Retiring early has obvious advantages, but it can also have disadvantages. Early retirement is often envisioned as ditching the daily grind for a worry-free lifestyle in your 50s and 60s. However, if you are not properly prepared, a tighter budget might make that lack of the daily grind seem less enjoyable.
However, if you are armed with a plan (such as one including some of the following strategies), early retirement can be everything you’ve dreamed of and then some. Starting early is an obvious first step, but as you’ll see below, there are plenty of other strategies to choose from, such as being frugal, having moderate risk in your portfolio, having multiple streams of income and maximizing contributions whenever and wherever possible.
Something I often see with clients who come to my office hoping to retire early is they’ve already done some research themselves; they’ve had early retirement as a goal and knew they needed a strategy in place to get there. But they were in need of advice beyond contributing to 401(k) plans and being frugal, such as on allocation or risk management, to truly maximize their return and retire comfortably.
Those who are not prepared, on the other hand, could still very well have money sitting in the bank or in real estate and other endeavors. From there, it’s a matter of looking at which of these options are still viable and how best to utilize the strategies available to them.
If you are in the midst of your career and have plenty of planning time before your ideal retirement date, below are some tactics you’ll want to consider to help you retire early:
1. Living Below Your Means
This might be difficult depending on your obligations, but many of the ultra-rich have practiced this. They stay in their same home, because they don’t necessarily need more space (Warren Buffett still lives in a home he bought in 1958). When it comes to vehicles, they keep the same car, because they don’t need anything too frivolous (Amazon CEO Jeff Bezos still drove his Honda Accord until 2013). They also might not splurge on decadent dining experiences (Mark Cuban admitted to living off macaroni and cheese). These and many other frugal millionaires and billionaires are on to something. And it’s that living under your means can pay dividends.
2. Ensuring You’re Not Just Relying On Social Security Come Retirement
While Social Security is one of the few income sources that is guaranteed for life, it might account for considerably less than your desired income in retirement. What will your other sources of income be to ensure you can retire early? Do you have a pension, a 401(k) plan, an individual retirement account, personal savings or other miscellaneous income (such as rental properties)? For those retiring without an employer pension, a portion of their 401(k) plan or IRA savings can be rolled over into an annuity to create additional inflation-adjusted income. Determine these income sources in advance to ensure less stress upon retirement.
3. Tracking Your Progress Monthly (Or Having Your Financial Advisor Do So)
You can’t get to where you’re going without knowing where you currently stand. If numbers and finances overwhelm you, work with a financial advisor to take this burden off your shoulders, and let them do the planning for you. They may very well bring things to your attention that you have not thought of (such as ways to minimize fees and use your assets to your advantage, tax tips, etc.).
4. Protecting Your Portfolio
This can be done in a number of ways, including by choosing quality investments and ensuring you are minimizing fees and expenses. Avoiding overly expensive mutual funds or buying things that have higher fees can help minimize what’s being taken out of your nest egg.
5. Saving A Minimum Of 10 Times Your Highest Annual Salary
This straightforward strategy involves having a minimum of 10 times your highest annual salary in savings by the time you retire. For example, if your highest annual salary was $75,000, you’ll want to have $750,000 in savings. Don’t let this number scare you; it really is achievable.
6. Using The ‘100 Rule’
Now sometimes called the 110 Rule or 120 Rule due to the increased average lifespan of Americans compared to decades ago, this rule asks you to subtract your age from 100 (or now 110 or 120) to determine the percentage of assets you should invest in stocks. For a 25-year-old, this would mean investing 75% in stocks, while the remaining 25% could go into lower-risk investments. For a 50-year-old, this would mean a 50/50 split in stocks and bonds.
7. Maximizing Your Retirement Contribution
This means investing the full $19,000 allowed each year into your 401(k) or 403(b) plan plus the maximum amount of $6,000 into a traditional IRA or a tax-advantaged Roth IRA. If you are age 50 or older, you can make catch-up contributions of an additional $6,000 to your employer-based plan and an additional $1,000 to your IRA. This will give your retirement savings a nice boost. A good goal to aim for here is to maximize your retirement contribution from your paycheck by your 40s at the latest.
From here, it’s all about looking at what combination of investments and contributions works best for you, since every person is different. Your financial goals, frugality and list of to-do’s while relaxing in early retirement all play into what strategies will best get you there sooner rather than later.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.