Most Americans struggle throughout their entire lives to make sure they are financially secure once they reach retirement age. However, retirement doesn’t have to be such a daunting or life-long goal. Depending on when you start saving, you could retire before you’re even 40!
Is Early Retirement Realistic?
It’s not easy, and there will be plenty of hurdles along the way, but early retirement is a realistic goal if you have the desire and tenacity for it. You’ll need to save at least 25x what you make annually – and probably closer to 30x, if you want a bit more security – or more accurately, you’ll need to save 25-30x what you expect your annual expenses to be while you’re retired.
Let’s say you make $80,000 per year. After factoring in inflation and the standard of living you desire, you think you’ll still need $100,000 each year even though many of your former expenses are completely out of the picture by this point. Thanks to the wonders of math, we find that 30 x $100,000 = $3,000,000. That’s a lot of money! A common practice is to take out 4% or less of your retirement savings each year over the course of your retirement (in this case, 4% would be taking out $120,000 – a bit over your goal), which should let you have a long retirement with a healthy safety net. Often, people even end up leaving behind a solid chunk of cash following this method.
Of course, depending on your goals and length of retirement, this may be too conservative or too risky for you. I encourage you to sit down and think about how much you’ll need during retirement – accounting for inflation – and talk to a financial planner. You may want to save 25x your annual expenses and withdraw 4% or more each year. You may decide to save 33x your annual expenses and only withdraw 3% each year. This is an incredibly personal decision, and it may change how difficult it is to get there early, but it won’t change the overall strategy.
After you’ve determined your target retirement savings, the next steps are simple – increase your income, maximize retirement savings, and minimize expenses. Simple, but not easy.
1. Define Retirement And Set A Target
Your retirement may not mean you never work again, it could just mean you’ve reached some level of financial independence you can be secure with indefinitely. It could also mean you work part-time instead of not at all. For many, a retirement with absolutely no work can be boring – it may just be a period where their work is more philanthropic than a typical career.
It’s important to be realistic about your goals and what your day-to-day would look like. After you’ve done that, setting a target for your retirement savings (so that you have a concrete goal you’re working towards) should be easy.
2. Figure Out What You’re Working With
Determine how much you currently have, particularly your net worth, as well as your retirement savings. If you don’t have anything yet, don’t fret, this is just so you know where you’re at in your journey and how much more you’ll have to do.
After that, figure out how much money you spend each month and each year. This will make it easier to set better goals and highlight any problem areas. Remember, a good target is at least 25x your annual expenses. If you can live happily on less, that will make your retirement goals much easier to reach.
3. Minimize Your Expenses
In the meantime, it’s a given that you need to spend less than you make. The less you spend (and the fewer expenses you have), the more you’re able to invest towards your retirement.
I recommend you start by creating a budget and eliminating debt. Most people can usually cut an enormous amount of spending if they focus on their major expenses like housing, transportation, and food. If you want to try cutting minor expenses, go ahead, as you may be overspending by large margins in certain areas. If you do try to be frugal, be wary of spending so little you deprive yourself of basic necessities and simple pleasures – financial security and emotional well-being are both important.
4. Maximize Your income
You can only go so far by just cutting your spending. After a certain point, it is much easier and effective to find ways to increase your income. If it makes sense, pursue further education, obtain certifications, or take on more responsibilities to further your career. Doing so will likely net you raises or promotions if you follow-up by requesting more from your employer (or switch jobs entirely).
Better yet, start spending some time each week working on a side hustle. Not only can they be more flexible than a standard job, but their potential return can be extraordinary.
5. Maximize Your Retirement Savings
Start saving as early as you can, and as much as you can. Tax-advantaged retirement accounts are often the best way to get started. A simple priority list may be something like:
- Meeting the 401k company match, or for federal employees and military personnel, meeting the Thrift Savings Plan match
- Maxing out your Roth IRA
- Trying to max out your 401k OR put the rest in a standard account with a brokerage like M1 Finance or Vanguard
The major drawback behind tax-advantaged accounts is that they have restrictions on withdrawals. The main exception to this is the Roth IRA, from which you may withdraw your contributions (but not earnings) at any time. The solution is to either make sure you invest a lot in an account with a brokerage outside of your 401k and IRA, or roll over the investments in other retirement accounts into your Roth IRA. This may take some effort, but it can be well worth it.
6. Consider Paying Off Your Mortgage If You Haven’t Already
This is an option – and certainly not a requirement. When it comes down to it, paying off your mortgage early may not be the optimal financial maneuver. However, if not having a mortgage relieves stress and helps you feel secure, it could be a boon.
7. Factor In Health Insurance
Retiring early usually involves leaving your current employer – who you likely get health insurance through. In this case, consider thinking through how you’ll pay for healthcare. There are many options including working part-time with benefits or pursuing options through the Affordable Care Act marketplace. Regardless of your method, make sure you account for health insurance throughout your retirement.
8. Prepare For The Worst
Sometimes life doesn’t go as planned. In case of some disaster, try to keep your options open so you can earn an income if needed. Whether this is through maintaining credentials, keeping up-to-date on your former industry, or having a business, be sure you can provide for yourself if the worst ever happens.
For those who have retired early, a common recommendation is to build an emergency fund with 1-3 years of expenses, so that you don’t have to withdrawal your investments during a market crash.
9. If You Need Help, Talk To A Financial Planner
Financial planners can help guide you along the way, and answer questions about your specific case. They can help you minimize your future tax burden as well as the fees you pay for your investments – two variables which can cut out huge portions of retirement savings and forcibly add years to the length of your career.
Make sure anyone you hire is someone who you can work with long-term. Remember though, you’re paying for their expertise, not their charm. The amount they save you should far outstrip their cost.
There Are A Few More Things To Remember
There are a few more things you need to take to heart – remember to keep them all in mind!
Avoid Increasing Your Lifestyle With Your Income
When you get a raise or bonus do NOT spend that money on any unnecessary expenses. Instead, invest that money for your retirement. Once you get into the habit of spending more, it is hard to cut back. As a general rule of thumb, try to keep your expenses the same amount, or lower if possible, from year to year. Occasionally, due to major life events like a birth or marriage, your expenses may change drastically – which is perfectly okay.
Save – A Lot
Most people who retire early save 50% of their income, or more. The earlier you retire, the fewer years you have to save up through working, and the more you have to pay for out of pocket. In order to make this a reality, you need to be aggressive about how much you save.
This may sound overzealous, but you’ll be surprised at how much of your spending can be cut once you start thinking of the long-term ramifications. It seems hard at first, but it gets easier. If you have trouble saving or investing at the start, think about trying out Acorns – an app that helps you automatically start saving, teaches you along the way, and gives you $10 for free when you sign up!
Remember The 25-30x & 4% Guidelines – But Change The Amount You Save And Withdraw According To Your Personal Goals
Depending on how early you plan on retiring, withdrawing 4% annually from a portfolio that is 25x your annual expenses might not cut it if you plan on not working for forty years. Decreasing the amount you withdraw (some people do as little as 1-2%) and increasing the amount you save can help ensure you stay retired.
Conclusion
What are you waiting for? Start saving! Not only does retirement give you more time to pursue leisurely activities and passion projects, but it gives you security you’d never have otherwise. If you want to stay up to date on content like this, and for a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
