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Early retirement possible through ‘banking’ each raise, maintaining old spending habits: Author

Tanja Hester, author of “Work Optional: Retire Early The Non Penny-Pinching Way," joins Yahoo Finance Live to discuss tips to achieve a potential early retirement.

Video Transcript

DAVE BRIGGS: Welcome back to Yahoo Finance Live. Time now to talk about getting retirement ready, brought to you by eTrade. Today, we're taking a look at how to think outside of the box when it comes to retiring early. Some Americans are utilizing what's called the FIRE method to achieve this goal. This Financial Independence, Retire Early strategy requires followers to save a significant portion of their annual income and withdraw only about 4% of their savings annually. Tonya Hester is the author of the book, "Work Optional, Retire Early, The Non-Penny Pinching Way." She joins us now. Nice to see you. So let's talk about your personal story, which, of course, you write about. When did you retire? And how did you do it? How did you go about it?

TANYA HESTER: Hi there. Thanks for having me. I retired at the age of 38. And that was almost five years ago now. And I like to say that the story was pretty boring. My husband Mark and I just saved a big chunk of our income and let time and the magic of compound interest do the rest. So it's not that interesting a story, but certainly, being able to save a good percentage of our income helped us. That's something that not everybody can do, so we were really lucky in that way. But yeah, mostly, it's just time and compound interest.

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DAVE BRIGGS: I have to ask the obvious question-- do you have children?

TANYA HESTER: No kids, so that, for sure--

DAVE BRIGGS: Ah.

TANYA HESTER: --makes things easier.

DAVE BRIGGS: There it was, the key.

SEANA SMITH: It makes it a lot easier--

DAVE BRIGGS: Seana, go ahead.

SEANA SMITH: --as I've recently found out, being a new mother. Tanya, let's talk about how exactly you got to where you are because I think a lot of people watching this segment are very envious. I think a lot of people have a goal to retire as early as they can. So the one, two, or three steps that people can take now, that they should take now to better position themselves. What should they be?

TANYA HESTER: Yeah, I think putting yourself in a position to retire even a little bit earlier than you otherwise could is a really smart move. So whether you can retire in your 30s or 40s or not, it certainly is not something that's accessible to most people, given how much the cost of living is increasing. That's just-- that's reality. But that said, we know that 2/3 of people don't get to decide when they actually retire. They are forced out of work by illness or needing to care for a loved one, or perhaps they get laid off and then can't find another job.

And so, looking to retire in your mid-50's, you know, 56, 57, 58, is certainly something that is going to put you in a much better, more secure position than planning on working until 65 or 70, because that's just not the reality for most folks. So I think looking at your budget, seeing if there are places where you could trim a little bit, or my favorite method and what really worked for us was to say each time we got a raise, even if it was small, could we bank that raise? Could we keep our spending the same as it had been the year before, more or less?

And I know that's hard to say now with inflation where it is. But if you can even just get in the habit each year when you get that raise of saving a little bit more and a little bit more, it's pretty incredible what that adds up to over time.

DAVE BRIGGS: I've pretty much accepted putting three kids through college. I will never retire, but Tanya, what are some of those common areas that people overlook that could actually make a difference when you focus in on it over the course of a year?

TANYA HESTER: Yeah, most people tend to look at the kind of nickel and dimey places where their money is going, but I really recommend you start with the big things. So the big things for most people are housing and transportation. And so we have this culture, especially in America, where you get a starter home, and then you move up to the next home. And then people are always aspiring to something bigger. But perhaps staying in a smaller home could be a good solution to help you save a whole lot more and invest a lot more over the long run. Or transportation-- perhaps you could downsize-- lose a car for the household or look at other ways to cut your transportation costs.

But it's also-- it's really good to look at your overall spending, not sort of the theoretical budget that you imagine, but look at where your money's actually going. In the case of my husband, Mark and I, for us when we did that, we discovered that we were spending a lot more at restaurants than we thought. And so that was actually a pretty easy place to cut because I think folks get scared that they have to give up stuff. And that's really not what I recommend. I think, instead, it's about scaling.

So for us, it wasn't, can we eat at restaurants and get takeout multiple times a week or not? No, it was, could we cut back by half perhaps? And so we did that, and we looked at incremental cuts over time that felt pretty comfortable, didn't feel like big sacrifices. And that's really how we got there. So I think for a lot of folks, look at those big line items first. You'll get a lot more bang for your buck that way than trying to figure out where every single nickel is going.

SEANA SMITH: Tanya, when we talk about retirement, I think a lot of the focus is always on 401(k)s. If you don't have that option or looking for additional avenues to save for retirement and places to keep your money, what should people consider?

TANYA HESTER: There really are a lot of good tax advantaged options out there. So for folks who don't have a 401(k) or a 403(b) or something like that offered at work, there are, of course, your IRA, Roth IRA options. And there are things like the SIMPLE IRA and the self-employed 401(k), which have-- the self-employed 401(k) especially has really high individual limits. So you can potentially save quite a lot that way.

But even if you've maxed out your tax advantaged opportunities or you just don't have very many, you can still save in traditional investments, like just having a brokerage account with a brokerage firm and buying regular investments. And the advantage there, you're not getting the tax-free growth on the front end, but then when you take withdrawals, there are no age restrictions, no early withdrawal penalties. And in some cases, you've already paid some of those taxes on things like your dividends. So you're not looking at as big a tax bill at the end. So I think everyone has lots of options out there potentially. And then it's just a question of how much you can personally save or invest.

DAVE BRIGGS: All right, time for a little discipline in the Briggs family. Tanya Hester, thank you so much. Enjoy the weekend. Appreciate it.