Does retiring at 40 or 50 sound too good to be true? For some people, the dream is a reality. Follow in their footsteps to an early retirement with these five tips to prepare for an early retirement:
Do the Math.
A common worry about retiring, especially about retiring early, is that you must have a huge nest egg saved up, which can be difficult to do. However, that equation only considers the saving side of retirement, and not the spending side. Young retirees know that magic number isn’t their income, but rather their savings as a percentage of their take-home pay, which tends to be much more attainable. With that equation, it doesn’t matter how much money you make a year as long as you are saving a good chunk of it.
“If you are spending 100 percent of your income, you will never be prepared to retire . . . If you are spending 0 percent of your income and can maintain this after retirement, you can retire right now,” said retirement blogger Peter Adeney.
The greater percentage of your paycheck you can save, regardless of the size of your paycheck, the faster you can retire—and it might just be sooner than you think.
For early retirees, spending less is a way of life and something they have done for years. Early retirees tend to be somewhat frugal in at least a few areas of their lives and stick to a budget. One common thing good non-spenders do is weigh the happiness that will come from two levels of purchases—will you be that much happier if you spend money to go out to eat versus eating at home? Start now by becoming aware of where your money goes; creating good habits of not spending makes it easier to save the money required to retire early, and it stretches that money further.
Budget for healthcare.
One of the most commonly overlooked expenses for young retirees is healthcare. Medicare eligibility doesn’t start until age 65, but most people lose employer health benefits after they retire. Consider joining your spouse’s plan or signing up for COBRA coverage, which extends your employer health plan for up to three years after leaving a company. There are also options like finding a plan via your state’s marketplace. And while shopping around can help you find a somewhat lower rate, healthcare is still a mandatory expense.
“You can’t dial these expenses up and down much—they are what they are,” said Sunit Patel, senior vice president at Fidelity Investments.
Whatever your choice, it will likely make a dent in your monthly budget, so plan ahead to avoid getting surprised later.
If you’re looking for a big investment secret or insider tip from early retirees, there isn’t one. While investing is definitely the way to go, most early retirees keep it simple and started investing early, allowing them to create a steady, long-term investing plan with compound instead of jumping into shorter-term, high risk/high reward investments. As an example, someone who invested $100 a month between the ages of 20 and 30 still ends up with more money than someone who invests $100 a month between ages 30 and 60. You can still be aggressive with your investments, but the earlier you start, the more time you have to watch that money grow.
Find Passive Income.
Even an early retirement isn’t immune from challenges and unexpected financial troubles. One of the best ways to provide a nest egg that keeps on giving is to find a source of passive income. That way, no matter what happens as you are saving or retiring, you will always have some money coming in. A popular passive income option is real estate, though it does come with a steep learning curve. Other options include royalties from writing a book, sales from a creating a blog or app, running an online course, or rental services. Find someone that matches your interests and talents and use it to cushion the uncertainties of retirement.
It’s never too early to start thinking about retirement. By taking the steps to get your budget and investments in order when you are young, you can reap the benefits of an early and comfortable retirement.