Early retirement isn’t just a pipedream; it’s a growing reality for a number of motivated and ambitious individuals who have decided to take retirement saving to a whole new level. These are everyday workers who start saving with salaries as low as $50,000 a year. Their goal? To achieve this definition of financial independence: doing what you want, when you want, while you are still young enough to enjoy it.
Could you retire early? According to a 2017 Retirement Confidence Survey by the Employee Benefit Research Institute, there is a big gap between when people think they can retire versus when they actually do. Only 9 percent of workers say they plan to retire before age 60, versus the 39 percent of retired individuals who actually did retire early. The stock market has been climbing steadily for the past eight years, with the S&P 500 index more than tripling since 2009. Want to know what you can invest in to achieve your dreams of financial independence? We’ve compiled a list of 5 key tips so you can rethink what’s possible.
TIP#1: INVEST IN A PLAN
Consider Kristy Shen and her husband Bryce: they were able to quit their jobs as computer engineers to retire early at the age of 31. People like Kristi and Bryce who get on track to retire early also get together with their spouse or partner or a financial planner, and they develop a plan. You can track your money like they did by using a simple spreadsheet, sign up for free online service like Mint.com, or you can add up the charges made to your credit cards and deducted from your bank statements. The key is to use the actual numbers of what you really spend versus what you think you spend. Knowing what you are spending now can help you in two ways:- It identifies where you can reduce spending to free up more money to save.
- It lowers your monthly expenses, which ultimately lowers the amount you need to save in order to retire.
TIP #2: INVEST IN STAYING PUT
Justin McCurry didn’t win the lottery or inherit from a rich uncle, yet he managed to retire early at the age of 33 with his wife and three kids. He did it by saving up to 50 percent of his income even when he was only making $25,000 a year, and here’s the biggest secret: he and his wife did NOT “trade up” in terms of where they lived. As their family got bigger, they invested in their starter home and stayed put. Housing costs make up the majority of most people’s monthly expenses. Experts suggest that your rent or mortgage payments should cost you no more than 30 percent of your income, but if you want to retire early, aim for an even lower number – 10 to 15 percent. Making the decision to be satisfied in a smaller house and not upgrading, as your salary increases, is one way you can significantly boost your savings. Instead of using your salary increase to fund a more lavish lifestyle now, choose to fund instead of the freedom of financial independence later.TIP #3: INVEST IN YOUR OLD CAR
The Money Wizard built up a savings account of $150,000 by the time he was 26-years old. He did it by becoming aware of the burden that came with owning things. While he can afford to drive a newer and nicer car, he chooses instead to keep his monthly fixed costs low by splitting the rent with his girlfriend and driving a 13-year-old truck that’s completely paid off. He is not alone. Since 2008, more and more people have been holding onto their cars longer and opting instead to invest in repairs to keep the car running. Transportation costs are usually cited as the next biggest expenses after housing. Another option is to go completely car-free and take advantage of the health benefits that come from walking or biking to work. By cutting these costs, you can put more dollars toward your retirement lifestyle.TIP #4: INVEST IN EXPERIENCES NOT THINGS
There’s a new trend emerging among consumers, led by the millennial generation (those born between born 1980-1996, now ages 21-37). A study by Eventbrite and conducted by the Harris Group confirms that the majority of millennials – 72 percent! – prefer to spend money on experiences rather than on material things. This can be good news for someone aggressively making their way toward early retirement. While it’s true that experiences can include expensive things like scuba diving, parasailing, and dining out, they can also include simple things like a backyard picnic, a hike on in a national park, or an evening stargazing with a bottle of wine and two plastic cups. It could be argued that living a meaningful and happy life is about creating and sharing experiences. These experiences then become our memories, which can in so many ways be the richest treasure we own.TIP #5: INVEST-TAX DEFERRED AND MAKE IT AUTOMATIC
If you haven’t started saving for retirement, the first place to go might be your company 401(k). Take advantage of the free money you can get from employer matching programs and commit to putting away the maximum amount the IRS will allow. The federal government puts a limit on how much you can contribute to your 401(k) plan, but other tax deferred-investments such as annuities don’t come with contribution limits. When your money grows tax-deferred, it benefits from triple compounding:- You earn interest on the amount you contribute.
- You earn interest on top of the interest as the investment grows.
- You earn interest on the taxes you would have paid if the investment was taxed annually.
