Want to retire before 65? It takes planning—and investing. Here’s how to invest to retire early.

Early or late retirement might seem like a subjective evaluation of your age, but it’s actually based on guidelines set by government agencies. In the U.S., early retirement is before the age of 65—that’s when Medicare kicks in.

And while you may think of early retirement as the opposite of work (that’s kind of the whole point, isn’t it?) the reality is that early retirement requires quite a lot of work. Even more than retiring at the traditional retirement age.

It is possible—if you know how to invest to retire early. After all, you earn income from one of two places: your salary and your investment gains. Here’s how to make your money work harder so that you can quit work earlier.

What You Need to Retire Early

First, you have to understand that early retirement is work. A lot of work. And if you hope to retire in your 50s, 40s, or even earlier, you need to be as strategic as possible—and you need strong resolve.

Basically, in order to retire early, you must have sufficient assets socked away to provide an adequate standard of living without working. But unlike other retirees, you need to accumulate those assets a decade or two earlier, which in turn means you need them to last a decade or two longer. This is why many people continue to work as long as they can—every year they work is one less year they have to live on savings.

The best way to calculate this is to calculate what you need to pay your expenses for a year and multiply by the number of years you expect to live. Here’s a hint: unless you’re already in frail health, round up. Many people dramatically underestimate how much they’ll need to cover a 35- or 45-year retirement. Basically, you need 35 to 45 times your annual salary.

How to Invest to Retire Early

If that number sounds startling, that’s because you’ll never be able to save up enough if you’re just stowing money in a savings account. You have to make your money grow.

Here are a few strategies to get there.

Get a Flexible Retirement Plan

First, you need a flexible retirement plan. Some retirement accounts charge a 10% penalty for every withdrawal before the age of 59.5.

If you hope to retire early, your best bet is a Roth IRA, a type of individual retirement account that allows you to contribute after-tax dollars. Your contributions and investments can grow tax-free—and you can withdraw them anytime without penalties. However, there’s still a fee on any withdrawals made before age 59.5.

Keep in mind that you have to earn less than $118,000 per year to contribute to a Roth. If that’s not your situation, use a combination of a 401(k) and an IRA. A traditional IRA still charges penalties for early withdrawals, but there are ways to avoid them, and either way, you can withdraw penalty-free after the magic number 59.5.

Invest to Achieve Growth

Since you have less time to achieve growth, you need as much growth as you can manage. Traditionally, the advice is the opposite—the closer you are to retirement, the more conservative you should be. However, that advice relies on the notion that you’ve already spent decades saving and can’t afford to lose capital. That’s not true if you retire early, which means investment returns are critical.

In terms of stocks, your best bet is low-cost, high-performing index funds. An index fund is a type of mutual fund or exchange-traded fund structured to match components of a financial market index. When you invest in one, you invest in every company that’s part of the fund—the Standard & Poor 500  Index, for example, is an index of the 500 largest publicly traded companies in the U.S.

Regardless of how you invest, your portfolio should be tilted primarily toward stocks for as long as you can swallow the risk.

Do Your Homework and Diversify

From there, you have to do your homework and diversify. After all, as 2020 proved, the market can crash out of the blue. And if you’re hoping for early retirement, you need to protect your portfolio against these crashes as much as you can without limiting growth.

Your best bet on that front is to think beyond stocks. Alternative investments (anything that isn’t a stock, bond, or cash) are a good example of where to turn—they have low correlation to the market and work well as a hedge against inflation. Depending on what you invest in, some of them (like real estate) can generate income over time.

As with conventional assets, diversification is the name of the game with alternatives. That way, even if one investment is a bad bet, you can still see growth in other areas.

Invest for the Future You Want

Figuring out how to invest to retire early isn’t for the faint of heart. But with the right assets, the right strategies, and the right mindset, it’s possible.

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