional insights. 

With over 20 years of experience in senior roles within the financial services industry, I've gained a deeper understanding of personal finance strategies. Some of Ramsey's principles were invaluable in my journey, while others required adjustment to fit my circumstances.

For instance, I agree with the importance of an emergency fund, but I believe its size should depend on an individual's ability to find a new job or access to money elsewhere. This accounts for some people have the ability to find new jobs quickly, while others may be in roles or have resumes, that make it take longer. 

I also take a more aggressive approach to retirement savings, advocating for maximizing contributions to tax-advantaged accounts like 401(k)s and HSAs before allocating funds elsewhere. 

When it comes to debt repayment, I appreciate the psychological benefits of the debt snowball method, even if it's not always the most financially optimal approach. 

Final Thoughts

As you work toward financial independence, remember that flexibility and continuous learning are key. Personal finance is, after all, personal. What works for one person may not be ideal for another. 

Ramsey's advice is a great starting point, but I encourage everyone pursuing early retirement to keep learning about personal finance and investments. There are many ways to retire early. Be ready to adjust your plans as your situation and the economy change. 

With discipline, strategic planning, and a willingness to adapt, early retirement can become a reality, opening doors to new opportunities and life experiences. 

🙋‍♂️If you like what you just read, then subscribe to my newsletter and follow us on YouTube.👈