Five steps toward early retirement
The internet is brimming with stories of people who retired in their 30s or 40s.
If they鈥檝e piqued your interest, you鈥檙e not alone 鈥� and you鈥檝e probably sorted through the strategies enough to know there鈥檚 a wide range. Many are straight-up scams where someone is getting rich, but it won鈥檛 be you. Others involve complex, risky investments or multilevel marketing. (If you鈥檙e not familiar with that term, one example is聽that friend on Facebook who won鈥檛 stop shilling workout DVDs.)
Rarely is the suggested path one of hard work and frugal living. That鈥檚 a shame, because while most of us are likely to work well into our 60s, it is possible to retire younger. Does that mean you鈥檒l be able to clear your desk in five or 10 years, shouting grievances on the way out the door? Maybe not. But it might mean you can work 10 or 15 fewer years than your parents did,聽.
Here are five moves that will get you closer to an early retirement.
1. Cut your expenses
There鈥檚 an oft-repeated money mantra that urges living within your means. It鈥檚 wrong. If you want to save, you need to live听产别濒辞飞聽your means, spending significantly less than you earn.
, a blogger who retired at age 30, is a notable example. He says he and his wife saved two-thirds of their pay while working 鈥渟tandard tech-industry cubicle jobs.鈥�
Is that extreme for most people? Yes. Did he do that before undergoing聽one of the most expensive lifestyle changes possible, also known as having a child? Yes. But even if you can鈥檛 put away two-thirds of your salary, there鈥檚 a good chance you can put away more than you do聽now.
To do that, look very closely at your spending. (It helps to use a聽.) You already know you should cut out the lattes, but what else can you lose? Cable is increasingly a painless choice; here are聽聽while still keeping up with the Kardashians. You might also consider聽, checking into聽, canceling recurring subscriptions you no longer use, taking steps to聽聽and looking into refinancing your debt, including聽聽and your聽.
2. Earn more money
If you can鈥檛 lower your expenses, you have to increase your income. Negotiating your salary is a good place to start, as long as you can prove yourself worthy. Here鈥檚 what to do with that raise when you get it: A聽聽found that saving just half of each raise starting at age 25 could amount to more than聽$200,000 after 40 years, a healthy boost to any retirement fund.
Consider other options, too 鈥� namely, the side hustle. The gig economy makes this easy. If you can drive, you can Uber. If you鈥檙e not allergic to dogs, you can sit or walk them via DogVacay. You can also check whether聽your skills match any needs on freelance sites such as Scripted or Upwork, or if you can lend a hand to those who want to outsource their to-do list via TaskRabbit. The options here are limited only by your willingness to schlep laundry.
3. Take advantage of free money
Free money doesn鈥檛 come around often, so when it does, grab it.
The most notable form is in 401(k) matching dollars. Companies聽聽to these employee plans, according to a 2014 survey by the Plan Sponsor Council of America.
Let鈥檚 say you contribute 15% of your $50,000 salary to your 401(k). With that 4.7% employer match, a 7% investment return and 3% annual salary increases, you could build close to $530,000 in 20 years. The employer match would account for about $130,000 of that.
We鈥檙e talking about early retirement here, so that 20-year time horizon is appropriate. But the numbers have聽even more impact with a few extra years: Stretch it to 30 years, for example, and you鈥檇 have $1.3 million, more than聽$300,000 of which is from the employer match.
4. Invest wisely
The above examples show the importance of investing, rather than just saving: Using the same numbers but lowering the return to 1% 鈥� a pretty standard interest rate from an聽聽鈥斅燾uts the accumulated amount by half.
Unfortunately, many people are missing this message:聽from October 2015, Americans report having 65% of their net worth in cash, despite acknowledging that 33% is a more reasonable allocation 鈥� and some might argue even that is high. Although it鈥檚 true that money you need within聽, your long-term savings should be.
聽that is appropriate for your age and risk tolerance is just the first step, though. It鈥檚 also key to聽, which can very quickly eat into your retirement savings if left unchecked. One way to do that is by selecting low-cost index funds and ETFs over actively managed funds. Another way is to consider a聽, which will manage your investments for you 鈥斅爓ithin an IRA, taxable account or, in a few cases, a 401(k) 鈥� for a fraction of the cost of a human advisor.
Robo-advisors also have a secondary benefit: They serve as a barrier between your emotions and your money. That鈥檚 particularly helpful during market conditions like we鈥檙e experiencing now, which can tempt investors to fiddle with their choices unnecessarily.
5. Minimize debt
Many early-retirement evangelists shun all debt. We鈥檙e not about that. Especially in times of low interest rates, borrowing for a聽聽or even a car can be financially advantageous. When a good-credit borrower can get a mortgage with聽less than a 4% interest rate, it doesn鈥檛 make a lot of sense to pull money out of the market 鈥� where you can expect returns that average 6% to 7% per year over the long term 鈥� and put it into a home (beyond, of course, a 20% down payment).
But there are caveats to that approach. For one, you want to make sure you鈥檙e not borrowing more than you can afford; the lower you keep your debt expenses, the more you鈥檙e able to stash in retirement accounts. Your total monthly debt expenses shouldn鈥檛 exceed 36% of your gross monthly income;聽NerdWallet鈥檚 calculator can help you determine聽.
However, this thinking also doesn鈥檛 apply to high-interest-rate debt, most often floated on credit cards. Paying the minimum on a card with a $10,000 balance and an 18% interest rate will cost you more than聽$8,000 in interest. But if you聽invest that money instead, you could have $60,000 after 30 years at a 7% return. In other words, carrying high-interest聽debt over the long term is a quick way to sabotage not just an early retirement, but any retirement, period.
This article first appeared at .
