How to retire early? It is a question most of us ponder at some point in life. After all, who wants to put in the 9-5 for decades and decades together. Here are 5 golden tips that if followed ardently, will without a doubt help you retire early.
How can I retire early?
Assume a 10% haircut on all future paychecks!
Saving just $100 a month for 30 years and investing it in a retirement fund that has exposure to equities can give you almost $150,000 at retirement (assuming 8% market return a year). $150,000 is more than what 90% of Americans have saved up for retirement, at age 65 nonetheless!
The sad truth however is that what-could-have-been calculations like these dawn on people only when it too late. If you are still young and have 40, 30, 20, 10 or even just 5 years to save for retirement, start saving and start saving exclusively for retirement.
One of the best ways to do that would be to make an self-sacrificing assumption that all your future paychecks receive a 10% haircut. If you earn $1,000 a month (just for example sake), assume that your income is just $900. When you do that, you will plan your life according to the $900 that you make rather than the $1,000 you actually get in your hands. It takes discipline and a lot of self-control to not dip into retirement savings but it is something you just have to absolutely do if you want to retire early. Signing up for an automatic debit saving program is one way to enforce such a saving method.
Something has to give when it comes to retiring early and this is one aspect that just can’t be compromised upon.
Stay debt averse
If you want to retire early, you must at least be debt averse even if you are not completely debt free. You must want to bring down your debt balances to zero. You must have a penchant to do so.
Now, it is obviously difficult to suddenly become debt-free, like if you have a mortgage that is locked in for several years. But then, you must try to focus on avoiding debt on purchases that have quickly depreciating value. A mortgage is good kind of debt as your home appreciates over time, ideally at least. With most mortgages, there will hopefully come a time when the home’s value and all the money saved on rentals is higher than all the principal and interest payments you have made on that mortgage, thereby making sense as an investment.
The same can’t be said of a purchase on a car. A car loses 10% of its market value as soon as you drive it out of the showroom, even before it clocks its first mile! Where is the sense in paying an appreciating cost for such an asset. It actually makes no sense whatsoever, particularly when you have plans or at least a desire to retire early!
Pare down whatever debt you have, at a faster rate than normal if possible and be very careful about taking on new debt. If you have to take it on, try to ascertain if such debt will pay you returns. A student loan for example might pay you back handsomely if you can manage to land a lucrative job. You must weigh the pros and cons before signing on the dotted line of any debt agreement.
Make practical personal choices
Do you want to retire early but also want to have a family and kids. They are not very complementing desires. Marrying, having kids and running a family needs a large income, with often very little left for savings. Unless you have a business idea that is already working, with an upward earnings trend or a career with huge potential for growth, it just might not be possible for you to retire early and also provide for your family.
Many Americans make practical life choices where they remain unmarried and without kids, so they can retire early. Even having one kid instead of two can have a profound effect on how you save up for retirement and how much you have left over to call it a day. Individually retiring early is also a lot less cheaper than retiring with a family or even with just a partner for that matter, unless that partner has a similar early-retirement plan savings like you.
Your choices when it comes to the type of lifestyle choices you have will also decide whether you can retire early or not. For example, if you are someone who loves driving a new car, living in a big home, travelling and enjoying life to the fullest, you are going to feel empty if you retire without being able to do all that.
So, when you say you want to retire early, you must also think about how you want to live when you retire early and then try to figure out what you need to do to make that happen.
Read this couple’s story about how they saved up $1 Million and retired in their 30’s, in another country. It is not a glamorous story like you might think it is. They actually made big sacrifices like sleeping in their car to save up all that money! Now, at just 30 years of age, they have enough money to retire, albeit live a very simple retirement life by the beach, in a foreign country!
Take advantage of 401k employer contributions
If your company offers you a 401k plan, while also matching contributions on the same, it would be downright foolish to pass up on such an investment. Some employers match as much as 100% of your own 401k contribution. Some even do more.
In fact, ConocoPhilips offers a 900% match of your 401k contribution, matching a contribution of yours that equals 1% of your paycheck! Boeing, Amgen, Citigroup and McDonald’s are other companies that offer great 401k benefits.
Event at a 50% match, your employer is contributing 50 cents for every dollar that you want to save for your retirement. You just can’t go wrong with that formula. Learn more about 401k and get an investment open if you haven’t done so already. If you already have a 401k going, try to maximize contributions to also maximize employer contributions.
Don’t procrastinate retirement saving
When we are young, it is natural for us to look forward to a full life. We are not particularly worried about how we will be when we are older. But then, the years roll on by quickly and it is often too late when you begin to understand the importance of saving up for retirement. Remember, retirement is a difficult financial phase in your life as your income is quite limited, while there are many unexpected cost avenues that could open up. Healthcare, assisted living and dependents who will rely on you to get through their retirement are all large expense heads, expenses that need planning if they are going to be met.
If you are still not convinced about saving up for retirement yet, at least put aside a token amount every month, even just $20, just to get into the habit of retirement saving. After a few months, you will slowly see the prudence to invest more and more and might actually look forward to it, as fiscal discipline brings out a more money savvy side of you.
Please also read other Money Looms retirement posts to get more ideas about how you can fine tune or just get your retirement saving going.