Like waking up early to see the sunrise, planning to retire early can be incredibly rewarding.
Whether you equate early retirement with the youngest age you can begin collecting social security (currently 62) or an age much, much younger, here are 8 key ways to get there as soon as possible.
Eliminate Debt and Retire Early
Debt weakens one of your most powerful wealth-building tools: your income. Payments toward debt reduce your cash flow, cutting into the amount of money you have available to save and invest for retirement.
The first step toward early retirement is to get out of debt, and that starts with paying off high-interest credit cards. Make a list of all debts, ordered from highest to lowest interest rate and prioritize paying off the highest-rate debt first. Meanwhile, reduce your spending, so you don’t continue to add to your debt balances.
The sooner you stop overspending and start paying down existing debt, the sooner that money can be redirected to saving for retirement.
Need some inspiration? Document your finances in the NewRetirement retirement planner and try out a scenario of eliminating debt as soon as possible. You will immediately see the impact on your near and long term finances.
Cut Household Expenses
If you want to retire early, you might need to make some short and long term sacrifices. Dramatically cutting expenses benefits you in several ways:
- It frees up more money to pay down debt and set aside for savings
- It conditions you to live on less money – which will come in handy when you lose earnings in retirement
- It reduces the amount of money you require to live on, thus lowering the amount you need to save
To get a handle on where your money is going now, sign up for a free finance tracking service like Mint or just create your own spreadsheet to track income versus expenses.
Then, relentlessly look for ways to cut costs, like spending on:
- Subscriptions you don’t use
- Services you don’t need
- Dining out
- Expensive entertainment or even just your cable bill
- Utility bills — wear a sweater or take a shorter shower
- Banking fees
In addition to cutting small expenses, get in the habit of periodically shopping around on larger expenses such as home repairs, car insurance, and cell phone plans.
Dramatically Reduce What You Spend on Housing and Transportation
Remember that housing and transportation are some of the largest costs for working Americans. While conventional advice is to keep housing costs at no more than 30% of your income, if you want to retire early, you should aim as low as 15 to 20%. That may mean moving to a more affordable city and avoiding homes that are large and high-maintenance.
To retire early you will likely need to drive older, more affordable cars. According to Consumer Reports, the average car costs more than $9,100 a year to own. You can reduce that number by choosing less expensive cars that are more reliable and cheaper to service and driving that car longer. If you really want to cut costs, consider living in an area with reliable public transportation.
Increase Your Savings Rate
Every time you cut an expense or get a bonus or free up money in your budget one way or another, make sure that money is redirected to either:
- Paying down debt
- Saving for retirement.
Create Guaranteed Income Streams
Research has shown that retirees who receive guaranteed income in retirement tend to be happier than those whose retirement income is vulnerable to stock market fluctuations. Two ways to create guaranteed income are pensions and annuities.
It’s hard to find a private employer offering a pension these days, but many government agencies still do. It’s not uncommon to find people who go to work for a government agency for ten years solely for the pension. However, you should weigh the benefits of a guaranteed pension against any possible reduction in current salary. You may be better off seeking out a higher salary now and buying an annuity to generate guaranteed income in retirement.
An annuity is essentially an insurance contract in which you pay a financial institution a lump sum or a series of payments in exchange for a promise to pay you a regular income. With an immediate annuity, you will start receiving payments right away. A deferred annuity begins paying you at some point down the road. Before you purchase an annuity, make sure you understand the expenses, management fees and any surrender charges you’ll be required to pay if you later want out of the contract. And to make sure your guaranteed income really is guaranteed, stick to annuities issued by insurers with high financial ratings from companies like A.M. Best or Standard & Poors. If the company goes belly-up, your state’s guarantee fund will take over the policy, subject to the coverage limitations set by your state.
Plan for a Retirement Job
For many early retirees, retirement isn’t really about never working again. It is about having time and freedom to pursue hobbies, start a business, or travel. The right retirement job can provide an income stream and possibly other benefits while giving you the flexibility to pursue your passions.
Part-time employment isn’t just fast food and retail jobs. Many websites have popped up in the past few years that connect experienced professionals to part-time and flexible jobs. Check out Flexjobs.com, RetirementJobs.com, and Indeed.com for work that matches your skill set and interest. You may also be able to parlay your professional experience into freelance consulting work that you can do on your own terms.
In your talks with potential employers, make it clear exactly what you are after. Be up front that you are in the market for part-time or flexible work. While you might be worried that this level of honesty will harm your chances of being hired, it can actually help you. Employers may be reassured that you’re not just looking for a job to hold you over until something better comes along. They may also like the idea of getting someone with your experience at a lower rate since you’ll be working fewer hours.
Retire . . . But Only Temporarily
For a long time, the “norm” was working for 40+ years, then taking the time to enjoy yourself. But with more people working well into retirement age, why not find a way to inject bursts of freedom and fun into your career path?
Consider taking a sabbatical or a career break for a few months or a year. Some companies provide formal sabbatical programs for employees – meaning the time off may be paid or unpaid, but the employee will have a job to return to. Other employers don’t offer formal sabbatical programs, but you may be able to request an unpaid leave of absence to travel or just try out the work-free world for a while.
Pick a date and duration for your break. Don’t just think about “someday.” Make it concrete. Then start planning your finances: paying off debt, reducing expenses, and planning for covering expenses while you’re on your break.
Next, figure out what you want to do with this time. Do you want to travel, volunteer, try a new career, write a novel, or work on projects around the house that you started but never had time to finish? Don’t take a career break without a plan for spending your time. Doing nothing for several months will likely just lead to boredom and depression.
Create a Really Good Early Retirement Plan
To retire early – with enough money to stay retired – is a tall order, but it is doable. Stay out of debt. Live simply. Save money. You may even need to change your definition of retirement. Early retirement will require tough choices and a strong plan.
The NewRetirement retirement planner is a good place to start. It is one of the most personalized and detailed retirement calculators available. Forbes Magazine calls it a “new approach to retirement planning” and the tool was named a best retirement calculator by the American Association of Individual Investor’s (AAII).