Early Retirement: How to Retire Early and Tips to Save, Invest, and Eliminate Debt
Many people start to look forward to retirement shortly after their college graduation. In the American lexicon, retirement is the well-deserved “me time” in a person’s life after decades of hard work. We all hope to retire and pursue and personal goals and dreams at a certain point in our lives.
However, retirement has become more elusive in recent years. Harsh economic conditions, and unclear expectations about saving for retirement, have caused concern for many in the American workforce. For some, the recent hullabaloo has been a wakeup call that it’s time to start saving, no matter how late you start. However, a select few individuals are ready to make the push to secure enough wealth for an early retirement.
Early retirement is the ultimate way to exit the workforce. Those who are skilled and disciplined enough to pull it off can enjoy rest and relaxation during their golden years. Are you one of those people? Let’s find out about the makings of retiring early.
Table of Contents
- 1 Know How Much You’ll Need In Retirement
- 2 Save More Money and Invest Strategically for Retirement
- 3 Pay Off Your Debts
- 4 Manage Your Credit Wisely
- 5 Is Early Retirement Really Worth It?
Know How Much You’ll Need In Retirement
Whether you’ve been working hard to make your money, or had a streak of good luck like winning the lottery, having a ton of money isn’t enough to allow you simply retire early. Unless you want to go back to work when your 70 because you ran out of money, you need to know and plan out exactly how much money you’ll need to stay retired.
The average retiree survives off of $30,000 to $45,000 a year, with about $16,000 of that income coming from Social Security. if you are going to retire early and looking to live a typical retiree lifestyle, you need to make sure you have enough money to cover that average cost of living every year for the rest of your life.
Estimate Your Retirement Income Needs
Maybe you don’t want to live the average retiree lifestyle, because there are expenses you aren’t willing to give up. This means that you need to calculate how much income you’ll need per month, and in turn, how much money you need in whole to supply that income.
Start with recurring expenses you’ll have, including: mortgages, regular bills, paying for insurance, and enough money to survive on. Then, add on what luxuries you want to enjoy during your retirement. These can include travel expenses, regularly eating out, supporting expensive hobbies, and extra money for when unforeseen expenses arise. Don’t forget to incorporate healthcare expenses for later in life, as most people in retirement have some sort of medical bills and/or debt.
Plan for Inflation and Taxes
The cost of living is consistently going up, and you need to account for that (plus taxes) when planning out your retirement.
You need to figure out what taxes you will owe every year. If you’ve put money away into a Roth IRA or 401(k), then you won’t need to pay income tax on that money, but if not, it’s likely you’ll need to pay it. Include other taxes too, like property taxes and capital gains taxes.
Adjust Your Lifestyle to Maximize Savings and Reduce Spending
When planning out your early retirement, you might find that, while you’re sitting on a good size chunk of money, it won’t be enough to fund your current lifestyle. Most retirees have to cut back extensively on their expenses in order to have enough money.
Retiring early probably means you, too, will need to cut back on your spending, and try to get the most out of your savings. The longer you can leave the majority of money in your savings and retirement accounts, the more money you can have later. By drastically reducing your spending, you will find it easier to stay within your budget in the future.
Save More Money and Invest Strategically for Retirement
If you are wanting to retire early, especially if you are nowhere near the standard retirement age, you need to make plans to ensure you’ll have money in your later years. That might mean making some financial sacrifices now, and putting the extra money into sound savings and investments.
Diversifying your investments is a smart way to ensure you have multiple income sources in the future. This way, your money can continue to grow, meaning a smoother retirement for you.
Consult a Financial Advisor
If the world of investments is a bit confusing and too large to understand, consider meeting with a financial advisor. It’s money well spent, especially if you want to retire early. They can guide you on what kinds of investments to make, how to pay the least amount of taxes both now and in the future, and provide insights on making money you won’t normally have.
Pay Off Your Debts
Ongoing debt is undoubtedly one of the biggest hurdles for anyone looking to retire. As long as you have outstanding debt, you need a job to make money and pay it off. It is practically impossible to retire early if you are still in debt. If you’re at the age where early retirement is starting to seem like an option, the sort of debts that are likely affecting you are your home mortgage and possibly leftover student loan debt. Paying these off should be your first priority, in case you haven’t already.
Extra debts are just an extra burden on your smaller retirement monthly income that could make it even harder to live. Pay them off as quickly as you can before you retire early.
Manage Your Credit Wisely
When you retire, one of your most powerful financial tools is your credit. While on a fixed monthly income, there isn’t a lot of wiggle room, unless you have tons of extra cash in your savings.
In unexpected situations (like if a car breaks down, a bathroom floods, etc.), your credit can be a huge help. You can afford to make small regular payments when you couldn’t buy it outright at the start. Make sure your credit score is strong and your credit report is clean.
Is Early Retirement Really Worth It?
While the idea of hanging up your working hat early sounds nice, it might not be what’s best for you in the long run. If you work more now, save up that money, and retire in the future, that can mean a more luxurious retirement. Instead of having to live month to month, worrying that single unexpected expense could ruin you, work a bit longer and grow your retirement funds.
Waiting to retire also gives your retirement accounts more time to grow along with regular contributions from you. The more money in the accounts, the faster they grow, meaning more money at the end.
If you’ve decided though that retiring early is the way for you, then remember to do it strategically. Plan out how you are going to fund your life and make sure you have enough money to cover the rest of your years.
Image Source: https://pixabay.com/
Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated February 28, 2019. It was originally published July 31, 2017.