Retiring early is a dream held by many, but few people understand what it takes to make it happen. Even worse, many people don’t realize how much money they’ll need to retire early, so they hold out hope when their chances are slim.
Still, it’s important to note that early retirement is absolutely achievable. With a commitment to saving a large percentage of your income and a willingness to sacrifice in order to get there, you could turn your dreams of early retirement into reality. But, how can you make it happen. And, how much money will you need?
How Much Do You Need?
The amount of money you need to retire depends on your own specific circumstances. However, asking yourself a few questions early can make planning for early retirement easier. For example, how early do you want to retire? And how long do you plan to live? Do you have any debt? Do you have any plans for retirement, like traveling or wintering in a warm weather climate? These are all things you need to take into consideration before working up a plan that makes financial sense.
Planning to live on 80% of your preretirement income during your golden years is one of the most commonly cited rules of thumb. Of course, your number could be more or less, depending on what kind of lifestyle you hope to live during your retirement. If your plans include a lot of traveling, perhaps your number will be closer to 90%. However, if you’re already comfortable with living below your means, your number could be much, much lower.
Working with a financial planner is the best way to determine how much money you’ll need during retirement. Of course, there are plenty of online retirement calculators that can help you get a good estimate as well.
5 Steps You Must Take to Retire Early
Even though most companies no longer offer their employees a pension plan, retiring early can still be a viable option for you. It is, however, extremely important to take the proper steps well in advance if you want to make your early retirement dream a reality. Regardless of whether you want to retire at 55 or 35, here are 5 things you’ll need to do in order get there.
1) Save Early, Save Often
If you’re planning on retiring early, you are going to need to start saving…well…yesterday. The earlier you start, the better your chances will be of retiring early. Not only will you accumulate money more quickly, you’ll also be able to take advantage of compounding interest far ahead of the rest of your peers. For example, if you save $100 a month in an index fund that brings in 10 percent annually, you’ll have a little over $225,000 saved in 30 years. If you wait just 5 years longer, you’ll gain another 66%, or about $155,000. Do that when you’re 20, and it can help you retire at 55. Do it at 30, and you’ll have to wait until 65 to see that type of return.
Obviously, how much you save and when you start will have a direct effect on whether or not you’ll be able to retire early. Save as much as you can, as often as you can, even if it is only 20 bucks. The more you save, the more you’ll have…and the sooner you can tell your boss “buh-bye.”
2) Increase Your Income
The best way to save more money is to make more money. Your income is the most effective wealth building tool that you have, so it only makes sense to try and make more. Provided you don’t fall into the trap of lifestyle inflation, making more money can help you retire much earlier than you probably realize.
That sounds great in theory, but you can’t just make more money by wishing it to be true. One way to increase your earning potential is to learn a new skill or obtain a new credential. Of course, starting your own side hustle is another great option. And, if all else fails, do great work at the job you already have…then ASK for a raise. Provide your boss with proof that you are worth it. The worst they can say is no!
3) Live (Well) Below Your Means
Learning to live below your means is a great way to stretch the dollars you already earn. By living below your means, you’ll be able to invest more money, accumulate wealth more quickly, and prepare yourself to live within a budget during your retirement years. When it comes to living below your means, there aren’t really any drawbacks.
However, if you’re going to retire early, you need to do better than just living within the confines of your paycheck. In other words, living off of 95% of your income just isn’t going to cut it. You need to live well below your means, perhaps spending only 50-60% of what you make. Look for ways to eliminate expenses like cutting cable TV or switching to a discount cell phone plan. If you can learn to live well below your salary now, you’ll be well suited to live far below what you need in retirement.
4) Eliminate Debt
If the best way to grow your wealth is to grow your income, the fastest way to destroy it is through debt. Owing money to other people is its own type of prison sentence. When you acquire debt, you’re forced to work longer and harder than you should just to pay the banker. Having money deducted right off the top of your monthly income makes it extremely difficult to save the kind of money you’ll need to get ahead, much less retire early.
If you are going to retire early, you absolutely can not be carrying around a pile of debt. To make your debts disappear, look for ways to eliminate your debt in a reasonable amount of time – and avoid taking on new debts. Don’t carry balances on your credit cards and refuse to finance items you can’t otherwise afford (like new cars). If you already have debt, pay it off as quickly as you can so you can put it behind you. Retiring at 55 is going to be a big stretch if you’re still making a $1,500 mortgage payment each month.
5) Save Until It Hurts
Saving 10% of your income is a great practice if you want to retire on time. But if your goal is to retire early, that 10% isn’t going to cut it. You’re going to have to start putting money away, and fast!
You might think saving 50% of your income seems ridiculous, even impossible. If you want to retire early, you should start shooting to save more than you ever thought imaginable…and you should do it right now. By saving early, increasing your income, living well below your means, and eliminating debt, you may just find that saving 50% of your income isn’t all that tough. Heck, even if you can save 30% of your income, you’ll be able to retire far ahead of the 10% crowd. By following the steps outlined above and making saving a priority, you’ll be handing in your retirement papers before you know it.
You Can Retire Early
Retiring early isn’t easy. It takes careful planning, a little sacrifice, and a lot of hard work. But just like anything else, if you want to get ahead, you are the only one who can make it happen. Stick with your plan, make the necessary sacrifices, and your dreams of early retirement can become a reality.