Saving for early retirement boils down to simple economics. If you’re spending 100 percent of your income, you’ll never be able to retire comfortably, no less retire early. Using the combination of smart investing and frugal spending, you can depart the workforce years before traditional retirement age. As soon as your savings and investments allow you to pay fully for your living expenses while also leaving a cushion for inflation, you’ll be ready to retire early.
Trim The Fat
One of the first steps to saving for early retirement is to find areas you can cut back on your spending. Although making small changes like brewing coffee at home instead of grabbing a daily latte at Starbucks is helpful, you’ll want to think bigger. Create a detailed list of what you’re spending each month in your household. The list will also be a point of reference of what type of income you need to bring in each month once you plan to retire.
Start off by nixing all the expendables in your budget. This may include taking fewer vacations and dining out less often. Although these changes may not save you much at first, the money will add up over time. Then, look at your larger monthly bills and find ways to cut back. For instance, if your kids no longer live at home, do you need that four-bedroom property set on an acre of land? Downsizing will not only reduce your mortgage payment, but also lower your taxes and utility bills. Another way to save on housing is to switch from a 30-year to a 15-year mortgage to drastically slash interest charges.
Save for early retirement by living below your means. Although you may want the shiniest new car on the lot, purchase a reliable used vehicle instead. Just because you can shop at a gourmet grocer, doesn’t mean you should. Also, don’t get wowed by the latest electronics gadget to hit the market. Stick with your old phone until it is no longer working. If you can’t afford something, don’t buy it. At all costs, you should avoid using credit cards. And if you have credit card debt, your goal should be to eliminate it as soon as possible.
If your employer offers a 401(k) or 403(b), check to ensure you’re receiving the maximum amount of matching dollars from your company. As far as your investments, diversify your portfolio instead of playing it safe. Never taking any risks with mutual fund investments will hurt your chances of retiring early. Focus on accounts with tax advantages that do not carry early withdrawal penalties. Examples include tax-exempt state and municipal bonds, U.S. Treasury bonds, pensions, and dividend paying stocks. If you have Roth IRA investments or 72(t) and 72(q) distributions, you’ll have to wait until age 59 ½ to avoid tax penalties.
Before you retire early, most experts agree you should have assets that value up to 10 to 15 times your current salary. For instance, if you’re making $60,000 annually, you’ll want around $600,000 available to you by the time you retire. The smartest way to retire early and succeed is to make a plan and start saving at a young age.