7 Early Retirement Tips
While fifty is the new forty and sixty is the new fifty, many Americans want to retire in their sixties, or earlier. The reality is that many people are living longer, making retirement more expensive; which is why it is more crucial than ever before to strategically plan finances if you want to retire younger.
The stock market has been climbing for the past nine years, with the S&P 500 indexmore than tripling since its 2009 low, making the early exit from the workplace a seemingly possibility. Take this opportunity to consider what an early retirement looks like for you — and whether it’s feasible.
Get empowered to retire early by laying the necessary groundwork to set you up for future retirement success. Here are seven early retirement tips to consider:
1. Get Organized
To buy yourself the freedom to retire early, you need to set yourself up for financial success. Here are the steps to getting organized.
What are your financial goals?
Whether you want to attend luncheons with friends, play golf, travel to exotic places or spend time with grandchildren in your retirement, it’s important you figure out your long-term financial goals. Creating a chart of your goals and assigning them a timeline will inform your investment strategy.
What is your retirement spend?
Projecting your discretionary and non-discretionary spend will help inform your retirement spend and what you need to do to save money for an early retirement.
What is your net worth?
Assessing your net worth is important when investing to determine how much money you have to invest or add to your retirement resources. You have to know your total assets and liabilities to calculate your net worth. A financial advisor can help you determine your net worth as well as help you strategize how to grow that worth through smart financial strategizing.
What is your cash flow?
Calculating your monthly cash flow will help you evaluate your present financial status and determine how much you available funds you have to invest. A financial advisorcan help you determine whether your cash flow is what it needs to be so that you can retire early.
2. Manage Your Debt
Managing your debt is important at any age, but it’s especially important as you approach 50 and beyond as these are the years when your savings and financial assets are needed to sustain your lifestyle as you consider retirement. The less money you put towards paying off outstanding debts and interest charges, the more you will have to save and invest for your future.
If you want to retire early, you need to make sure your investments have compound interest working in your favor to offset any debt.
3. Live Below Your Means
There’s a natural tendency to increase your spending as your earnings increase, but if you live below your means you’ll be able to save more efficiently for early retirement.
If you’re like most Americans, your biggest expense, and also your biggest opportunity to save, is your home. Housing costs take up a third of the average budget, according to the U.S. Bureau of Labor Statistics. Live modestly and stay in your home if your home is big enough; or at least say no to buying the biggest house you can afford.
After a home, a car is the second-largest purchase most consumers make. But the costs don’t stop when you drive off the dealer’s lot. Owning and operating a vehicle is the second-largest household expense, according to data from the Bureau of Labor Statistics; and continuing upkeep costs roughly $8,700 a year, according to AAA’s Driving Costs study. That breaks down to $725 a month and 58 cents, on average, for each mile driven.
Make sure to buy an economical car, instead of buying the newest model or flashy brand. Keep up on maintenance and shop around on car insurance.
Vacations can add up quickly. Instead of traveling to expensive tropical, luxury or foreign destinations, take a road trip or try a staycation. If you must travel, take advantage of a mileage card or hotel points to budget.
Budget on every day items, such as grocery store deals and clothing sales. If you spend hundreds to thousands on the the next top-of-the-line clothing, accessories and gadgets, your savings will take a hit — making an early retirement challenging.
4. Invest Strategically
If you plan to retire at age 50, say, you should be more conservative with your portfolio management in your late 40s than your peers who plan to stay in the workforce until 65 or later. This is to avoid what advisors call “sequence of returns risk,” or having a series of down markets clobber you when your finances are particularly vulnerable.
You need an investment portfolio strategy for every phase of your career, which generally gets more conservative as retirement approaches. As a general rule, you should have 40 to 50 percent of your portfolio in stocks at retirement, according to financial advisors. By contrast, for a 50-year-old who plans to work to 65, 50 percent to 60 percent is suggested. A financial advisor can help you determine which investments make the most sense for you, and at what risk.
5. Save, Save, Save
If you really want to retire early, you need to cultivate a whole new attitude toward your finances. Every decision to spend money has to be a conscious tradeoff weighed against your goal. Saving for early retirement is more than a little belt-tightening; it’s eliminating extravagant spending.
Your financial goal is to save as much as you can each paycheck. Putting away at least 30 percent of your paycheck is what financial planners recommend. To do that, make savings a nonnegotiable item in your budget and funnel all tax refunds and bonuses into your nest egg, as well.
6. Take Advantage of Tax Savings
To retire early, you have to commit to putting away the maximum allowed in tax-favored accounts so that you can grow your money faster.
401k and IRA Accounts
Max out your yearly allowance to your 401k and IRA accounts. Married couples who file a joint tax return can fully fund Roth IRAs if their income is less than $186,000, regardless of whether they have a savings plan at work. The contribution is limited above that income and ends at $196,000.
If you’re 50 or over, you can add an extra $6,000 to a 401k and $1,000 to an IRA. A financial advisor can help you determine what makes sense in your unique situation.
If you have a side job or hobby as well as your regular job, use a retirement plan such as a SEP-IRA to save a portion of that income. In 2018, you can fund a SEP with 20 percent of adjusted profit, up to $54,000.
Health Savings Account (HSA)
An HSA allows you to pay for current health care expenses and save for those in the future. One advantage of an HSA is that contributions are tax-deductible; or if made through a payroll deduction, they are pretax. Also, the interest earned is tax-free. You may make tax-free withdrawals for qualified medical expenses, as well.
If you want to retire early, health savings accounts save you extra money each year as health expenses can really add up as you age. Qualified expenses in the program include most services provided by licensed health providers, as well as diagnostic devices and prescriptions. They even include acupuncture and substance-abuse treatment.
Unlike health care flexible spending accounts, which have a maximum year-to-year carry-over of $500, HSAs have no limit on carry-overs or when the funds may be used. Even if the account is opened through an employer-sponsored program, all money in an HSA belongs to the account owner. Accounts are held with a trustee or custodian, which may be a bank, credit union, insurance company or brokerage firm.
7. Stay Financially Flexible
It’s important to do a regular, financial ‘checkup’ to make sure you’re on track with your financial goals, and then adjust, accordingly. A financial advisor can help you revisit your budget and update your portfolio so that you can expertly manage your finances and stay on top of your early retirement goal.
If you don’t work with an advisor, do your own yearly review of your spending, which you can track with an app such as Mint or Personal Capital. Make sure to revisit your budget to update how long your portfolio might last given your actual spending and reasonable assumptions of investment returns. Being flexible is key if you want to save strategically for an early retirement.
Consider a Part-Time Gig
Many people age fifty and beyond realize that retirement today is not that of a generation ago. Gone are the days of company pension, company-paid health care and assured Social Security. Today you need to plan more effectively and consider that you’ll need more money to pay the costs of living that used to be covered by work or government programs. A part-time job is an excellent way to be flexible to to save a bigger nest egg and also provide some stimulating social interaction and new skills in the process.
What is the Average Retirement Age for Men and Women?
On average, men retire at age 64 and women at 62, government statistics show. Nearly half of retirees end up leaving the workforce earlier than they had planned, according to a recent report by the Employee Benefit Research Institute. That is often due to a layoff or an illness, however, a third speed up their workplace exit because they can afford to retire early.
Making an early exit is not easy, though. The more ambitious your goal, the more important it is to start saving and planning as soon as possible. Connect with a financial advisor to start planning for your early retirement.