In today’s economy, retirement has become an elusive goal for many Americans who were hit particularly hard by the fallout from the housing market collapse. Some older workers are even facing the possibility of having to continue working long past retirement age. The concept of retiring early may seem foreign to a large part of the population but if you’re diligent about saving, it could become a reality. Here are some tips:
First off, what exactly do we mean by early retirement? Is there a particular early retirement age? That depends. “Early retirement” for your 401(k) is before age 59.5. If you start taking distributions from your 401(k) before that age you’ll have to pay early withdrawal penalties. Early retirement for Social Security means before your Full Retirement Age as mandated by the Social Security Administration. Employees of government agencies may think of early retirement as retirement facilitated by the Voluntary Early Retirement Authority. Folks who work for private companies may associate early retirement with the early retirement packages some employers offer in place of lay-offs.
Most people think of “early retirement” as any time before age 65, since that’s generally the cut-off for senior citizenship. These days, plenty of early retirement blogs and forums will tout the benefits of leaving the workforce early. Want to retire early and join their ranks? Here are our tips:
1. Save, Save, Save
Personal finance experts have long recommended that you set aside at least 15 percent of your income to build your nest egg but if you’re looking to retire early, you’ll need to kick your savings strategy into high gear. Statistically, you’ll need to work for about 45 years in order to save up enough to retire based on a 15 percent rate. Doubling up to 30 percent shaves off about 15 years while socking away 40 percent of your income cuts the time in half.
If you haven’t started saving, you can’t afford to wait any longer to start squirreling your cash away. The sooner you begin saving, the sooner your money can start to grow. If you’re already maxing out contributions to your employer’s retirement plan you may be able to accelerate your savings by chipping into an IRA. For 2014, you could put up to $5,500 into a Roth or traditional IRA and you may even be able to score a tax break for your contributions.
2. Cut Your Expenses
Putting away money for retirement can be a challenge if your expenses are eating up a substantial part of your income. The more fat you’re able to trim from your budget the more money you’ll have to throw towards your savings. If you’re not sure how much is going out each month it’s time to sit down and track your expenses. Writing down everything you spend is the easiest way to see the numbers in black and white.
Once you see where your budget leaks are, you can start cutting back on non-essentials. Whether it’s a daily cup of coffee or dinners out every week, there’s sure to be something you can give up in order to boost your savings. After you’ve gotten rid of the smaller things you can take a look at some of your larger expenses, such as your home or car. For example, taking public transportation or riding a bike could save you thousands each year and get you to early retirement that much faster.
3. Be Realistic
One of the most important questions you need to ask yourself is why you want to retire early. For some, it’s because they want to travel the world. For others, it may mean spending more time with family or being able to dedicate time to charitable causes. The more specific you are about how you plan to spend your time the easier it is to evaluate your future financial needs.
Depending on what you want to do, the amount of income you need to maintain your lifestyle may increase or decrease significantly once you retire. If you expect your costs to go up, then you’ll need to factor that in when you’re working on your savings strategy. If you think your expenses will stay the same or even go down, you still need to be vigilant about how much you’re saving. Inflation can take a big bite out of the value of your nest egg and relying on Social Security or pension benefits to cover the gap could leave you coming up short.
Drafting a post-retirement budget can give you an idea of how much money you’ll need to cover your expenses and whether your current savings strategy will allow you to reach your goal. For example, if your home is paid off you’ll still need to pay for things like property taxes, insurance and maintenance. If you’re planning to retire before you’re eligible for Medicare you’ll need to factor in the cost of health insurance and out-of-pocket expenses.
Unless you’re expecting a huge windfall, retiring early will require some hard work and careful planning. The younger you are the better but it’s still not too late even if you’re already in your forties or fifties. If you’re willing to be aggressive when it comes to saving you could find yourself hitting your goal years before the rest of the crowd.
Related Article: Saving for Retirement with a Small Salary
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