Many of us dream about quitting the rat race to spend more time with our friends and families. But with bills to pay and daily costs only rising, the thought of retiring at all, let alone retiring early can seem like a distant dream. While it’s true that the vast majority of people don’t retire before 61 or older, it’s not impossible to buck the trend with some careful planning and determination.
If you’re looking to be one of the few who manage to secure their financial independence at a younger age, then here are some things you need to focus on.
In order to determine the earliest likeliest age at which you can seek retirement, you need to figure out how much income you’ll need to sustain your lifestyle post-retirement. You will also need to know how much return you must earn through income and investments in order achieve these savings. When calculating these amounts you must account for inflation which will steadily decrease the value of your assets over time, and increased amount of leisure time and the costs related to it.
Generally in order to ensure your money does not decrease over time, you will be restricted to spending from interest rather than principal. The rule of thumb states that your lifestyle should be supported by withdrawals of only 4% of your total wealth, with the expectation that your savings and investments will generate a return of 6-10% ensuring constant growth.
The key to ensuring your long-term future is how much money you have, and in order to achieve a sufficient amount to last you for multiple decades, you’ll need to get used to living far below your means.
You should be looking to save up to 30% of your income every month. This means no large unnecessary expenditures, and a cost-cutting focus on all your smaller monthly expenses as well, including snacks, utilities, and entertainment as well as credit card payments.
If you’re lucky enough to achieve a promotion and commiserate income rise, then look to bank at least half of your salary increment. Just because you’re earning more doesn’t mean you should be increasing spending either. While the occasional splurge can be budgeted for if your income affords it, make sure to always be on the lookout for deals and cost saving opportunities.
Apart from a regular salaried position, you should be looking for outside sources of extra income. Invest your time and energy into pursuits that will generate returns long after your retirement. When checking out options, you should look for investments that protect you from tax effects. Some of these options include:
Tax-exempt bonds generally offered through the State or local governments offer consistent returns while allowing you to avoid federal and State taxes. Treasury bonds offered by the government are usually low-yielding investments but they’re safe from the fluctuations of the stock market, and any earnings are tax free.
Most investors will keep a portfolio of equities long-term; the taxes on these stocks are usually capped at 15% and restricted to earnings you receive from dividends or through sales. Holding on to blue-chip stocks will usually ensure consistent and rising dividends into the foreseeable future.
Investing in rental properties can also grant you huge tax savings alongside the consistent rental income. By hiring an independent management company to take care of maintenance and collection, you can earn passively from real estate for years to come.
Retiring at an early age will mean lots of free time. We recommend not letting all of it go towards leisure. Pursue hobbies and passions that can net you a secondary source of income, whether it’s freelance writing, consulting a new business or even art and design. While the earnings may not be large, this will supplement your living expenses and also keep your skills honed in case you do decide to return to the workforce.
We recommend keeping yourself open to the option of working again at all times, stay in touch with employers and think carefully before rejecting great opportunities. While the thought of early retirement is great, the reality of nothing but leisure time well into the future can take its own toll on your mental and financial health.