There’s no secret to early retirement. It is possible, but it takes sacrifice, hard work and the right mindset to pull it off. Here’s some good advice on how to make such a dream a reality.
The edited excerpts above, and those below, are from an article* by Ben Carlson (awealthofcommonsense.com) originally entitled How to Retire Early which can be read in its entirety HERE.
According to Harry Sit, who writes The Finance Buff blog, the strategy is simple and obvious:
- earn a good income,
- save a large part of it and
- invest the savings well.
Each of the three parts is important, and I would say a good income is the most important. Without a good income, you just don’t have as much to work with. A good income also makes it easier to save a large part of it. When you invest it well, you are then adding more to a larger sum.
Here are a few things I would add to Harry’s tips for early retirement preparation:
- Lifestyle creep is probably one of the biggest hurdles over time for building a large enough nest egg to retire early (or retire at all for that matter). It can be difficult to resist the urge to spend all of your income gains over the years as you start to make more money. One of the hardest things for people to do is be happy with what you have and keep your standards of living relatively constant over time.
- Figuring out ways to save money is the easy part; getting your priorities straight is the hard part. Unless you’re banking on a large inheritance, or earn a large salary, you’ll have to save a fairly large chunk of your earnings (I’d estimate 40-60% depending on your spending requirements). There will likely have to be sacrifices made when it comes to things like big houses and new cars.
- The average life expectancy continues to rise. You have to take this into account when considering early retirement. If you retire in your 50s, your investments could have to last you another four decades or so. Your retirement years could actually end up being longer than your working years. The planning required to make this happen is no easy task.
Now for the boring considerations no one wants to hear when dreaming about living on the beach for the rest of their life:
- Depending on when you retire you’ll need taxable investments and savings to carry the load until you’re 59 1/2 and able to draw down your tax deferred retirement accounts such as an IRA or 401(k). You also have to wait until your 60s to start receiving social security checks.
- If you quit your job and don’t have a spouse that continues to work, you’re on the hook for your own healthcare costs until Medicare kicks in during your 60s.
- I would say the biggest financial goal, in addition to the simple steps laid out by Sit, would be to have all of your debts paid off. That means no mortgage, no student loans, no car loans and no outstanding credit card debt to allow for maximum financial flexibility.
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