7 Tips to Retire Early
Whether you love your job or dread every day at work, one day you will retire. How you retire and how soon is largely up to you. For instance, a 20-year-old worker who consistently saves just $500 a month could accumulate nearly $285,000 in two decades’ time, assuming an annual 8% rate of return. It’s not an unrealistic figure based on past stock market performance.
Many participants in the Financial Independence Retire Early (F.I.R.E.) movement take things much farther by saving up to 50% or more of their income and slashing their expenses to focus entirely on an early exit from the workforce. For those extremists, a monthly contribution rate of $1,000 or even $2,000 a month could be quite realistic.
Given those high rates of saving and investment, a monthly investment of $1,000 with an 8% annual return over the same twenty-year period would provide a nest egg in excess of $569,000. However, a $2,000 monthly contribution would make the F.I.R.E. participant a millionaire ($1,138,557 to be precise).
It may be in its infancy, but the early retirement movement is gaining steam with blogs, video guides, tutorials and books galore. Unfortunately, early retirement does not just happen. It requires careful planning and considerable financial discipline. Here are seven tips to retire early and make an early escape from the workaday world.
Start young.The earlier you start saving, the earlier you can retire. According to an analysis published on CNBC.com, a worker who starts investing at age 20 would need to save just $319 a month to retire at 67 with a million dollars, while a 50-year-old with the same goal would need to salt away $2,831 a month.
Invest consistently.Consistent investment is key to a successful early retirement. Nothing can smooth out the bumps of the stock market, but dollar cost averaging allows you to benefit from the ups and downs. The easiest way to dollar cost average is through your workplace retirement account. Allocating a portion of every paycheck to a 401(k), 403(b) or Thrift Savings Account ensures consistent investing, putting this time-tested method into action.
Focus on career growth.You may dream of an early retirement plan, but that does not mean you can ignore your career goals. The more you earn, the easier it will be to reach your savings goal. By focusing on your career goals, you can boost your earning power - and your odds of an early retirement.
Lead a healthy lifestyle.An unexpected health crisis could doom your dreams of an early retirement plan. So, take good care of yourself during and after your working years. Unforeseen circumstances could strike when you least expect it. If you want to learn how to retire early and stay retired, saving extra for unanticipated circumstances is always a smart move. One of the best vehicles for doing that is the health savings account. If you are eligible, you could enjoy triple tax-saving benefits. Participants in high-deductible health plans can contribute to an HSA in return for an immediate tax deduction, then enjoy tax-free growth and tax-free withdrawals for eligible health care expenses.
Develop passive sources of income.When you retire, your active source of income, i.e. your paycheck, will stop immediately. Not so for your passive income streams, which can go on and on. Building a portfolio of dividend-paying stocks can create a basic monthly income in retirement. If needed, you can supplement it with passive income from self-publishing, affiliate marketing and other online sources.
Pay down (then off) the mortgage.Retiring early may be an impossible dream if you have large monthly expenses hanging over your head. Entering retirement with a mortgage could be financially devastating. So, look for ways to eliminate that expense before you quit working. Whether you double up your monthly payments or pay extra when you can, every little bit helps.
Overestimate your post-retirement expenses.Many retirement calculators make unrealistic assumptions, starting with the idea that you can live comfortably on just 80% of your pre-retirement income. In some cases that 80% figure may be accurate, but other retirees may spend as much, or more, than they did when they were working. If you want your early retirement to be successful, it pays to overestimate your expenses.
Things to Consider When Planning to Retire Early
Early retirement may be a dream for many workers. With these helpful tips to retire early, you may be well on your way. However, without the right retirement planning, it could be the wrong decision. Even if you have the resources to retire early, you may want to really consider your options first.
When you retire early, even a small financial shock could have huge repercussions. Some members of the F.I.R.E. movement have already gone back to work, forced there by family circumstances, health crises and other unforeseen circumstances.
Even in the absence of financial shocks and family issues, early retirement can create problems with boredom and a lack of purpose. After you retire, you may consider starting a less stressful job that fills you with purpose but can also supplement your retirement savings income. Before you retire early, it is important to evaluate these concerns and always have a contingency plan in place.
Plan accordingly now so you can enjoy your later years no matter what life brings your way. Just prepare yourself to be flexible, as you can never quite plan completely for the unexpected.
For more help on planning for retirement, either early or at a normal retirement date, reach out to the knowledgeable advisors at CPK Wealth Management. We can help you with your finances to save enough for retirement and turn your dreams into a reality. Give us a call today at 239-230-2177 for a free consultation and to learn more about how we can help you with retirement planning at rates likely better than your current advisor can offer.