- Sooner or later the idea of retirement crosses everyone’s mind.
- With that known, there are some who simply can’t wait until 65 to do so.
- If you’re thinking of retiring early, check out this article for 5 solid tips to help make your retirement wishes come true.
Sometimes you have to simply swim against the tide. While others suffer away inside their cubicles for eight to ten hours a daywith no end in sight, you’re making the right call for yourself through the consideration of chucking all this weekly drab and mediocrity to retire early.
But where do you start and what do you do? The following 5 tips given in an article that appeared on Nerd Wallet will set you on your way safely to an early retirement.
- Make some adjustments to your current budget
While the first tip to an early retirement is simple in concept, it may be a different scenario when it is put into place. That first step, of course, is to cut your spending…and not just by resisting your next urge for a Mocha Frappuccino, but by much more. What is more? Try 50%.
That’s right, 50%.
50% is the magic number that most early retirees aim to reach when they cut their spending, with what remains going straight into an Individual Retirement Account or IRA.
Why an IRA? Simple, the banks don’t offer enough in interest to facilitate a well-funded retirement, particularly an early retirement.
An IRA by nature will make multiple times more money than a standard bank account. This is because IRAs are made up of stock holdings that in many cases due to the market’s activity usually rise much more quickly than a bank account.
At the same time, you should try to wipe out as much debt as possible, even the good debt as the article on Nerd Wallet suggests.
Good debt comes in the form of home mortgages and car loans. If you have one of these types of loans another route you can take to help you to your early retirement is to double your monthly payments. Doing so can truly increase your retirement progression while also ensuring that you won’t have to worry about debt once you do feel you can safely quit working.
The Nerd Wallet article also suggests that you be creative with your anti-debt actions. For instance, look into your everyday expenses. Maybe you can…
- Bring a lunch to work instead of eating out five days a week.
- If you own one, ride a bicycle while doing errands to save on fuel and other car-related expenses like parking.
- Cut back on the cable channels. After all, do you really watch a month’s worth of a sports or movie package?
- Eat at home more often.
- Just buy less “stuff.”
These actions along with continuous saving can speed up your retirement. Before you know it, you’ll be in a beach chair instead of an office chair.
- How much do you think you’ll spend in retirement?
Do you know how much you’ll need for retirement? If you’re already slashing your debts and saving money while living a frugal yet adequate lifestyle, you’re definitely well on your way.
Now you need to calculate your annual retirement spending. As outlined in the Nerd Wallet article, take a look at your current monthly spending and consider what will go down, what could go up, and what might be added or eliminated altogether.
Once you do that, add your final monthly expense estimates, multiply by 12 and that will calculate your annual retirement needs. If you want a buffer with that amount, Nerd Wallet suggests you increase your retirement budget by 10% to 20%.
- What are your total savings needs?
Once you’ve curtailed your spending, Nerd Wallet suggests the next two rules of thumb used by many early retirees.
The first is the rule of 25: You should have 25 times your planned annual spending saved before you retire. That means that if you plan to spend $30,000 during your first year in retirement, you should have $750,000 invested when you walk away from your desk. $50,000? You need $1,250,000. Incidentally, this is good motivation to get that budget in check.
The rule assumes that your retirement nest egg is invested so it continues to grow — after all, because of inflation, your spending will increase at least slightly each year, and your investments need to keep up with that.
This brings up the second rule which is the 4% rule. The 4% rule indicates that retirees can withdraw 4% of their invested savings during their first year of retirement. Each year after, retirees can draw that amount adjusted for inflation.
- Invest for growth
Of course everyone knows that the earlier they retire, the less time they’ll have to save. That goes hand-in-hand with having a longer period of time in which a retiree has to live off their money.
This translates into better investment returns. While it is not advisable to put your retirement investments into risky stocks, with the help of a qualified financial adviser, you can fine tune your IRA so that it can bring in as much assets as possible. You also should diversify your holdings to have a nice balance should one sector of the market suddenly fall behind the rest of the market.
- Keep your expenses in check
Nerd Wallet states that it is very important that you stick to the 4% rule while in retirement.
It is designed to allow your spending to increase with inflation, but not to withstand large spending increases beyond that. Each spending increase — particularly recurring expenses, like a new debt payment — increases your likelihood of running out of money.
And of course, once you run out of money, you may have to consider the opposite of retirement, which is going back to work.
Conclusion
Retirement can be a wonderful time in a person’s life, particularly if your retirement is an early retirement. Just bear in mind that your spending and saving habits may have to be adjusted as you work. But once you’re used to that change in your lifestyle, it’s all downhill from there, making retirement a strong reality and not a fleeting dream.
For more information, look into these articles:
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- Long Term Objective – A Factor In All Your Job Search
