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January 17, 2021General Retirement
What do you do if in your 50s, you’re unequipped to retire comfortably in the next decade? Or you are 30, and would love to retire early on your 40th birthday?
To retire in 10 years, regardless of your age, you must increase the savings in your 401K, practice frugal expenses, get additional sources of income or have a diversified investment portfolio, and perhaps, hire a financial planner to help you strategize.
You could feel hopeless and hung out to dry, but it is still not too late, as long as you have comprehensive financial planning. You need financial planning to know what to do because if you are getting a late start, you can't have any more unforced errors. You have to make wise decisions henceforth.
It also helps to have a financial planner on your side. This is somebody who can take a closer look at your finances and make recommendations based on your unique circumstances Now, most people will agree that when it comes to saving for retirement the earlier we start, the better.
People don’t usually plan for retirement when they are in the first quarter of their lives. At this point, we believe there is still a world to explore, and we’re earning barely enough to keep up. Eventually, we get off to a late start. Regardless of whether you don't start saving into your mid-30s or maybe your 40s or your 50s, it is never too late to start planning your retirements. Can you get it done in 10 years? The answer is Yes!
Table of contents
Planning to save for early retirement in 10 years is quite different from saving towards the retirement age.
The most important thing to understand here is the savings rate. While the ability to retire early may seem like a fancy goal, the premise comes down to one thing, you need to invest money so that it earns you more money. This way, in ten years, your investment will make enough money for you to retire early.
Also, find out the final amount that you need to retire early and from which you can live off comfortably. Then put that amount in a financial investment which will give around 8 percent interest on it, and then you can live off with just the interest rate.
How you can reach that final amount in terms of how much to invest each month for 10 years is also important. Cutting your spending rate is way more powerful for early retirement than just increasing your income. The more control on expenses you have, the more you save, and the earlier you can reach your goal.
If you have decided at 30 to retire in 10 years, most of your major financial decisions should be made with that prior decision in mind. Chances are you don’t yet own a house at 30 and you’re looking into that, which is a great idea. But while checking the market for available offers, you might have to choose between a big fancy house with an exorbitant mortgage and a medium cosy home that you can pay off soon. You may also want to buy a car, plan your wedding and so on. Always make the decision that helps you live well now but also helps your retirement plan.
Achieving the ideal savings rate to retire early in 10 years might not be that easy in this world of societal pressures, new gadgets and bad habits. But you can still reach your goals if you have set the plan on paper and make your investments automatic.
The first thing you want to do is increase your retirement contributions.
This may seem like a very obvious strategy, but it is very important because when it comes to catching up on your retirement planning, the only way to do this is to save more, especially if you are in your 30s.
So, increasing your retirement contributions, whether it's by 1 percent or more, is an excellent way to start. As of 2020, you can contribute up to $19,000 into a 401k, you can put in an additional $6,000 to play catch-up on years you have missed.
To illustrate how it is not too late to start, assuming you start saving for retirement at 40 and you max out your contributions, typically with retirement accounts, you can expect a return between 5% and 8% depending on market conditions.
For this illustration let us assume a 7% return if you max out your retirement contributions at age 40. By age 65 you can have a retirement savings of $1.2 million dollars, and this does not even factor in any contribution you may receive from an employee match program.
In order to max out your contributions, you would have to contribute over $1,600 dollars a month into your 401k, and for a lot of people that's probably unrealistic, or you probably have to be making some really good money to do that.
Even if you can't max out your account, increasing your contributions by 1% can make a big difference over 10 years.
Assuming you make $50,000 a year and you want to increase your retirement contribution by only 1% or $42 a month, with a 7% return after 25 years, you can have an additional $34,000 in your retirement savings and that's only with 1%.
So now imagine how much more you can have if you were to increase it by 2 or 3%.
If you happen to be in a position to max out your 401k and you have income left over to invest, the next thing you want to do is open up an individual retirement account.
There are different types of IRAs to choose from but the most common types are Roth and traditional IRAs.
The difference between these two is that when you get your tax break with the traditional IRA, your contributions are tax-deductible but withdrawals are subject to income tax.
But with a Roth IRA, your contributions are non-tax-deductible but your withdrawals are tax-free.
One could think about an IRA in that they are not only for employees. But like a 401K, you can have one, whether you are an employee or if you are self-employed. In fact, if you are self-employed this would probably be one of your primary ways of saving for retirement.
One thing to keep in mind is that in 2020 you can only contribute up to $6,000 to your individual retirement account or $7,000 if you're aged 50 or over.
Even though contributing more to a 401k or opening an IRA is an excellent way to play catch-up and build your retirement savings, you need to have extra income to do this and that raises the question of where is this income coming from?
Now, you might not have to do anything as drastic as selling your house, but if you want to retire in the next decade, and you are struggling to increase your contribution, you are going to have to make some tough choices to a point where you might rethink your housing situation.
This is because if you are spending too much on housing, that could make it impossible to save money for your future.
Considering the fact that moving in with someone is not going to make sense for everyone, you might want to sit down and crunch the numbers to see if it makes sense to move into something a little bit cheaper or smaller.
Living above your means can complicate your finances and make it very difficult for you to plan for the future. So depending on how much you are paying for rent or housing to effectively save for retirement in 10 years, you may have to look into getting into something that is several hundred dollars cheaper than what you have.
If you are staying in an area with a higher cost of living and what you are paying for your rent or your mortgage is not going to get any cheaper, one thing you can do in this situation is to look at alternative ways to see if you can bring down your housing cost.
For example, if you are a single person living alone, you can look into getting a roommate or somebody who can share the expenses with you. Also, if you have adults living in the house with you, you can charge them rent.
Another thing worth considering is refinancing your mortgage because qualifying for a lower interest rate could potentially reduce your monthly payment which is going to give you a little bit of room in your budget.
If you can save hundreds of dollars by refinancing your mortgage, you could take that savings and put it into your IRA every month.
Refinancing your mortgage can help compensate for any income you lose by increasing your retirement contributions at work.
So, look for ways to save money on the housing side. It is a great way to start and it makes sense because for a lot of people housing is the biggest expense.
While it is good to spend less on the housing side, do not stop there. In order to get where you need to be financially in 10 years, you have to cut spending in other areas too.
If you go through your expenses and evaluate you can make a commitment to get rid of unnecessary spending to boost your savings quickly.
At the very least, reduce spending in at least five different areas. If you can do more, great because at this point in life you do not have the luxury to be spending so much money on extras when you are preparing for the future and making a late attempt at having a substantial retirement saving.
Even though we have to live to have fun, life is about balance too. So at the same time, you should not have so much fun at the expense of planning for the future.
If you have ten subscription services, you can cut that down to three or five and if you have cable you could downgrade to a smaller package since it is not even possible to watch all the stations in the first place.
Also, you can reduce how much you spend on recreation and entertainment by half. You can negotiate your insurance rates, or get better rates. All these little expenses will add up, and before you know it you could have an extra $250 in your pocket every month. This can go towards saving for retirement.
All these would be as adequate for your needs but yet save you a ton of money.
Another thing you can do is to not save for your kid's education. It is understandable if parents don't want their kids to leave school with tens of thousands of dollars of debt, and this might go against what some people believe, but if you are approaching 50 years ol, or you are planning to retire in your 40s and you don't have anything saved up yet, you have to rethink your priorities.
The reality is there are a lot of ways to pay for college. There are loans, grants, work-study programs, scholarships, etc. However, there is no loan or grant to cover retirement savings.
If you can afford to save for both putting money aside for kids’ education and retirement, then you can do both. But if you have to choose one over the other, many financial experts will tell you to always put retirement planning first.
Another thing that can help you play catch up is to find ways to increase your income. If you are able to make an extra $500 to $600 a month that can be a huge difference in the long run. You are at advantage if you are still in your 30s because you will still have energy to run multiple jobs.
There are several ways to earn extra money. Some people might look into getting a part-time job and that is definitely an option.
With a part-time job, you can start working quickly and you can start earning money as soon as possible. However, along with starting a part-time job, you can also look into some type of side hustle or business, something that you can do on your own and possibly earn passive income.
However, the thing about starting a business is that the income is not always immediate. You have to first build a business and get clients.
If you are interested in earning passive income, you have to do a lot of work in the beginning before you are able to earn money.
But the reason why starting your own business is a great idea is because it is an opportunity where you can really work at your own pace, and a lot of times you can even make more money than your real job.
It is even better if it is something where you can earn passive even in your sleep. This would be just perfect for you as someone who is trying to play catch-up and save for retirement.
The ability to earn more money is going to help you get to your goal faster. One cool thing about a hustle is that if the business takes off and it does well there is even an opportunity for you to continue earning income later in life which can then supplement anything that you are getting from your retirement income.
Another tip when playing catch-up is to stay healthy and fit. You might be wondering what this has to do with saving for retirement, but for those in their 50s getting older can sometimes bring on new health problems.
However, some health problems are unavoidable and it doesn't matter what you do or what age you are, you might still get sick. But a healthy lifestyle can reduce the risk of certain diseases and illnesses, and if you're able to reduce your healthcare costs you can then, in turn, save money. Also, the more money you save, the more opportunity there is to save for retirement.
So get regular screenings and eat a healthy balanced diet. One benefit of staying healthy is that it may even allow you to work longer and by working longer you could possibly delay retirement which then allows your retirement savings to grow a few more over these 10 years.
It is also important that you don't take on any new debt if possible because taking on new debt can derail your plans.
This means you will have less money available for savings and it is going to push you further away from hitting your retirement goals.
So if you can delay getting any new car loans or any new debt for as long as possible, do everything you can to minimize this debt.
This can involve buying something a little cheaper or even making sure that your credit remains good. This way, you are able to qualify for a lower interest rate which can also lower your monthly payment.
If you have existing debt, come up with a strategy to get rid of it. In fact, you can even use a lot of the earlier suggestions because debt robs you of any opportunity to save money, and once the balances are gone that is even more money than you can allocate to growing your retirement fund.
Sometimes, saving your way into retirement may not be the best way to go about it. Saving helps a lot. But as you might know, $1,000 in the year 2000 is worth more than it is now. A lot of things have changed since then. Apart from savings, something you should consider if you are planning a retirement in the next decade is investing. Not just investing but investing wisely, in a diversified manner. As a radical example, imagine if by chance, you had invested in Amazon, bitcoin and, or Netflix 10 years ago. Retiring now might have yielded more than you ever imagined or planned on.
The secret is not just working hard, but working smart. Make investments. This may be risky but a hack is to make several investments. Don’t put all your eggs in a basket. One investment may turn out bad, but by investing in several industries with great potential, you can’t possibly have all bad investments.
If you are in your 30s, you can perhaps find information on what the best things to invest in are. Learn about investment portfolios and diversifying. If you don’t have time to do the research on your time, think it’s a rather complicated process or are in your 50s and don’t think you’ll figure it out yourself, then get a financial advisor to plan your investment.
It doesn't hurt to get help from an expert. Luckily, there is no shortage of financial experts offering advice these days. Every person's financial situation as well as their future plans are unique and may require the services of a specialized financial professional. When you consider the service providers you trust most and who might impact your life, your financial advisor might rank up there with your doctor or lawyer.
But who exactly is a financial advisor? A financial advisor refers to anyone who helps people manage their money. You can think of it as a general title that other more specific titles fall under. Depending on where you want to be in 10 years, your financial adviser will guide your investment choices and manage your money, providing comprehensive financial planning throughout life's stages.
So why would someone consider using a financial advisor? The answer varies greatly based on an individual's financial circumstances.
You might have questions about a specific situation such as buying a house, getting married, or paying for your children's education. You may want help with insurance, tax guidance, or debt counseling. Or you may simply need to build a long-term financial roadmap.
Ultimately, every person's financial situation is different. It's important that whichever type of financial advisor you choose has the skills and experience best suited for your circumstances.
An advisor should be able to assess your financial needs to help you achieve your goals. A great financial professional will act in your best interest and be committed to providing unbiased advice to help you plan for an uncertain future with confidence.
While you definitely want to choose an individual who is credible, professional, and competent there are also some other key characteristics you should look for in a financial planner. They include:
A CFP professional is somebody who has done extensive coursework, gone through enough experience, has the ethics requirement, and has passed the rigorous CFP board exam in order to get that designation. Moreso, ensure that your financial planner has extensive knowledge of the market and how it works. You really don’t want to put your future in the hands of someone who doesn’t know the current market trends because how then can he advise on your investment portfolio?
The second characteristic you should look for is that the person actually has experience with working with somebody like you. This could be a lot of people in your type of profession or field or people in your specific life stage or in a similar financial situation as yourself.
Another characteristic to look for in a financial planner would be that they have a clear client relationship process and they can articulate that process.
This is important because it means that the person is able to deliver the advice and the service that is valuable for you.
A financial planner should be able to do holistic financial planning that integrates all other components of their client’s life.
This planning looks at all areas of a person’s financial life and makes sure that they are holistically planning out their financial future, seeing the big picture, and making smart decisions based on the vision that they have for their life.
The last characteristic you should look for in a financial professional would be that they can clearly articulate how much they charge for their services.
A lot of people are intimidated by financial professionals because they are afraid that they will charge them an arm and a leg or they just don't even know how they work and how they charge for their services.
Hire a qualified financial planner that communicates in a way that puts you at ease when you talk of your financial future and that is very clear on his rates and how much he charges.
If you want even more tips on how to choose a financial planner, look at the CFP Board website. They have tons of free tips, tools, and kits that you can download and use to make sure that you are understanding what financial planning is, what questions to ask a financial planner, and a lot more info to help continue learning about money and saving for your retirement.
By educating yourself about financial planning, you can use your money to create a life that you love.
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