Whether you started putting money into a 401(k) from day one of entering the workforce or have yet to begin saving, early retirement is possible. That said, there are a few retirement planning tips and tricks you’ll need to follow before you can gain financial independence and retire early. From researching the best places to retire to establishing good retirement saving habits and more, here are a few strategies you can use to take control of your future retirement.
- Estimate Savings Needs
- Make Smart Investments
- Create a Retirement Income Plan
- Move Somewhere Retirement-Friendly
- Find New Ways to Spend Your Time
Estimate Savings Needs
Once you determine how much money you’ll be spending each year in retirement, you need to estimate how much you’ll have to save to afford those living expenses. The concept of saving enough money to retire early may sound daunting at first, but thankfully there are a number of early retirement saving strategies that can help keep you on track for retirement.
Get Out of Debt
Saving for early retirement is easier if you don’t have lingering debt, so get rid of any outstanding charges against you as soon as you can. Consolidate debt where appropriate, commit to paying off as much as you can each month, and get a balance transfer credit card with low or 0% interest.
Make a Budget
Since you’ll probably be spending more on recreation in your retirement years, it’s important to account for an approximate monthly recreation budget. You’ll save money during your retirement in other areas, too, like the amount you spent on gas each month for your work commute, so keep in mind some areas in your current budget may shift to new areas in your retirement budget.
Calculate Your Annual Expenses
In order to know how much you need to save for an early retirement, you’ll first need to get a better idea of your annual retirement expenses. Start by adding up your recurring monthly expenses. Then, add in other expenses that are currently covered by your employer, such as health insurance.
Be Mindful of Spending
Most early retirement strategies revolve around mindful spending. So when saving up for your own retirement, set a budget and stick to it. To accelerate your savings, use an established budget model like the 50/30/20 method. According to this method, you should spend 50% of your income on essentials, 30% on “wants,” and save the remaining 20%. This allows you to still enjoy life before retirement since overly restrictive savings goals aren’t usually sustainable. If you like to go out to eat, for example, you don’t need to stop going out entirely. Simply limit yourself to going out once a week.
Have an Emergency Fund
Financial experts agree that it’s wise to have at least three to six months’ worth of living expenses saved as an emergency fund—and this is especially true for those who plan on retiring early. The longer you’re in retirement, the more likely you’ll need this financial cushion to fall back on.
Make Smart Investments
Aggressive investing isn’t always smart investing. Instead, use the retirement investment strategy that makes the most sense for your financial situation, and make sure to rebalance your portfolio often so that you’re not relying too heavily on any one investment. Making the maximum monthly contribution to your IRA and 401(k) is a good start, but there are many more ways to invest for early retirement.
Purchasing stocks and equities is a common early retirement investment strategy. Some find themselves uncertain about this option, as the market naturally goes through periods of growth and loss. But if you’re willing to be patient and strategic, investing in a balance of long- and short-term stocks can give dividends.
Put Money Into Bonds
Unlike stocks, which represent portions of a company in the form of monetary value, bonds are a loan paid by the investor to the company. There are two main ways to make money from bonds: waiting until the bond reaches maturity and collecting the interest or by selling them at a higher value.
Invest in Real Estate
Investing in real estate is a smart and simple way to earn passive income—a perfect arrangement for those looking to retire early. You can fix and flip homes, rent out single-family homes, or own a vacation rental property. Best of all, if you’re not interested in performing the maintenance or administrative tasks that come with being a landlord, you can work with a property management company to help keep your investment safe and sound. The ROI (return on investment) of being a landlord is generally high, but it isn’t for everyone. If you don’t feel comfortable spending money toward maintenance or hiring a property management company, then you might want to consider investing in land.
Focus on Your 401(k)
A 401(k) is a form of a retirement savings account sponsored by your workplace. There’s a designated person in your company responsible for opening your 401(k) account, but it’s up to you to opt in and choose how much you will contribute each month. That said, many companies will match your contributions. If this is the case, your employer will make tax-free contributions into your account each month for the same amount as you do. It’s important to realize, however, that there are financial penalties for trying to withdraw money from your 401(k) account too soon.
Open a Roth IRA
Although contributions to Roth IRAs (individual retirement accounts) are taxed, the money in this account grows and can be withdrawn tax-free, pending certain requirements. Regular contributions need to be made by cash or check, but a number of investment options—including stocks, bonds, money market funds, and more—open up for your funds once they’re in the account. There are a few restrictions, though. The first primary restriction is that the annual contribution limit is $6,000 for those under 50 and $7,000 for anyone 50 and over. The second main restriction to keep in mind is that single individuals must earn no more than $140,000 a year to qualify, and married households must have a combined annual income no higher than $208,000.
Contribute to Your HSA
An HSA (Health Savings Account) is an employer-sponsored account meant to help you save toward healthcare expenses. Funds in these accounts are contributed, grown, and withdrawn tax-free, and unspent money rolls over at the end of the year. While HSAs aren’t explicitly retirement accounts, they can be used for retirement. In fact, the funds don’t have to be used toward healthcare at all after the age of 65. Other people, such as a spouse or employer, can also contribute to your HSA, but the maximum annual contribution is $3,600 for individuals and $7,200 for families.
Create a Retirement Income Plan
Retirement income plans outline how and when you’ll receive your money throughout your retirement. To write your own retirement income plan, start by making a spreadsheet with every calendar year for the expected length of your retirement in the rows, then add columns for income, expenses, and the total amount of expendable cash you’ll be left with. You can find a more detailed guide on writing retirement income plans here.
Learn More About Medicaid & Medicare
Since your employer will no longer be covering your healthcare, it’s important that you understand your insurance options. Medicaid is a state and federal health insurance option for low-income individuals, while Medicare offers health insurance to those 65 and up, or people of any age with a disability. If you’re eligible, you can lower your healthcare costs by enrolling in both. But if you plan on retiring early, don’t qualify for Medicaid, and don’t have a disability, you’ll need another insurance policy to cover your healthcare expenses.
See If You’ll Need Private Insurance
There are several options for private health insurance, and if you don’t qualify for Medicaid and/or Medicare, you’ll need to find one that’s right for you. Start by browsing the Health Insurance Marketplace, research your options, then choose the policy that strikes the best balance between affordability and good benefits.
Get Your Social Security Benefits
Social Security is a federal program that allows retired individuals to receive a monthly payment comprised of previously withheld funds from the taxed portion of your payroll. The earliest age you can start receiving social security benefits is 62, so people who retire earlier won’t be able to receive their benefits right away. That said, it doesn’t hurt to research the application process and prepare yourself to do so when the time comes.
Determine How to Get Your Pension Payout
There are two main ways to get a pension payout. Traditionally, retirees use an annuity or stream payout. Through an annuity, you’ll receive a fixed payment once a month for the rest of your life in an amount determined by your employer. You can also get your pension payout as a lump sum, but not all employers offer this. You’ll need to determine what your employer allows and research the payout option that’s right for you as you approach retirement, since your unique scenario will require a unique solution.
Move Somewhere Retirement-Friendly
A strategic action for retiring early is preparing your home. Many retirees downsize to a smaller home and move somewhere warmer. Some retirees move in with their families, too! Understanding what your living expenses will be can help you get a leg up on your income plan and budgeting so that you can be better prepared for your retirement. With that in mind, check out these options for adjusting your living situation as you retire.
Relocate for Retirement
Though it isn’t a necessary step, moving to a more retirement-friendly state can help make your retirement more enjoyable and affordable all at once. Many cities throughout the U.S. offer a low cost of living, tax incentives for retirees, pleasant weather, and other desirable factors.
As you enter retirement, you may find that you no longer need the space that you had during your working years. In fact, you may find that a large home is more trouble than it’s worth in your golden years. From higher bills to more space to keep clean, large houses and retirement typically don’t go hand-in-hand. You certainly don’t need to move into a studio apartment, but retirement may be the ideal time for you to reconsider whether your current housing situation matches your lifestyle.
Check Out 55+ Communities
While you’re contemplating your retirement living arrangements, why not consider moving into a community specifically geared toward retirees? These neighborhoods tend to be quite safe and offer a variety of recreational activities. And many of these communities function like HOAs, meaning certain maintenance tasks and amenities are covered for you so that you can focus on relaxing and enjoying your early retirement.
Find New Ways to Spend Your Time
With early retirement comes plenty of free time. Some people who choose to retire early will take up a part-time job for extra income and to keep themselves busy, while others take up hobbies. Getting a start on these things before you retire can actually play into your early retirement strategy. After all, the transition into retirement isn’t all about your finances. By easing into your retirement habits, it will be easier for you to relax and adjust. Also, if your new hobbies happen to cost some money, you can plan how you’ll budget and prepare to pay for them starting now.
Begin New Hobbies
With all of the new time you’ll have on your hands, why not pursue a new skill or hobby? From learning a language or auditing a community college class to picking up pottery and beyond, there are so many different ways you can stay productive after retiring early.
Seek Out Ways to Stay Active
Taking care of your body is just as important as taking care of your mind, so on top of learning new skills, don’t forget to also stay physically active. Try going on bike rides throughout your city or taking a jog through the park every morning. Or why not enroll in a workout class like aerobics or yoga? So long as you choose something you enjoy, you’re bound to find your new routine as fun as it is rewarding.
Pick Up a Part-Time Job
If you don’t want to completely leave the workforce after an early retirement, getting a part-time job is a great way to earn extra income, socialize, and add some variety to your day-to-day life. Just make sure you pick something you truly enjoy!
Volunteer Some of Your Time
Use your time in retirement for good! Take up volunteer work to make a difference in your community while finding self-fulfillment. You can get involved as little or as much as you like, whether it’s serving at a soup kitchen or joining the Peace Corps for a couple of years. The point is to get out, meet people, and make an impact!
Go on Your Dream Vacation
One of the best reasons to retire early is to give yourself plenty of time to travel. With your time and money both freed up, you can easily spend your golden years trekking around the country and beyond. Truly, your retirement years are the perfect time to cross off your dream vacation from your bucket list!
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