Updated July 25, 2022
Need help with personal financial planning?
Even if you love your job, you may not wish to work forever. Many people hope to retire early to do anything from traveling the world, starting their own business or simply spending more time with the grandchildren while they’re young.
However, early retirement can seem like a faraway dream to many workers, as more than 20% of Americans currently have less than $10,000 saved for retirement. So how can you afford to retire early in a tough economy? It takes considerable planning to be sure. Here are seven tips designed to help you bid adieu to the 9-5 grind earlier than you hoped.
1. Create and Keep an Emergency Fund
Life happens to us all, and circumstances such as corporate layoffs can derail early retirement plans. Create an emergency fund consisting of at least three months worth of income, preferably six. This way, should the unexpected occur, you don’t have to resort to dipping into your retirement savings should the unexpected strike.
2. Capitalize on Existing Savings
If you have $10,000 or more in a savings account making roughly one percent interest, you’re doing yourself a grave disservice. Once you have at least three months saved and then some, transfer some of your money to a high-yield savings account. Alternatively, consider investing in a CD. These mature in anywhere from 6-24 months and pay higher interest rates if you hold the certificate for the required length of time.
3. Pay Off Debt
It doesn’t matter how big a bankroll you have if you’re buried under a mountain of student loan and credit card debt. You want to retire debt-free to keep bills from eating up your savings. Make more than the minimum payment each month, and if doing so leaves you with no spending cash afterward, consider a side hustle to earn extra income.
4. Drive a Beater
Sure, you look great rolling into work in a Porsche, but what do you want more — a sweet ride or freedom to leave the workforce early? Consider buying as cheap a car as you can tolerate. If you’re mechanical, go ahead and invest in a beater as long as you have sufficient tools and know how to keep repair costs from breaking the bank.
Live in an area with a solid public transportation system or in a mild climate in a location with ample bike lanes? Consider whether you need a car at all. The money you’ll save on gas and repairs will fund your early retirement kitty more quickly.
5. Max Out Your Contributions
Take advantage of your retirement plan at work. Sadly, few employers still offer pensions or annuities to employees; however, changes in the tax law have increased the maximum contributions thus:
- After years of the maximum contribution being $5,500, for 2019, even individuals under 50 may contribute up to $6,000 with no tax penalty.
- Big change here. The max contribution for 2019 is $19,000.
- You can contribute up to $13,000 for 2019.
- If you’re self-employed or contributing after-tax dollars. For 2019, you can save up to $56,000 after tax or through a self-employed retirement plan. This includes SEP IRAs and and solo 401k’s.
Tax deductions may phase out depending on your income, but you still can take advantage of the higher saving limits. Note: for adults over 50, catch up rules still apply.
6. Diversify Your Portfolio
It’s great to own blue chip stocks for security, but if you’re young and can accept more risk, include some stocks with the potential for higher returns. Not savvy enough to invest on your own? Open a mutual fund account which diversifies your portfolio for you, or consult with a certified financial planner.
7. Create a Fallback Plan
The best laid plans of mice and men and all that — you never know when serious illness, natural disaster or other major tragedy will eat through your retirement money quickly. Make a contingency plan.
Do you have a skill such as programming you can capitalize from even if in a hospital bed for extra cash? Keep up to date with trade journals long after your last day in the office. Consider, too, creating a residual income stream. E-books and online webinars can bring in extra money long after you create them. Rental properties with quality tenants provide you with an income stream for relatively little labor outside of maintenance.
Retire Early, Retire Rich
Although it can be difficult, it’s possible to retire early with a comfortable lifestyle if you practice sound financial planning when young. There’s no better time than the present, so get started saving for an early retirement today.
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