Have you ever wanted to retire before the conventional age of 65 or does this sound like a pipedream to you? Well, retiring early is very much possible and it can be one of the most rewarding achievements of your life. Not only does it free you from the scrutiny of an employer, but it also offers an opportunity to pursue your passions while you’re still young and energetic. As inviting as it sounds, planning for early retirement requires you to take the necessary financial steps to get your house in order, so here are 7 steps anyone can take to retire early!
Step #1: Create a retirement plan
Creating a retirement plan is the most preliminary step of retiring early. No doubt, laying out a detailed retirement plan is the equivalent of preparing a plane for take-off. It involves laying the necessary groundwork to pave the way for a smooth retirement process. This is the step where you start thinking about your retirement goals and making a projection of what you want your life as a retiree to look like. This is where you ask yourself all the important questions and find sure answers for them too.
For example, do you intend to stop working completely? How old will your dependents be by the time you down your work tools? Are you okay with taking up some light income-generating activities to supplement your post-retirement expenses? How do you picture your retirement home or travel experience?
These are examples of some tough questions that accompany retirement planning. These questions will lead you to find a meaning of retirement that resonates with you. Whether that means leaving the corporate world to teach piano or taking up flexible contractual jobs to allow you give you the spare cash you need to travel.
As a rule of thumb, ensure you have solid answers to these questions because they’ll greatly determine your retirement’s financial trajectory. For example, suppose you intend on quitting work completely. In that case, your retirement plan will include much more saving and diversification than someone who intends to take up freelancing.
With a clear definition of retirement in mind, the next step is to assess your current sources of income. Will your income sources be enough to give you the retirement of your dreams? Keep in mind that you should aim to save at least 25 times of your current annual expenses if you dream of early retirement. If need be, sign up for the popular FIRE (Financial Independence Retire Early) movement. It’s a concept that embodies intense saving habits for aspiring retirees, usually in the neighborhood of 50–70% of your income.
Next, you’ll need to engage a financial advisor to help you establish an accurate and achievable target retirement figure. While taking your net worth into account, a financial expert will help you determine the best assets and securities to invest in. Your financial planner will also help you calculate how much money you’ll need to have in your retirement fund when you retire.
Step #2: Have long-term, medium, and short term goals
The next step of planning to retire early is segmenting your retirement goals into long-term, medium, and short-term goals. At this step, you have a rough, if not a clear picture of your post-retirement lifestyle. Your next task is to set bite-sized milestones of how you intend to achieve the lifestyle you want for yourself and your dependents. Sure enough, goal setting is an important catalyst of financial independence; hence you should orchestrate it keenly. With that said, which is the best approach for breaking down your retirement goals? Your goals will fall into any of the categories mentioned above, depending on the time-horizons required to achieve them. Short-term goals are those that can be achieved within a smaller time-window, usually in a few hours, days, or months, depending on your financial capability. These goals are important because they set a good precedent for achieving both medium and long-term goals. Actually, you’ll find that as you achieve your short term goals, you’ll get the fuel and motivation to face the bigger ones. Some good examples of financial goals that fall in the short-term category include:
Creating a budget
Clearing your credit card debt; and
Building an emergency fund
Drafting a budget, for instance, is something you can do in a matter of hours, yet it has the potential to downsize your expenses and shoot up your savings. And the more money you’re able to save and invest, the sooner you’ll be able to retire with sufficient funds in your retirement account.
Medium-term goals refer to those goals that require months to less than five years to achieve, such as building an emergency fund or saving for a down payment. On the other hand, long-term goals are those goals that require more than ten years to achieve, such as retirement or clearing your mortgage.
All three goals are super-important and threaded together, and they help you stay on your toes without getting overwhelmed. Also, separating your goals this way stops you from becoming fixated on one magic number. Rather, it creates a good impression that you’re accomplishing the smaller goals that will eventually lead you to the bigger ones.
Step #3: Assess your financial needs in retirement and your retirement timeline
The third step to retiring early is to get familiar with your financials. By this, I’m implying that you need to assess your financial needs in retirement and evaluate your retirement timeline. This will help you develop a specific amount of money you will need to live on once you leave the workforce. It will also help you determine your retirement portfolio’s ideal size and the level of diversification it should have.
Having laid a finger on your retirement income, the next step is to calculate the retirement portfolio to help you achieve it. At this point, allow me to introduce a concept called your safe withdrawal rate. This convention is hinged on the idea that your retirement portfolio should enable you to safely withdraw 4% of it without risking depletion. With this in mind, you can calculate the desired portfolio whose 4% withdrawal rate will fulfill your post-retirement needs, including healthcare and housing.
The bottom line is, it’s important to ensure that the goals you set for retirement coincide with your preferred retirement timeline and your projected post-retirement needs.
Step #4: Save monthly to fund your investments
The next step towards early retirement is to save monthly to fund your investments. And I’m sure you’re probably riddled with thoughts regarding the best saving strategies for retirement. I don’t intend to discourage you, but let me just remind you that saving for retirement is not an easy feat. Out rightly, be prepared to stretch your financial muscle to extents you never expected. While at it, you’ll definitely be compelled to deny yourself a few pleasures here and there and to re-direct your efforts towards your savings account. When it comes to saving for retirement, it’s a habit you need to cultivate early-preferably in your twenties or thirties. Starting early increases your odds of fully taking advantage of compound interest to increase your savings. If, for example, we have two people who start saving for retirement ten years apart, the one who starts earlier will receive a significant boost to his or her retirement savings. Assuming they both put aside $5,000 every year and that their money attracts a 6% rate of return, the person who starts saving at 24 will enjoy double the financial rewards compared to the one who kicks off their saving journey at age 34. And while saving is one of those habits that can be daunting to start, you’ll never regret saving money.
When it comes to how much you should save every month, I’d say save as much money as you logically can. However, any financial expert will advise you to retire at an income that is 80% of your pre-retirement income. A simpler method is to take your current annual expenses and multiply them by thirty years. This is a good starting point, although this figure will incur see-sawing changes depending on your life plans. For example, if you expect a more costly health insurance plan after retiring, you’ll need to adjust this income upwards. If, on the other hand, you’ll withdraw the support you offer your adult children, then you expect this figure to take a dip.
Another accurate gauge of how much you should stash away every month is your timeline for retirement. If your saving window is smaller, you may need to acquire additional income streams to enable you to save more money.
Once you’re sure of the amount you’re able to start saving with, the next step is to explore your saving options. Does your employer offer match, tax-free retirement accounts? If yes, hop on it as soon as you can. If not, you can also establish an individual retirement account (IRA) to secure your nest egg.
Besides retirement accounts, you could also channel your savings towards high-interest money market funds (MMFs). These will hold your money safely while accruing some extra interest on top. Honestly, money market funds are way more lucrative than leaving your money idling in low-interest bank accounts.
Step #5: Select passive income assets to invest in
As you build up your savings, start thinking about income-generating assets that you could invest in. Don’t forget that invested money beats saved money by an infinite margin. So depending on your risk appetite and income goals, you should endeavor to find a suitable investment that will grow your money. Real estate, stocks, and online businesses are just a few examples of opportunities that can potentially do wonders for your cash flow.
The best part about a diversified portfolio is that it’s well-cushioned against risks. Besides, passive investments such as Real Estate REITs, peer-to-peer lending, index funds, and dividend stocks attract some juicy investment returns, yet they are quite easy to manage.
Step #6: Automate your investments
Having decided what you want to invest in, I strongly recommend running your investments on auto-pilot. The secret for investing towards retirement is to orchestrate swift systems that promote a desirable financial demeanor.
Automating the contributions you make towards your investments will help you knock down instant gratification. When you pay yourself first, you can reinforce desirable financial habits that eventually become fulfilled goals. Start with consolidating your investment and savings accounts to give you less paperwork to review every month. Next, make arrangements for automatic remission of funds from your checking account to your retirement account or brokerage firms.
Automating your investment in this manner ensures that your retirement account becomes the first beneficiary on payday. By doing this, you eliminate any chances of splurging on things that would normally waste your financial resources.
Step #7: Eliminate your debt
The final step when preparing for early retirement is to clear your debt. I know this may sound unachievable for some people, but believe me, clearing debt is your best bet if you want to fast track you way to early retirement. In particular, high-interest debts like those associated to credit cards will drown any efforts you make towards maximizing your saving potential. But why is this?
For one, any form of debt will have a negative impact on your cash flow. As its interest builds up, it gradually chips away at finances that you would have otherwise pumped into your nest egg. High-interest rates will also make any owed money snowball into a huge stumbling block that prevents you from achieving your retirement goals.
Secondly, the earlier you pay your debt, the less likely you will transition with it into your golden retirement years. Nothing beats retiring early and with no one knocking at your door demanding what you owe them. And besides, regardless of when you do it, you’ll still need to eventually pay back your lenders. The last thing you want is to end up with the shorter end of the stick simply because you weren’t disciplined enough to eliminate your debts early. So if you’re an aspiring retiree, start taking the necessary steps towards clearing, or reducing any form of consumer debt or bank loans.
Those are the seven steps you need to take to retire early!