# A No-Nonsense Guide to Early Retirement

**(Edited 2024-07-18: Looking at this 3.5 years later, there's a few changes I would make.**  
  
**First, I avoided being too opinionated about asset allocation -- but I now think it's pretty important to have a high % of investments in stock index funds.  I would not drop below 80%, except perhaps briefly during the early stages of retirement.  I am currently 100% invested in stocks.**  
  
**Second, I recommended establishing an emergency fund in cash, then paying off all debt above 3-4% interest rate.  Interest rates have since increased across the board, and you can earn 5% just sitting money in a high-yield savings account, so this no longer makes sense.  I also think it can make sense to save money in investments even while holding some high-interest debt -- you might lose net worth, but you gain financial stability by having additional assets you can call on in case of job loss/etc.  This is especially true if the debt is large, such as a mortgage. **

**Third, I recommended a flat 6-12 months of expenses kept in cash.  If you have sufficient amounts in stocks that you'll be financially safe even given a large market downturn, this is unnecessary.  I keep ~2 months of expenses in cash (a money market fund) and the rest in stocks.**

**Fourth, I think Fidelity is ergonomically better than Vanguard, and ETFs are ergonomically better than mutual funds.  I also don't mention expense ratios.  Nowadays, my default recommendation would be "Fidelity + buy VTI" instead of "Vanguard + buy VFIFX".)**

**(Edited 2021-02-28: Added a section on how retirement is risky, and changed a few other sections to provide more context or clarify various trade-offs pointed out in the comments.)**

Introduction
============

I wanted to be able to link people to a guide on early retirement that succinctly covered everything I thought was important, but I couldn't find one that I was satisfied with.  So I made this.

There are tons of communities and resources out there for anyone who wants to read more about retirement, investing, financial independence, etc -- many of which I'm cribbing from.  You might start here: [https://www.reddit.com/r/financialindependence/wiki/faq](https://www.reddit.com/r/financialindependence/wiki/faq).

This is an opinionated guide, which means a lot of it is kind of made up -- but I think it's ~95% in line with what you'll find in financial independence communities across the internet.  Even if some numbers are wrong, I have decent confidence nothing here should lead you too far astray.

Also, **disclaimer**: I'm a random guy on the internet, please be careful with your money!

Overview
========

To retire successfully, you need to have enough money to live on until you die.  This requires saving money, and preferably investing it in assets that gain value over time.

Though there's a lot of fiddly details and no one can predict the future, given some reasonable seeming assumptions the process for figuring out how long this will take you is pretty simple.  Just calculate:

*   How much you're saving per year
*   How much you're spending per year
*   How much money you currently have invested

and then plug those numbers into an early retirement calculator like [https://networthify.com/calculator/earlyretirement](https://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4) or [https://engaging-data.com/fire-calculator/](https://engaging-data.com/fire-calculator/).  As a rule of thumb, you need to have ~25x your yearly spending invested well to be able to live off of the returns.  So to support a $30k/year lifestyle, you need ~$750k invested well.  The actual number may be 15x or 35x based on the length of your retirement, the future performance of markets, whether you ever generate any income during retirement, how flexible your expenses are, etc. -- but we can use 25x as a ballpark.

So you need to save money and invest it in assets that gain value over time.  The more you do this, the quicker you'll retire.  Here's my ultra-sophisticated three part strategy to doing so faster, and consequently the three sections in this guide:

*   Spend less
*   Earn more
*   Invest well

Risks of retirement
-------------------

Before diving in, it's worth pointing out ways that retiring is risky.  The main way that retiring is risky is that you might not have enough money at some point, and also might not have any good options for getting more.

Some reasons you might not have good options for getting more money at a later date:

*   Credential and professional network decay.  If you haven't worked in your profession for 10 years (or 1 year in some cases), people may not want to hire you for various reasons.
*   Age-related declines in health or cognitive function.
*   Ageism.
*   Automation and societal changes.  Your profession may no longer exist in the same form in the future.
*   Hedonic adaptation.  You may have a harder time dealing with the pressures of holding a job after you've gone a long time without holding one.

Retiring earlier is riskier than retiring later because you have to deal with risks over a longer time frame.  You're reliant on market performance you can't control.  The calculators and 25x rule mentioned above use historical market performance to estimate how much you need to retire, but the market may not behave like it did historically.  The longer your retirement will be, the more room there is for the market to behave unexpectedly and wipe out your investment.

You also might need more money than you expect in the future.  Perhaps you have children you did not plan for, suffer an unexpected medical expense, or encounter a significant opportunity that requires money.  New technology might create such opportunities, e.g. costly anti-aging treatments.  Unless you think money will lose most of its value, these risks can all be offset by just saving more than you expect to need.

Another way to manage these risks is to not fully retire.  Maintain some level of professional activity, such that you can more easily jump back in to full-time employment if you need/want to.  You could drop to part-time at your employer, try to start your own business, or try to find a consulting role which supports sabbaticals, working only X months out of the year.  You could also use your newly found freedom to retrain for a new profession that better supports these goals.

You can control some of these risks by modulating your spending based on your investment performance; if the market goes down, downgrade your spending as appropriate.  This can help substantially in back-tested simulations of retirement risk, although there are obviously limits to how far you can downgrade.  This also doesn't protect you from unexpected expenses.

Another, unrelated, risk to retirement is that not having a job could make you unhappy.  In that case, you should get (or keep) a job!  This guide may still be useful to you -- even if you never want to retire, having significant savings and investment income can open up new opportunities.  You could rely on savings to allow you to pick a job you'll enjoy independent of its financial payoff, or to take risks in order to create your own company/non-profit/side-hustle.  If you haven't done so, you could also explore filling the "job" slot in your life with things such as research, volunteering, mentorship, media creation, lobbying, or anything else that you find meaningfully productive.

Spending less
=============

Spending less helps in two ways: it lets you save more, and it also reduces the amount you need to save.  Remember the rule of thumb that you need ~25x your yearly spending in investments to retire.  If you consistently reduce spending by $100/month aka $1,200/year, your necessary investment for retirement is lowered by $30,000.  A $500/month increase in rent becomes a $150,000 increase in necessary investment.  Minor looking financial commitments can cost you years of your life!

It turns out that the calculation of years-to-retirement doesn't really depend on your absolute level of spending or savings, just your relative level.  If you save 80% of your net income, it will take you ~5 years to retire no matter what your income is.  If you save 75% of your net income, it'll take you over 6 years.  This illustrates again how minor differences in the amount you consistently save can have a big impact on when you can retire.

It's hard to give specific advice about how to spend money, since it's so personal and situational.  This area can also be surprisingly emotional; I recommend approaching it with gentleness and honest reflection instead of moralism.  If you find that you can't consistently spend less, it's ok; you can rest satisfied with your current trajectory (which you should calculate), or you can also try to make more money.

First, look at how much you're spending every month in categories like rent, groceries, eating out, shopping, etc.  This might be scary, but knowing your spending in detail will help you control it and make trade-offs that you feel positive about.  There are tools online to do this like Mint, but you can also just make a spreadsheet using LibreOffice or Google Docs, copy the information from your bank statement, and then use a pivot table to summarize spending by category.

If you know you have specific areas you tend to spend a lot in and would like to reduce, make a monthly summary for them that you monitor.  Reflect on your most expensive areas first: saving $500 by selling your expensive car is worth more than saving $200 from not eating out which is worth more than saving $10 from cancelling a subscription.

Be careful of unintended effects.  Reducing rent by moving further away from work and increasing your commute can have a big negative impact on your happiness, for instance.

There are massive reservoirs of information online about how to save money, but there's no magic wand.  If rent and groceries take up 60% of your income, then you're never going to save more than 40% of your income unless you reduce spending on rent or groceries.  If your spending is already pretty well tightened, you might do better by focusing on earning more.

Earning more
============

The way most people earn money is with a job, so all of my advice in this section relates to jobs.  You also might be able to earn more by doing things like joining the gig economy, starting a side business, or renting out space in your house -- definitely consider such options if they seem like a good fit for you.

Getting a better job
--------------------

One of my biggest career mistakes (among many) was taking the wrong job after I finished school.  I doubled my salary when I switched to a different job 9 months later -- a job that I'd been qualified for the whole time, and which made no use of my 9 months at the first job.

My big takeaway: try applying for better jobs.  Better might mean more pay now, more pay later on (for instance, by getting into a new profession with higher pay potential), or some other improvement (such as a job that fits your values better or offers you better working hours).  The time commitment to apply is at most a few hours to work on your resume and cover-letter -- the potential payoff is years off of your eventual retirement timeline.  Imposter syndrome and self-esteem issues are big obstructions for a lot of people; if you self-identify as having either of those, you're probably under-applying and should apply to more jobs.  Apply even though you don't think you meet the qualifications.  Even if you're completely happy with your current job, I'd propose you should send something like a dozen applications out per year just to test for even better opportunities.  The only reason I can see not to is if it'd be hard for you to find a dozen better opportunities anywhere in the world.

When applying for jobs, getting a recommendation from an existing employee is much better than just sending your resume and cover letter blind.  People have written mountains about networking, but I'm bad at networking so I'll summarize with "meeting and befriending people in settings related to your profession can have high payoff."  Promising locales include real-life meetups, conferences, and social networking sites.  Don't use your lack of a network as an excuse not to apply for things though -- you can apply now AND try again later if you end up finding someone to recommend you.

If you've worked at the same company for a while, try applying for other jobs even if they seem like lateral moves; you might be able to get a pay boost or promotion by switching companies.  Raises and promotions at a single company don't necessarily keep pace with your market value as your experience increases.  Even if you don't want to switch jobs, you may be able to negotiate compensation increases at your current company if you have another competitive offer. 

For certain jobs, building or improving a public portfolio might increase your application success rate.

Depending on your situation, it might make sense to try earning credentials in order to land better jobs.  This is extremely situational and you should do your own research before committing to anything.  Here's a scattered list of thoughts:

*   Look for data on salaries by school, degree type, and field before committing to any degree program.  E.g., a Bachelor's degree in Computer Science from Stanford is extremely valuable; a Master's degree in Fine Arts from For-profit College X is probably worthless.  Compare median graduate salaries with the cost of attendance and opportunity cost from lost time.
*   PhDs are almost never worth the opportunity cost, with few exceptions.
*   Programming is still quite lucrative if you can break into it.  The field is saturated with entry-level applicants, but still has very high demand for experienced talent.
*   I've heard that law school has become a bad deal for most people, unless you get into one of the very top schools.
*   I've heard that med school has become a worse deal over time, but may still be a good deal on average if you can hack it + residency.
*   I've heard nursing can be lucrative.

Negotiating
-----------

If you're in the application, interview, or job-offer phase with any company, there's a number of things you can do to potentially increase your pay.  There's a ton out there about negotiation, so I'm just going to share the most important points as I see them.

In my overly simplified model of negotiation, your success has three primary inputs:

1.  Your perceived value to the employer, which affects how much they'll be willing to offer you.
2.  Your best alternative to accepting the offer on the table, which affects how hard you should be willing to push.
3.  Your ability to execute a basic negotiation strategy without making mistakes.

There are a lot of ways to increase your perceived value, some of which are very situational.  Another scattered list of ideas:

*   Acquire prestige.  This could be through schools, other jobs you've held, professional accomplishments, building a public persona, etc.
*   Be good at the job in a visible way.  If applicable, build public portfolios which demonstrate your skill.
*   Practice generic good social skills.  Try to get honest feedback from others about your social skills.  This is obviously a big area to figure out.
*   If the interview process will involve any technical skill, practice that skill so that you perform well (e.g. LeetCode for programmers).
*   Practice answering interview questions out loud on your own or with a friend.  Record yourself and examine the results.
*   During interviews, talk (honestly) about your positive qualities, achievements, and capabilities.  Don't focus on your negative qualities or failures -- if they do come up, talk about what you've learned from them.
*   Don't show desperation.  Even if you are desperate, do what you need to do in order to hide it for the duration of the interview -- the employer will not care and will find your desperation off-putting.

The impact of your best alternative is pretty straight-forward: if you're about to be homeless, you'll probably accept whatever someone offers you.  If you've already got a comfy job that you're happy with, you've got no reason to leave unless the offered pay is substantially better, so you can hold out or make multiple counter-offers.  This is a good reason not to quit your current job before applying to other jobs.

As to basic strategy:  try not to tell potential employers your current salary or salary expectations, as they'll mostly use this information to low-ball you when applicable.  You've got nothing to gain by giving up this information, and the person on the other end of the conversation is aware of this -- it's simply their job to try asking anyway. There's a million strategies posted online about how to avoid giving up this information, but here's a simple one that's worked for me: if they ask for your previous salary or salary expectation, tell them you'd rather not share that information, but that you're happy to confirm your expectations are within a given salary range if they have one -- this puts the obligation on them to list a range.  If they continue insisting without giving a range, just politely repeat that you'd rather not share.  If they ask why, you can truthfully explain that you'd rather hear their range first to anchor the negotiation.  If your current salary or salary expectations are required in a form, try entering the smallest number it will accept (like $0 or $1 or $1000).  If a human tells you these numbers are needed on a form, explain the above and then ask them to enter a small number.  If a human later asks you about the number on the form, repeat the above.  I find it easier not to make mistakes if I just commit to never giving this information, no matter how weird things get -- it's extremely unlikely an employer will be petty enough to refuse to proceed based on this, and if they do you've got a great story you can share on reddit.

After you receive a job offer for a high-skill / professional class job, you should usually ask for more money.  There is a chance that asking for more money will cause the employer to retract the offer, but as far as I know this chance is extremely low in most high-skilled industries if you ask for +10-15% -- most employers expect and plan around receiving counter-offers in this range.  You might want to do some research on your industry in particular in case it's weird about this.  People in high-skill jobs tend to be overly paranoid about the chance of an offer being withdrawn.  

If you receive an offer for a low-skill / high-labor-supply job such as retail or restaurant service, my impression is that attempting to negotiate at all might get an offer rescinded, so be careful.

A simple phrasing template for counter-offers: "Excellent!  I'm excited about x,y,z.  Unfortunately, the compensation is somewhat lower than I was aiming for.  Would you be able to come up to <counter-offer>?".  Add your own voice as desired, there's nothing magical about this template.  If you're unsure about your writing but have socially savvy friends, run things by them if you can.

If they don't counter-counter-offer, but they also hint that higher compensation is still on the table, ask about a slightly lower number (+5-10%).  If at any point they say they can't go higher, then making further counter-offers might cause them to withdraw the offer.  If you wouldn't want to accept their current offer regardless, there's no harm in continuing to hold out for the minimum you would accept.    As an anecdote, my last three salary negotiations (as a programmer) have yielded 12%, 6%, and 7% salary increases respectively over the counterfactual of accepting the first offer given.

You have more at stake proportionally than a company does during negotiation, so to reduce mistakes I think you should negotiate carefully by email whenever possible.  If pushed for answers or acceptance in person or over the phone, tell them you're excited but you'd prefer to think about things and get back to them shortly via email.  If they say or insinuate they need an answer immediately, refuse to give one and re-iterate that you'd like to think about it and get back to them shortly.  If they withdraw an offer due to you not giving an instant answer, then I guess they're either dumb or abusive -- you probably don't want to work for them anyways.  If you do decide to negotiate over the phone or in person, make sure you have your decision tree clearly written out or rehearsed, and try to bail back to email at the first sign of trouble.

Investing well
==============

Despite all of the intense social signaling around personal finance, investing well is surprisingly easy and boring.  You can get 80% of the value of everything in this section by doing exactly the following without any additional context:

*   Build an emergency fund to cover a few months expenses
*   Invest in your employer's 401(k) up to the matching amount.  Buy whatever stock index fund they offer.
*   Pay off all of your debt unless the interest rate is very low, e.g. 3-4%.
*   Go to vanguard.com and open a taxable brokerage account.
*   Deposit $X each month.
*   Use that money to buy VFIFX.
*   Never look at stock market indicators and ignore all stock news.
*   Retire once the calculators say your account balance is high enough.
*   Sell as needed for money during retirement, keeping your expenses the same modulo inflation.

By doing so, you'd primarily be missing out on the advantages of using more retirement accounts (which help your money grow faster) and optimizing your index fund portfolio.

Note that this whole section takes what is called a "passive view" on investing.  The alternative "active view" is where you dive deep on trying evaluate various assets and predict their market behavior on shorter terms than "when I retire".

Even among professional investors, most people who take an active view end up making much less than they would with an index fund.  Most of us are not at the level of professional investors, so should expect to do even worse.  All of your friends who report making good money actively buying and selling are either 1. selectively reporting, 2. lying, or 3. got temporarily lucky, but are just as likely to get unlucky in the future.  If you feel the need to be included in such games, set aside at max 5% of your monthly investment deposits for this purpose and put the other 95% into index funds.  Never sell your index funds to buy into the latest investment fad.

You can "leverage" a passive indexing approach using various financial products, and the math on this might be better than just buying index funds directly, but this is definitely straying from No Nonsense to Reasonably Large Amounts of Nonsense, so I wouldn't recommend it for most people.  See [this comment thread](https://www.lesswrong.com/posts/ttXGrquvXgouawHEq/a-no-nonsense-guide-to-early-retirement?commentId=S6ZFwiJAdHfHe8JeW) for some links and context.

1\. Emergency funds
-------------------

Your first investment priority should be taking care of your basic needs.  Have you eaten today?  Did you stay up all night writing an early retirement guide?

Your second investment priority should be building an emergency fund that you keep set aside for urgent and unexpected situations.  Having an emergency fund improves your well-being by giving you leverage and letting you get through life events with minimal disruption.  For example:

*   If your car dies, you can take Uber or rent a car.
*   If your roommate is late on rent, you can cover for them instead of being evicted.
*   If your fridge dies, you can replace your fridge and then buy new food.
*   Etc.

You should keep your emergency fund somewhere safe like a savings account, **not** in the stock market.

There's debate over how big your emergency fund should be given your situation. Here's a concrete recommendation that you can adjust to your comfort level:

*   First, save enough to cover 1-2 months worth of expenses.
*   Then, pay off any crazy interest rate debt (payday loans, credit cards).
*   Then, save enough to cover 6-12 months of expenses.  This gives you time to find a new job if you lose your current one.
*   Finally, put your excess into paying off other debt or buying investments.

Make sure you save for your **actual** expenses, not your **budgeted** ones.  Look at bank statements as discussed in the "Spending less" section to know how much you're actually spending.

Although investments will provide you with additional cushion (you can sell them in an emergency), you should plan to not sell investments until you really need them since any gains you've made on the investment will incur tax when you sell.

2\. Debt
--------

Debt is an anti-investment with a guaranteed negative return (its interest rate).  For this reason, it's basically always a bad idea to go into debt just to buy consumption goods.  Treat any purchase that comes with a monthly payment as extremely suspect.  Buy consumption goods (including cars) up front whenever possible, so you can't hide their true cost from yourself.  You may sometimes need to go into debt temporarily to survive; if so, work on escaping that situation as quickly as possible.  The other techniques in this guide might help.

Debt can be a good idea when it's used to finance creation of future value; for instance, taking out student loans which allow you to get a valuable degree that doubles your expected lifetime earnings.  Just be careful; if you misjudge the value of what you're buying, you might end up worse off. 

Mortgages and houses are a complicated topic that I've not researched much.  My current opinion is that having a mortgage is probably slightly better than renting in expected value, but riskier (your property might decline in value) and with much higher transaction costs for moving.  Those transaction costs lock you into a geographic location, which reduces some opportunities for making more money or reducing spending.  Think carefully before locking in.

If the interest rate is small enough, investing money in index funds can be better in the long run than paying off debt.  For instance, say you have a 3% mortgage and you think the expected yearly gain from an index fund is 10%; then you could make 7% a year by investing instead of paying off your mortgage.  You could even try to borrow more money at a low interest rate in order to invest it.

The catch is that interest rates are certain and index fund gains are not.  You take the risk that your investment does not pay off in any given year, which can be psychologically difficult when combined with debt.  Debt also increases your baseline expenses through minimum payments -- this could put you in a worse short-term situation if you lose your job at the same time as your investments decrease in value.  Still, if you think the markets will go up on average over time and you can cover the minimum payments, you should win out in the long run if the interest rate is low enough.   I would personally not do this with an interest rate over 4% unless I had a ton of other assets to cover me in case of a downturn or unemployment.

Make sure you have enough money to cover expenses before paying off debt.  Having debt paid off is no good if you can't pay rent.

3\. Retirement accounts
-----------------------

This is the most complicated part, because tax law is dumb.  This part is also entirely U.S. focused -- I'm sure other countries have their own dumbnesses, but I don't have knowledge of them.

Retirement accounts are accounts with money in them that you can use to buy investments like index funds.  You either open them yourself or have them opened by an employer.  You put money into them manually or through automatic paycheck deposits.  A non-retirement account for buying investments is usually called a "brokerage" or "taxable" account.  Retirement accounts have various tax benefits over non-retirement accounts, so are often called "tax-advantaged" accounts.  You generally make more money long-term by investing in retirement accounts, but they also come with various limitations.

I'm going to talk about 3 specialized retirement account types which are all that 90% of people should need to touch: traditional and Roth 401(k)s,  traditional and Roth IRAs, and HSAs. There's a few others floating around (like Solo 401(k)s and 403(b)s), but they work on a lot of the same principles anyways.

IRAs are accounts opened personally by you at some provider.  I recommend [vanguard.com](http://vanguard.com).  They're pretty straight-forward to use: you put money in and then select investments to buy.  The only catch to IRAs is you can't contribute to them if your income is too high.

401(k)s are opened by an employer, but you own the money in them.  Employers will often offer a "matching percentage", where they'll give you free money in exchange for investing in your 401(k) -- this is usually an awesome deal that you should definitely take.  Unfortunately, sometimes employers use bad providers with bad asset options and bad websites, so you have to find the best option you can among what's on offer.  I'll talk more about this in the section on index funds below.  You can eventually "rollover" a 401(k) into an IRA at the provider of your choice, usually after you've left the employer.

HSAs are only kind of retirement accounts, with their nominal purpose being to give you tax benefits on medical spending.  They can be opened by either you or your employer, although you pay less taxes if your employer deposits money directly into the HSA from your paycheck, so you should have them do that. You can only deposit into an HSA if you have a High-Deductible Health Plan (HDHP).  You can withdraw from an HSA at any time to pay for "qualified medical expenses", or you can hold the HSA until age 65, at which point it works mostly like a traditional IRA (see below).  Some HSAs are basically savings accounts with no investment opportunities; some others will let you buy things like index funds.  HSA's are not to be confused with FSA's, which as far as I can tell are really dumb and will eat your money.

All retirement accounts have limits on how much you can put into them per year.  Having multiple accounts at different institutions does not increase the limit; it's a total limit across all accounts. For instance, for 2021 you can contribute a maximum of $6000 to IRAs, or $7000 if you're age 50+.

If you withdraw money from an account before a certain age, you'll have to pay a penalty on your taxes.  The age rules differ for every account type, but the cutoff is always in the 55 to 65 range.  **I'll just say "retirement age" to refer to these cutoffs.**  The penalty has either one or two parts:

*   You'll always be taxed a flat percentage of what you withdraw; 20% for HSAs and 10% for most other accounts.
*   You might additionally owe regular taxes on some of the money withdrawn, even though you wouldn't owe taxes for an "authorized" withdrawal.

There are some important exceptions to the penalty rules, which we'll discuss shortly.  Those exceptions play a major role for early retirees who want to withdraw money before retirement age.

You'll notice the words "traditional" and "Roth" used above; these refer to two types of tax advantages.  The short summary:

*   Contributions to traditional accounts are tax free in the present (you get a deduction for what you contribute); you pay taxes when you withdraw money after retirement age.
*   Contributions to Roth accounts are taxed in the present (no deduction, you contribute with post-tax income), but then you can withdraw tax-free after retirement age.
*   With both versions, activity within the account isn't taxed; you can buy and sell different assets or receive dividends with no tax consequences.

Compare to a taxable brokerage account: you're taxed in the present (no deduction, you invest with post-tax income), and you also pay taxes on sales and dividends.  Taxes on dividends will drag down your returns somewhat, and even if you only buy once and sell once you'll still have to pay 0% to 20% in long-term capital gains tax that you wouldn't pay in a Roth IRA.  If you buy and sell more often then you'll drag down returns even more, since any gains you realize will be taxed and that tax money can no longer be kept invested.

You get to choose whether to invest in traditional or Roth accounts; you can mix and match however you want.  Which of the two options is better is kind of complicated -- here's an article with more details: [https://www.reddit.com/r/personalfinance/wiki/rothortraditional](https://www.reddit.com/r/personalfinance/wiki/rothortraditional).  The short answer:

*   If your tax bracket / income is low right now, you should probably do Roth.
*   If your tax bracket / income is high right now, you should probably do traditional.
*   If it's in between, there's pros and cons but probably either is fine.  I lean toward Roth.

Back to those penalty exceptions -- there's two big ones:

*   The principal amount you invest in a Roth IRA can be withdrawn at any time, penalty and tax free.  This is the main reason I would lean Roth for middle tax brackets -- extra liquidity is very good for the nerves.  You can also access the principal of a Roth 401(k), but first you need to roll it over into a Roth IRA.  Most service providers allow such rollovers while you're still employed, but supposedly a few do not -- thus you might not be allowed to do this unless you quit your job.
*   You can convert funds from a traditional IRA to a Roth IRA at any time, pay taxes on the conversion amount, and then withdraw that money penalty and tax free after waiting at least 5 (tax) years.  You can also do this with a 401(k), but you have to roll it over -- again, there's a small chance you might need to quit your job to do this.

Combined, these two exceptions let you access a good chunk of retirement account assets early without penalties: Roth principal whenever you want, and traditional principal+earnings if you can plan it 5 years in advance.  Roth earnings, unfortunately, are stuck until retirement age, as are HSA principal and earnings for every purpose besides qualified medical expenses.

**(EDIT: An important point I left out here -- the official record of your Roth IRA principal lives on tax form 5498 that your brokerage will send you or allow you to download each year.  As far as I understand, officially you need to keep these forms until age 59.5 to justify any early withdrawals to the IRS.  Brokerages tend to delete these forms after a few years, and they don't separately track a "contribution" or "conversion" number attached to the account.  I found this out the hard way when I transferred my Roth IRA between brokerages, my transaction history was deleted, and no one from either brokerage could tell me my contribution or conversion basis.)**

Since you can convert from traditional to Roth whenever you want, you can control what year you pay conversion taxes in.  This means you can pick a year when you have low income (say, during an early retirement), and fill up your deductible and lower tax brackets with conversion money.  Think of your deductible and lower tax brackets as a resource which expires every year; traditional to Roth conversions let you make use of that resource whenever it makes sense.  This leads to a tactic called a "Roth Conversion Ladder", where each year you convert just enough to cover predicted expenses 5 years hence.

If you have money in taxable accounts, you should usually withdraw that first before hitting your tax-advantaged accounts, since money in tax-advantaged accounts grows faster.

That's a lot of info; I'll summarize my recommendations on how to use retirement accounts in the section below on "Putting it all together".

4\. Index funds
---------------

An index fund is a pool of money that someone invests in a bunch of different assets, with the goal of having returns match an "index" of some kind.  Usually that index measures the total value of some big market.  Index funds are generally really good at tracking their indices -- they just buy up a proportional share of everything in the indexed market.  Because this is a really easy strategy to execute, they're cheap to run.  Plenty of providers will let you buy into their index funds, and thus you as a tiny investor can easily get an investment return that tracks the total value of a huge market.  Providers will usually charge a fee, and the smaller this fee is, the better.  I recommend vanguard.com; their ownership structure is designed to incentivize small fees.

I am not going to do justice to the theory behind index funds, so here's the short and probably misleading version of why they're such a good idea:

*   The performance of an individual stock is really hard to predict, even in the long-term.
*   The total value of the entire stock market is much easier to predict in the long-term -- or at least it looks that way based on historical data.  Inflation-adjusted, it seems to go up about 4-10% annualized over long enough time periods.
*   This fact is related to a math thing, where diversification (having lots of somewhat different assets) reduces risk without hurting returns.

Basically, picking individual stocks is a suckers game and no one is any good at it -- though lots of people pretend to be.  On average stocks are good, but any individual stock is an unpredictable rollercoaster that might eventually go bankrupt.  But if you pick ALL the stocks, things smooth out into a blissful upward rise -- at least, historically they do over investment time frames of 20+ years

The observation about diversification being good applies to basically any type of asset, not just stocks.  The most popular assets besides stocks are "bonds", and of course there's index funds for them too.  Bonds are (on average) a lower-risk, lower-return asset than stocks.  The main way people manage risk-reward tradeoff in a portfolio is to mess with the proportion of stocks vs bonds.  More stocks give higher risk, but also higher average return over the long-term.

So that's all good, but which index funds should you buy?  If you're on Vanguard:

*   "Target Retirement Funds" such as [VFIFX](https://investor.vanguard.com/mutual-funds/profile/VFIFX) are one-stop shops that are hard to screw up.  These funds hold a couple of other big stock and bond index funds, and automatically shift to fewer stocks/more bonds over time as you approach their target retirement date.  VFIFX targets a 2050 retirement so currently has a more aggressive 90/10 stock/bond portfolio, but there are funds available for every 5 year increment. [VTTVX](https://investor.vanguard.com/mutual-funds/profile/VTTVX) targets 2025 and has a more conservative 60/40 ratio.
*   You could buy VTWAX (total world stock market) for a one fund stock-only portfolio.  Lots of people would advise against having no bonds, however.
*   If you want to roll your own allocation, you could buy some mixture of VTSAX (US stock), VTIAX (International stock), VBTLX (US bonds), and VTABX (International bonds).  You could start with the mix from a Target Retirement Fund and go from there -- details are available on the fund pages.  If you do this, you might need to occasionally "rebalance" to maintain your target percentages as some investments grow more quickly than others.
*   You could read countless arguments online about exactly what you should do, and then do whatever.  As long as your strategy is "buy X% of some stock index funds and (100 - X)% of some bond index funds" it's probably sane, although IMO X should be at least 50.

If you're not on Vanguard, I recommend first figuring out what you'd do if you were on Vanguard, then finding the nearest equivalent on your provider.  Vanguard is so popular that many online conversations are phrased in terms of its funds.  Your 401(k) is probably not on Vanguard, but many 401(k)s now offer at least some Vanguard options anyways.  If not, look for terms like "S&P 500", "total US stock market", and "US large cap" -- these will all track relatively large stock market indices.  You can Google to learn more about the distinctions if you want to optimize, and you can use your IRA or taxable accounts to help balance out the poor selection in your 401(k).

5\. Don't screw up
------------------

**Don't sell assets when the market crashes.**  Stock markets have always recovered after crashes, and then some.  If you sell after a crash, the main thing you're likely to accomplish is missing out on the eventual recovery -- even if more crashing happens in the meantime!  There will never be a clear signal of when you should buy back in, so when you do buy back in, it will only be after you've seen that the market has already substantially recovered. You'll have missed out on that recovery.  Just buy investments and then don't touch them.  Market crashes mean things are selling at a discount, which is great for you in the long-term!  Keep steadily buying with your paychecks!  Ignore market performance!  The road to inner peace is to just admit that in the short-term you have absolutely no idea what the market will do and when it will do it.  Just steadily invest and ignore short-term results.  **This is the most important point in all of investing.  You are actually better off not investing at all ever if you end up selling during crashes.**

The paragraph above exists because humans instinctually want to sell their assets during crashes.  Note this about yourself and take precautions.  You might try buying a few shares in some volatile stock for a fixed period of time -- not enough to mess up your plans, but enough that a loss will hurt a bit.  Just see how it feels when the value goes down substantially.  Practice monitoring it daily, but only selling after the designated time period has passed.

If given all of the above you still predict that you're likely to sell if the market crashes, try moving to a less risky investment allocation NOW before the market crashes.  For instance, put a larger percent of your investments in VBTLX (total US bond market) or VFITX (intermediate duration treasuries).  The maximally safe place to keep your money would be VMFXX, or even better a savings account at your bank.  If you don't take any risk with your money, however, you won't get much reward.  VFIFX has returned ~10% per year over the last 10 years, wheras VBTLX has returned ~4% and VMFXX has returned ~0.5%.  Not having enough money to achieve what you want in the future is its own risk.

A less obvious way to mess up is to buy too much of the wrong assets.  If you really want to buy an asset that's not a stock or bond index fund, then just be careful not to buy too much of it.  I'll talk about four that seem to be popular: gold, other investment products, houses, and cryptocurrency.

Looking at historical returns, gold is just not a very good investment for its risk level -- the same applies to its cousin silver.  I think there's some trend around buying gold related to fear of hyper-inflation/market collapse.  I've not read anything that convinces me it's a good idea; if you're convinced, just keep the amount you buy relatively small.

"Other investment products" is a big category, but some common ones: specific stocks, ETFs that don't track a large market index, actively managed mutual funds, various commodities, annuities, futures, option contracts, and whole life insurance.  I'm pretty sure that 99% of everyone would be better off never buying any of these.  But if you do, just don't buy very much of them.

I mentioned houses when I talked about debt.  But debt is not the primary reason I think houses are dangerous.  Houses are dangerous because people tend to buy too much house.  Even with a paid off mortgage, money you have invested in a house is money that's not invested in the stock market.  You could own a $500k house and pay 5k/year on repairs and $5k/year on property taxes -- or, you could own $500k in index funds and safely withdraw $20k/year.  That -$10k to +$20k spread is money you could use to pay up to $2.5k/month of rent.  That seems pretty reasonable -- until you step back and wonder whether you should be paying effectively $2.5k/month rent in the first place.  Downgrading to a smaller apartment that costs $1k/month in rent would lower your necessary retirement investment by $450k, saving you potentially many years of your life.  But moving from a $500k house to a $1k/month apartment can become too big of a psychological leap for people to even consider.  So if you're going to buy a house, I think you should try hard to buy a small/cheap one until you've achieved all of your other financial goals.

I have no idea what the hell is going on with cryptocurrency and it has consistently surprised me, so I think it's completely sane to buy some cryptocurrency.  As of this writing, cryptocurrency has a market cap of ~$1.6 trillion, with ~$1 trillion of that being Bitcoin.  The total market cap of all stocks is ~$100 trillion, so overall investors are putting ~1% as much into Bitcoin as into stocks.  So far, cryptocurrency has been extremely high risk and high return as an asset class.   If you have a higher risk vs reward preference profile than the average investor, I can imagine going up to 5-10% crypto investment.  However, I don't think anyone really knows what's going to happen with crypto -- it may be a speculative bubble.

In all of these cases, I think it's ok to make a mistake and buy the wrong thing, or to take a risky gamble that doesn't pay off -- as long as that thing is only a small portion of your investment portfolio!  You'll be totally fine whichever way the gamble lands if you use 10% of your disposable paycheck for a few months to buy Dogecoin.  But if you sell everything to buy into a fad, and then the fad crashes, it will suck.  Be ok with getting rich slowly.

Putting it all together
-----------------------

Given all of the above, here's my detailed recommendations on how to invest:

*   Save an emergency fund of 1-2 months of expenses in a savings account.
*   Contribute to your employer's 401(k), but only up to the matching amount.  E.g. if they match half up to 6% of your salary, then contribute 6% of your salary.  Use contributions to buy your choice of index funds.  Default to just buying VFIFX if available.
*   Pay off high payday loans/credit cards/other crazy debt.
*   Increase your emergency fund to 6-12 months of expenses.
*   Pay off other debt (unless its interest rate is ~3% or less).
*   Put aside any money for large expected purchases (school, car, etc) in a savings account.
*   Max out your HSA if you have one.  Buy your choice of index funds if it has that option.  Default to just buying VFIFX if available.
*   If your income is low enough to be allowed to contribute, max out your traditional or Roth IRA.  Pick traditional if you're high tax-bracket, Roth if you're low tax-bracket.  Open one on Vanguard.com if you don't have one.  Use it to buy your choice of index funds.  Default to just buying VFIFX.
*   Finish maxing out your 401(k).
*   Open a taxable brokerage account on Vanguard.  Dump the rest of your investment money in here.  Buy your choice of index funds.  Default to just buying VFIFX.
*   Never look at stock market indicators and ignore all stock news.  In principle, look at your total portfolio value every 6 months or so to check whether you have enough to retire.  Never click the sell button.
*   Retire once you have enough.
    *   Start converting some traditional funds to Roth if you'll need the money 5 years from now or have space in lower tax brackets due to low income.
    *   Sell and withdraw as needed, starting with your taxable accounts.
    *   Keep your expenses the same modulo inflation.
    *   Do whatever you want!  Keep some level of professional activity / money-making to further reduce your risk.

Here's another great flowchart that I mostly agree with, with more detail in certain areas: [https://u.cubeupload.com/demonlesondledon/FIREFlowChart.png](https://u.cubeupload.com/demonlesondledon/FIREFlowChart.png).

Conclusion
----------

In its ideal form, this guide should become an extremely boring set of procedures and habits that you execute in the background of your life, taking up roughly 0.1% of your attention.  Then as a consequence, at some magical future date far in advance of what it should be, you are freed forever from basic financial concerns.  A boring set of procedures and habits that can grant you additional decades of freedom and autonomy strikes me as a surprisingly beautiful artifact.  I'm not sure if this guide will live up to that ideal for anyone reading, but I hope it helps and makes your future just a little brighter.