According to a report by the Center for Retirement Research, the average retirement age in the United States is 64 for men and 62 for women. But early retirement is the dream for many.
For those who do not receive a hefty salary nor have plans to become a multimillionaire any time soon, early retirement may seem like a goal out of reach. But with some planning and savings, you can prepare for a more comfortable retirement at an early age. However, be prepared to make some sacrifices today.
The FIRE Movement
FIRE is an acronym for Financial Independence, Retire Early. The concept emerged a few years ago and encourages financial discipline practices to enable someone to retire at 40, even 30. This can seem like extreme living for some, but even done in moderation, it can build wealth.
First of all, you need to identify your “FIRE number,” which is basically how much money you will need to save to retire and live comfortably for the rest of your years. For most people, this figure represents 25 times a household’s annual spending.
After reaching your number, you must understand how to build wealth.
Determine How You Want to Live in Retirement
Think about what you intend to do in your retirement years. Think about house and living expenses, as well as location. Start establishing how much this lifestyle will cost to understand how much you’ll need to save for retirement. The more money you set aside for your retirement savings, the more freedom you will have to do everything you have planned.
Don’t forget to also think about medical issues that can come up in older age (especially if you have serious health conditions) and other unforeseen financial emergencies. You will need to set aside a budget for those as well, as a kind of additional emergency fund.
Set the Budget
With your retirement planned, figure out what you need to get to that lifestyle you want. Break it down into a realistic number of years, considering your current needs and expenses to establish ways to achieve this through your income. It’s important to establish priorities and give an estimated budget for each category of your lifestyle, not forgetting details like health insurance and taxes.
Save 50% of Your Salary
The easiest way to ensure a comfortable retirement is to put 50% or more of your net salary into savings, retirement accounts, or investments. For that to happen, cut expenses as much as possible.
It can happen if your lifestyle is simple and without unnecessary expenses. Think about all the things in your life you don’t really need to buy (like new clothes, dining out, lavish vacations), and start saving now. Most people who get early retirement lead a humble life even though they can afford to spend more because they prefer to save for the future.
Max Out Retirement Plans
Some employers offer a traditional 401(k) plan, but you can also consider establishing an individual retirement account (IRA) to help save for the future. Put the maximum income you can in both. If your company offers to match your 401(k) contributions, be sure to take advantage of this as it is free money. Contributions to a traditional IRA may be tax-deductible.
Investing a significant amount of your savings is a smart way to receive substantial payoffs later. How you invest depends on factors like your income, age, and goals.
For example, if you don’t intend to take too much risk, avoid more volatile investments, but be prepared to reduce the expected rate of return. If you are younger, there’s more time to take risks and recover any investment that hasn’t paid off. Many of these funds may not be worth tapping into until older age, so be sure to consider this when creating long-term financial plans.
The goal for many wanting to retire early is to escape the workforce. But while you’re in it, take advantage of free time by finding side hustles. Some ideas for making extra money include renting extra space at home, selling craft products, and selling your skills online on freelance platforms. Many people turn their hobbies into something profitable, offering themselves as pet-sitters or selling articles for websites and newspapers.
Save Now to Enjoy Life Later
Retiring early depends on whether you have discipline in how you live today. In other words, your practices of spending or saving money now will directly affect your ability to retire earlier and with some comfort.
To achieve your goal, cut expenses, pay off debts, and put as much of your salary as possible into savings. Even if you don’t take the FIRE concept seriously, it is wise to start planning your retirement as early as possible. Sometimes a small behavior change is enough to guarantee a quicker and more comfortable retirement.