Early retirement is a popular topic of discussion on personal finance blogs like Mr. Money Mustache and Root of Good. The families in these two blogs were able to retire in their early 30s, which is about 30 years before most Americans will decide to hang up their lunchboxes for good.
Early Retirement Tips
Most young people assume that they’ll have to slave away until age 65 or 70 before ending their time working for someone else. It does not have to be this way. Here are some tips that can help you achieve retirement a decade or more before your colleagues.
Not all debts are created equal. A mortgage or student loans can sometimes pay off. It’s possible to spend less on buying a home than renting in many locales. Plus, you’ll build up equity while the mortgage serves as a sort of forced savings account. Student loans can lead to better jobs with higher pay. However, tons of credit card debt will definitely derail any goal for early retirement. The compound interest works in the opposite direction from what you want. It almost goes without saying that you’ll also want to avoid title loans and payday lenders, as the terms of these loans and the interest rates that usually accompany them are not intended to benefit the borrower.
Start To Save (Early)
In order to retire early, you’ll have to have enough funds available to support you indefinitely. This will require saving quite a bit of money in a short amount of time. It will also require keeping your spending relatively low, but still at a level that allows you to live comfortably. If you have a six-figure salary, and you can live like a person who makes $50,000 a year, you’ll be in great shape to retire early. This shockingly simple math behind early retirement shows that it would take 66 years to retire when saving 5 percent of your annual expenses. The number of years drops to 10 years if you can save two-thirds. The earlier you start, the more compounding can work its amazing power in your favor.
The easiest way to make sure that you’re able to save money is to make saving automatically. Many employers allow employees to break their direct deposits up into multiple accounts. Sending a portion of your paycheck to an investment account automatically is a great way to build up a nest egg that can lead to early retirement. If your employer offers a work-sponsored retirement plan like a 401k and offers a company match, this is a great option to build up retirement funds even more quickly.
Know Your Number
Many financial advisors recommend having at least a couple of million in the bank before advising people to pull the plug on paid work. This is not necessary. A research project known as the Trinity Study showed that it’s possible to retire as soon as you can live on 4 percent of your nest egg. In other words, if you add up your annual expenses and then multiply them by 25, you should be able to retire. Once you hit that number, paid work becomes optional whether you’re 35 or 65.
Early retirement is not a common occurrence. However, this does not mean that it cannot be done. By following these tips and investing as much as possible, more and more people are deciding to take the plunge and retire early.