Retiring early may seem like a dream, but the reality is that it takes a lot of sacrifice and hard work. In a nutshell, you can achieve this goal by being conservative with your spending, getting out of debt, and living simply. By planning ahead, you can retire early and maintain a comfortable lifestyle going forward.
5 Ways to Save Money & Retire Early
1. Determine how much money you need to save.
In general, saving money boils down to spending less than what you make; this is the crux of financial independence. Ask yourself what type of lifestyle you want in retirement. This will determine your budget. The smaller your budget, the more feasible it is to retire early. Use this retirement fund calculator to convert discretionary expenses into savings.
Once you’ve figured out how much you’ll need to retire, create a mock retirement budget. Do not include mortgage payments because you’ll want to eliminate all debts prior to retirement. Not only will debt cut into your savings, but it will prevent you from retiring early.
2. Invest in a diversified portfolio.
Invest in a portfolio of low-cost index mutual funds and monitor it to make sure the percentage allocations don’t get out of whack. There are numerous investment guides online where you can mimic top-performing portfolios with low-cost mutual funds yourself instead of paying a fund manager to choose and manage your investments. Try to cut out all discretionary expenses in order to avoid credit card debt so you can invest more money in your portfolio.
3. Figure out health care.
If you decide to retire early, and you’re younger than 65, you won’t be able to qualify for Medicare (there are, of course, exceptions to this rule). Therefore, you’re going to either have to get private health insurance or rely on the Affordable Care Act. How will you fund your health care costs?
4. Meet with a financial advisor.
This may seem like another expense. However, speaking with a certified financial planner or advisor can not only help you gain more understanding of the financial planning landscape, but can also help you make more informed decisions in your best interest. In addition, he or she will hold you accountable for your goals and make sure you stay on the right financial track. There are many professionals to choose from, so make sure you understand the differences between a financial planner and advisor.
5. Manage your taxes.
Taxes are still an important consideration even if you retire early. Make sure to estimate your annual tax bill in your “total savings needed” amount. If you’re withdrawing money from a 401(k) or IRA, you’ll owe income taxes, as well as a 10% penalty fee if you’re younger than 59 1/2. Social Security benefits are also taxable if you’re income exceeds a certain amount, and benefits you’ve claimed will be temporarily reduced if you continue to do consulting or part-time work post-retirement.
There are many factors to consider in order to retire early. However, with the proper debt management and budgeting plan, this dream can become your reality, too!