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The Benefits of Retiring Early
While the main reason why most Americans want to retire early is to stop working and do the things that they love, there's more to it. In addition to traveling the world, retiring early has many benefits that can be rewarding to almost anyone. Let's look at some of them.
You'll Have More Time to Travel - The fact that you no longer have to work will give you more time to travel and see what various parts of the world have on offer. You'll no longer be limited to two weeks of a vacation like you would be if you were employed or working.
Retiring Early Could be Good for Your Health - Do you want to live longer? Well, retiring early could be helpful. The working life generally comes with stresses that revolve around sleeping late and eating fast food meals at your desk. You'll also lack fresh air and sunshine, which are obviously part of the things that make retiring early a lot healthier. Again, retiring at 60 or more could have adverse effects both on your physical and mental health.
You Can Start a New Project, a New Hobby, or a New Career - Whether you've been dreaming of furthering your education, starting a new hobby, or starting a new business adventure, retiring early gives you a perfect chance to start early. For instance, retiring early could give you a perfect opportunity to start a business and become your own boss. You could also start off something that keeps you intellectually challenged and this is good for your health too.
Come Up with a Strategic 5-Step Plan
It's important to note that you don't have to be a millionaire to retire early. Instead, retiring early requires you to be financially independent that you no longer have to work for money or to earn a living. Here's how you can do it.
How Much Do You Need to Save?
Today, the best term for early retirement is being financially independent. This basically means that you should never connect retirement to a specific age. Instead, your main aim should be to retire fast and early so that you can have the chance to do whatever you want whenever you want.
The truth of the matter is, you can become financially independent to do whatever you want. Whether you just want to travel the world or want to work as a volunteer, the concept of being financially independent or retiring early fundamentally revolves around having enough money to support your lifestyle now and for the rest of your life. As such, the main point when coming up with a concrete retirement plan that would allow you to retire early must include knowing how much you need to save to support your lifestyle for the rest of your life.
The amount you need to save for your retirement will largely depend on how much you spend. For instance, if your lifestyle means that you're spending $500,000 a year and you want to retire at the age of 45, you'll have to save not less than $20,000,000 but this would not be perfect to sustain your lifestyle for the next 40 years if you put into consideration other factors such as inflation. In other words, your spending rate is the biggest determinant when it comes to how wealthy you'll retire. At the end of the day, the general rule of thumb is you should have 25 to 30 times of annual spending by the time you retire.
The most important thing is to figure out where your money is going now, monitor it, and even reduce it if possible. You should also reduce your current spending as it frees up more money that can go into your retirement savings' nest and can also reduce the amount you need to live on each year. This would mean that the total amount you need to save will be lowered.
You should, therefore, track your spending and minimize the use of your credit cards. The best way of doing this is to create a spreadsheet to keenly follow where your money is going. This will enable you to note unnecessary expenses and remove or reduce them from your expenditure, especially if you can do without them. For example, you can reduce expenses such as your cell phone bills, as well as car and home insurance.
How to Invest
Although your spending will be the main point when it comes to retiring early, it's always a good idea to invest and diversify your portfolio. For example, you can consider low-cost index mutual funds such as the S&P 500 index that charge investors lower fees than mutual funds.
You can also invest through a workplace account such as 401(k) but this will differ from the above-suggested portfolio. Make sure that your chosen portfolio can make you money and stick with it. You should monitor investment portfolios and ensure that the percentage allocations are in order.
Look at Your Housing Cost in Retirement
Another very crucial part of retiring early is ensuring that you keep your housing cost low. The best thing to do is to pay off your mortgage before you retire. But you can also be good to go if you save enough to cover the mortgage costs even in retirement. We, however, believe that you shouldn't have any debt burden before you retire.
You can as well choose to sell off your current home and move to a smaller home and channel the proceeds of the sale to your retirement nest. This may, however, depend on the assumption that the local housing market is stable and strong when it's time to sell and retire. This means that you should always keep in mind this uncertainty and include a flexible into your retirement plan.
Pay for Your Health Care
Even though you may not have to deal with lots of health issues as an early retiree, appropriate health insurance should be part of your retirement plan. Thanks to the Affordable Care Act, you can have proper health insurance even after you've quit your job.
It can be even better if you've saved enough to pay for your health insurance out of your own pocket. For instance, you can consider taking a low-cost, high-deductible health plan out of your pocket.
Manage Your Taxes
Having Uncle Sam knocking on your front door in your retirement may leave a huge hole that you may not get out of. Just like when you're working, you should always pay your taxes in retirement. But your tax bill will come in different facets. For instance, you'll most likely owe income tax if you'll be withdrawing funds from retirement funds such as 401(k) and IRA. You may also have to pay capital gain tax if you're getting your retirement income from a taxable brokerage account.
In essence, it's of great importance to have an estimate of your annual tax bill added to the total amount to retire.
What You Need to Do
Here is what you need to do to ensure that you can retire as soon as possible.
Change Your Attitude towards Money
It may be sad to note that many people including your friends and relatives are busy spending their money instead of saving for retirement. And as we noted earlier, saving for retirement isn't going to be easy. Instead, it's going to take a lot of hard work and diligent saving, which means that you'll have to change your attitude towards money.
While many people think that money is simply a useless piece of paper and metal, it has more value than any other thing in the world except life. As such, retiring early requires you to alter your attitude and modify your spending habits and your perception of the value of money. It's, therefore, important to note that achieving your dream of retiring early and quickly may be impossible if you continue to spend recklessly. It may also be impossible if you do not cut out unnecessary expenditures from your lifestyle.
Generally, you should save about 5-15% of your income if you want to retire at the normal age of 60. But if you're planning to retire early, you may have to increase this percentage to 40-80% and you'll be able to save six figures in a couple of years. This may be just enough for early retirement but may also depend on how you spend. More importantly, you should earn more, spend less, and save more.
Estimate Your Retirement Expenses
One of the first things to do if you want to retire early is to have an accurate estimate of how much you'll need to spend monthly when you retire. The best way to do this is by adding the expenses of the things you can't do without such as food, housing utilities, clothing, transportation, healthcare, and insurance.
Ideally, the best scenario is to enter retirement debt-free as a way of minimizing your expenses. There should be no credit balance, no mortgage, no student loans, no outstanding medical bills, and any other debt. But if you still have any outstanding debt, it would only make sense to include the debt as part of your expenses. You should also add discretionary expenses such as entertainment, hobbies, and travel expenses.
It's important to add everything together to determine how much you need monthly to sustain the kind of lifestyle that you need during your early retirement. You should start by having down a clear estimate of what you'll need each month before going to the yearly estimate, which should then sum up to the number of years that you'll be spending retired.
Many people make the mistake of waiting until it's a little too late. Do not fall into this pitfall. The best thing to do is to start saving today even if you're saving just a little bit. As they say, time waits for no man. Starting today will enable you to enjoy the magic benefit of compound interest. If you start investing when you're young, you'll be better off and will not only retire early but also quickly.
Let's put this into perspective. If you start putting away $10,000 each year at the age of 22 and want to retire at 50, you'll have twice as much than if you started saving the same amount at the age of 32.
While it's not going to be easy to start saving early, you should be diligent enough to start today. If you start today, your savings will grow and you'll have the feel-good-factor as your account grows.
Increase and Diversify Your Income Avenues
Once you've cut out the unnecessary expenses and decided to start today, it's now the right time to get out there and try making more money. In addition to optimizing your current full-time job, you can start a side hustle and even maximize your career.
You can turn a passion into a business or learn something new on the internet and use it to earn more money or create a new business that can be a source of additional income. Whether you can flip on eBay, work as a chauffeur, make deliveries, teach online, or sell on Amazon, there are endless ways of making additional money, which you can direct to your retirement nest. You should also think of becoming self-employed as it can give you the freedom and flexibility to diversify and do various things.
While some businesses such as a new mobile app may take some time to get up and running, you'll have a steady stream of income if it picks up. Just make sure that you're making money from something you love doing and it will not feel like work. In essence, you should fast track your early retirement goals by investing more.
Fast Track Your Savings Rate and Net Worth
Everything about retiring early seems to revolve around fast-tracking a lot of things in your life. In addition to investing more, you should fast track the rate by which you've been saving for your retirement (that's if you've already started saving for retirement).
Here's a simple saving rate.
- 10% savings rate if you want to retire in the next 51 years
- 25% savings rate if you want to retire in the next 32 years
- 50% savings rate if you want to retire in the next 17 years
- 75% savings rate if you want to retire in the next 7 years
Keep in mind that this is a typical example and may depend on a number of things such as your yearly income and when you want to retire.
Contribute to Your 401(k) and Meet Your Employer's Match
If you're employed, it's most likely that your employer offers the traditional 401(k) plan and you're eligible for it. The main benefit is that you can contribute your pre-tax money. You should also contribute enough if your employer chooses to match your contribution. This is essentially free money that you should never leave on the table.
Establish an Individual Retirement Account (IRA)
Establishing an IRA may be a good way to save more but this may depend on your income and whether you have a workplace retirement plan in place. This contribution may be tax deductible but the taxes can be deferred until when you make withdrawals during your retirement.
Don't Let Your Money Sit Idle
It's of great importance that you periodically monitor and revisit your savings and retirement accounts so that your money doesn't grow cobwebs. So instead of letting your money sit idle, you can choose to invest in non-risky low-yielding bonds that can earn you more money. Just make sure that your money is invested properly so that you do not lose what you've been working so hard to build.
Get Off the Hedonic Treadmill
This may be quite challenging for most of us but in line with the idea of cutting off unnecessary expenses, you should get off the curse of consumerism. Don't get trapped into buying things that aren't beneficial or not meant for your retirement plan. This will not only slow you down but will mean that you're lagging behind your retirement date and this is something you don't want.
Protect Your Assets
If you've built your assets and saved enough for your retirement, you may want to find ways to protect your investments. Keep in mind that your number one enemy when planning to retire early is inflation. Needless to say, inflation can eat away your purchasing power and totally ruin your financial security.
For instance, a 4.5% inflation can cut your purchasing power by half every 16 years. So to protect your retirement savings, you should double your targeted retirement money to break even. This is a very big deal that requires you to plan appropriately to avoid financial suicide. The best thing to do is to manage your savings appropriately so that the growth rate is much bigger than the inflation rate. This is perhaps the best way to deal with the monster that's known as inflation.
Seek the services of a Financial Advisor
Unless you're a genius investor, it can be a good idea to seek the services of a financial advisor to guide you through the challenging process of retiring early. Retiring early means that you have less time to save for retirement and more time to spend in retirement and this can be very challenging. But with proper guidance from a financial advisor who's qualified and experienced in matters early retirement, you can come with an investment strategy that makes it a lot easier to achieve your early retirement goals.
From helping you determine how much you need to guiding you on how to manage your income streams, the significance of a financial advisor cannot be downplayed.
If you've been thinking that retiring early is as simple as walking away from your normal working life and hitting the road vacationing in exotic places, you may want to think again. Retiring early is never an easy walk in the park. It may seem impossible at first but it's very attainable. So unless you win a lottery and retire as soon as tomorrow, you'll have to put in some real hard work, save diligently and sacrifice a lot of things, cut off your expenses, and put your money in less-risky and long-shot investments.