Many Americans dream of retiring early. Who wouldn’t want to leave work when they still have the time and energy to truly enjoy the rest of their life?
Unfortunately, for most, this remains just a dream – many Americans struggle to even retire by standard retirement age, which ranges from 59 ½ to 67. But early retirement is possible with some hard work and the help of the right financial strategies.
Make your retirement dreams a reality using the following time-tested tactics:
Save, and then save some more
To have any chance of retiring early, you need to save more aggressively than you would otherwise. An early exit from the workforce means you have less time to build your retirement nest egg, and you’ll need that money to last longer than the average retiree. This means you need to set aggressive monthly savings targets, higher than you’d set if you were planning a more traditional timeline.
Here’s an example: If a 30-year old needs to save $1,000 a month to reach their retirement savings goal at 65, they would need to save $2,000 a month to reach that same goal at 55, assuming a 7% return on their investments.
To get an idea of exactly how much you need to save, you should contact your financial advisor so they can build you an estimate based on your age, retirement target, and current salary.
Find other sources of income
Making the transition to zero income is a tough adjustment. Building up extra sources of new income will help reduce the pressure on your investments after you retire. Some people start an online business or freelance part-time. While your new venture may not always add up to a lot of money, it still supplements your retirement savings and can also keep you from getting bored – a common problem of early retirees.
Real estate is another great way to build a new income stream. Investment properties generate regular rent checks and, once your portfolio is large enough, you may be even to live entirely off your rental income. Self-directed IRAs use the tax benefits of an IRA to allow you to grow your estate portfolio more effectively, even before you retire.
Invest outside of retirement plans
IRAs charge a 10% early withdrawal penalty if you take money out before the age of 59 ½ (regardless of whether you are still working or not), while 401k accounts do not allow penalty-free retirement withdrawals until you are at least 55. If you want to retire early, you should think about investing some of your money outside retirement plans in a taxable investment account. Depending on your needs, you may be able to live off that money until you are old enough to start making penalty-free withdrawals from your retirement plans.
Pay off all your debt
Debt is a huge drain on your income. Between mortgage payments, car loan payments, credit cards, and student loans, it is not uncommon for 50% or more of your monthly income to go towards debt. If you take these payments out of the equation, you will be able to meet your needs on a much smaller monthly income. Set a goal to pay off all your existing debts before you retire and commit to staying debt-free from that point on.
Keep your work options open
While early retirement is a decision you should consider very carefully, it helps to think about a safety net, should you need to go back to work. Talk to your employer about the prospect of returning in a few years and make sure to never burn any bridges with your former employers (this is sound advice in any context).
Some early retirees also discover that they are not well-suited for the retirement lifestyle. All that spare time can leave you feeling bored. Perhaps what you actually needed was just a temporary break to travel and recharge. You may find yourself eager to get back to work, so make sure that remains an option.