Want to Retire Before 65? These Tricks Will Help You Reach Your Goal
Research shows that one in three American adults don’t think they have enough funds to keep them afloat after retirement. With such pessimistic views on retirement savings, most people can’t even think about retiring early.
What will happen to their 401k plan if they leave their jobs early? Will they have enough to survive afterwards? These scary questions can keep anyone from believing that they can retire early – but let’s not forget that others have accomplished this feat before you, and these smart financial strategies will help you reach your goal of early retirement too.
Be Number Savvy
When it comes to retirement, numbers are everything. There are two numbers that you need to take into account in specific: the anual income you will need after retirement, and how big your retirement portfolio must be in order to generate the income you need.
The conventional way of determining retirement income is by estimating that you will need at least 80 per cent of the income you make during pre-retirement. This isn’t a bad estimate to start with, and for the sake of simplicity, we will assume this to be true.
The actual number could vary depending on your plans after retirement, healthcare expenses, or housing situation. Based on how you plan to live after retirement – whether you wish to move to a cheaper neighborhood, downsize your house or pay off your mortgage – you can adjust the annual income and calculate the size of the portfolio accordingly.
Calculating the size of your portfolio is another crucial factor to determine how big your saving pool must be to provide the post-retirement income you require. Again, for the sake of simplicity, we’ll assume that the conventional withdrawal rate of 4% from the investment portfolio also holds true in your case.
In case you expect your retirement income to be greater than 80% of what you currently make, the withdrawal rate will need to be higher than the conventional rate. If your investment portfolio generates between 8% and in 10% income, you will not only have enough money for the rest of your post-retirement life, but also be able to grow your fund with the excess income.
Caution: When calculating your post-retirement annual income, don’t forget to take inflation into consideration.
Lower Your Cost of Living
If your goal is to retire early then it makes sense to lower your current cost of living so that you’re able to save more. Slashing your living costs now will not only give your savings fund a boost, but it will also get you in the habit of living frugally – a quality that you will need to have after retirement.
Lowering your cost of living will come at the expense of eating out, driving expensive cars, living in a high-cost neighborhood and taking vacations. What’s the upside of living this way? Once you retire early, you will have more time than traditional retirees to catch up on all the fun that missed out on while you were saving money.
Most people aren’t able to lower their cost of living because they associate happiness with money and think that scaling back on luxuries can result in a less fulfilling life. The truth is that stowing away a huge chunk of your income and watching the magic of compound interest grow your fund is far more satisfactory that spending the money on something that will provide no value in the future.
Stay Away from Debt
If you have to lower your cost of living in order to save more retirement, it goes without saying that debt is the one thing that can come in the way of realizing your early retirement dream. Debt won’t only slash your retirement savings but also get you in a dangerous mindset that borrowing money is completely okay, making you more likely to carry some of the debts into your retirement. If you continue borrowing money to pay for depreciating assets like automobiles and other luxuries, the interest payments will not only increase your current cost of living but also kill any hopes of retiring early.
Most financial experts think that despite its convenience, credit card debt is costly and wasteful. A great way to avoid getting into debt in the first place is by not spending more than the income you make. If you have accumulated debt and want to get rid of it as quickly as possible, pay off the balances with the highest interest first so that you have mire money freed up to pay off the remaining debt.
Remember, just like compound interest works to increase your savings exponentially, it can also work against your favor and increase your debt by several times. This is why making just minimum payments on credit cards is considered financial suicide.
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