There is no magical age for retirement. There is tradition, of course, but even this is changing. Setting a goal of retiring when you are ready is perfectly acceptable. You just need to know how to retire early and have a strategy to get you there.
What Does Retirement Mean to You?
Retirement doesn’t necessarily mean sitting on the beach and doing nothing. In fact, it rarely does these days. Retirement can mean leaving behind your career and launching a consulting company or writing books or becoming an editor at a business magazine, like Rob Berger.
Rob Berger, the author of “Retire Before Mom and Dad,” retired from his job at the age of 49. He is currently deputy editor at Forbes. He was able to save an amount equal to 25 times his annual expenses, something that experts say you need if you want to have financial independence. This is one way to retire early.
Spend Less and Save More
First a reality check. Americans are living longer which means you will need more money to cover your retirement years. The Bureau of Labor Statistics says that about one-third of Americans age 65 today can expect to live into their 90s. So, let’s say you are retired for 25 years and your annual expenses are $46,000, you will need at least $1M, not including any fluctuations in the economy such as inflation.
Berger advises you to spend less and put more of your income to work for you. In previous blog posts, we’ve talked about the importance of saving, especially for emergencies and retirement. Berger emphasizes that even if you earn a good income, you don’t have to spend all of it. Doing so places you in the same financially stressful position as someone living paycheck to paycheck, perhaps with less debt.
What do you need to retire early?
You Need a Financial Plan.
You need a financial plan even if you are not dreaming about retiring early. Without a financial plan, you will never be able to manage your money.
You need two financial plans. You need a financial plan to help you arrive at your early retirement goal and you need a financial plan for how you are going to live once you retire.
Here are some questions to ask yourself as you develop your financial plan:
- At what age do you want to retire?
- How many years do you anticipate you will spend in retirement? What are your expenses for those years going to be?
- What will you do in retirement? Will you become a consultant? Public speaker? Author? Entrepreneur? What is your anticipated income from these activities?
- Are you a single person or are there two of you? Will both of you retire early?
- Do you have kids? Will you be responsible for them after your early retirement?
- How is your health? Is there reason to believe you will have significant healthcare expenses during your retirement years?
Automate Your Savings
For some of us, putting money into savings can be very challenging. There are so many other things that you can do. Even if your motivation to retire early is at peak strength, you can still get distracted by “buying opportunities.” The best way to kick this is to automate your savings.
When you automate your savings the money never comes to your hands and the temptation is removed. Decide, based upon your early retirement financial plan, how much money you need to reach your goal. With automated savings, a percentage of your salary is transferred directly to your retirement saving accounts.
Pay yourself first, just as you pay all of your other bills (automate those too) and you will succeed in meeting your retirement savings targets.
Increase Your Savings
Boost the amount you save whenever you can, such as when your salary increases or you get a bonus or monetary gift. If you decide to take on a side hustle, put that income toward your retirement savings accounts. It doesn’t have to be huge leaps in the amount, only as much as you can so that you are continually building up your nest egg beyond even what your financial plan suggests you need. Emergencies do happen.
Look for Ways to Decrease Your Expenses
If you decrease your expenses, you will have more money to put towards savings. Your ability to retire early depends on when you meet your savings targets. Read some of our previous blog posts about how to find the leaks that are robbing you of money for your financial goals. Even if your income is limited and you are living paycheck-to-paycheck, you can find ways to reduce expenses so you have more money for debt reduction and savings. In fact, in a Charles Schwab survey, it was found that even though 60% of Americans are living paycheck-to-paycheck, the average household spends around $500 every month on non-essential items. Track your money, get rid of the waste, seal up the leaks.
Probably the most important aspect of your financial plan to help you retire early is the elimination of debt. Carrying debt costs you money in interest payments which can exceed the original expenditure. If you are carrying a lot of credit card debt, for instance, you are losing money to fees and interest rates that could be going toward your retirement funds.
With financial freedom, you can choose whatever path you want to take to achieve your dreams, including retiring early at the age of, let’s say 40 or 50.