Guest Post by Michael Deane
No one knows how long they'll live and thus how much money they'll need in their retirement. But you must plan anyway, especially if you would like to go into retirement early.
Many people dream of retiring early so they can travel more, spend time with their loved ones, or take up a hobby. This requires substantial funds, discipline, and a little bit of creativity because you have less time to save all that money than an average retiree.
Speaking about early retirement in an age where 66 percent of working millennials have nothing saved (according to the National Institute on Retirement Security) seems a little far-fetched. But as difficult as it sounds, going into early retirement is still possible if you follow the right steps and stick to your goals.
If you are considering early retirement, take note of these steps that will help you prepare for it.
Living within your means is essential to saving for the future. You don’t want to sacrifice your long-term financial goals to buy things you don’t need. Marie Haaland of SWNS Digital found that the average American spends $1,497 per month on non-essential things. That adds up to about $18,000 per year!
Think about that: $18,000 that you could have put in your retirement savings or used to pay off a high-interest debt.
You should aim to cut your monthly costs significantly so that you can set aside more money for your savings. Of course, you still need to live so make sure that you create a realistic budget and have enough money to cover your monthly bills and basic needs such as nutrition and clothing.
Before you do that, assess your yearly spending. Your annual spending in your retirement will depend on the lifestyle you choose. Do you plan on living modestly or traveling as often as possible? Will you retire completely or have a side-job, start a business, etc.? Many retirees simply transition from full-time to part-time jobs or even start their own businesses. In this case, you will need to save less money for your retirement.
Once you do come up with the target number for your annual spending, your goal should be to save up to 25–30 times of your annual expenses, according to Grant Sabatier’s book, Financial Freedom: A Proven Path to All the Money You Will Ever Need.
Of course, calculating exactly how much you will need in your retirement is difficult and depends on certain factors that you cannot always predict (such as a recession). Paula Pant of The Balance recommends focusing on spending rather than on your current income when it comes to your retirement projections. That’s because some people with entry-level income tend to spend more than they earn, which results in credit card debt.
But also keep in mind that your expenses might be significantly lower once you retire because you will have paid off your mortgage, for example. On the other hand, there is the risk of outliving your retirement savings, too.
As you can see, calculating how much you will need in your retirement can be complex. A financial planner can help you figure it out so you have a clear plan for the future.
It is unwise to enter retirement with unpaid debt. Naturally, you first think of your high-interest debt. In order to enjoy financial freedom in your early retirement (this is the ultimate goal, isn’t it?), you should be debt-free. This would give you true peace of mind. This includes your mortgage. You might not be able to relax and enjoy your well-deserved retirement if you have debt hanging above your head.
However, unlike consumer debt, your mortgage represents a much greater barrier to a carefree retirement. Michelle Singletary of The Washington Post believes that getting rid of your biggest expense (your mortgage) would leave room for managing other relevant expenses such as healthcare. She also points out that paying your mortgage off can save you thousands of dollars in interest.
But be cautious, you should not spend all your savings to pay off your mortgage. Balance is key here so if you can make extra payments towards your loan balance every month without draining your savings, go for it.
However, there is a dilemma that many people face regarding this problem: should you pay off your mortgage or invest that extra money? Business Insider consulted Brian Fry, a financial planner, to help clarify this matter. Fry recommended several scenarios depending on different financial goals. According to his analysis, if you get a raise and have extra money, the best action would be to refinance and invest more aggressively.
Retiring early means you need to save a lot more money (when compared to traditional retirement) in a much shorter time-frame. That is why the key to preparing for early retirement is creating multiple sources of income. Not depending exclusively on your fixed income creates new opportunities and eases the burden of saving.
There are numerous ways you can achieve this from getting a second job (part-time, something with flexible hours) to buying stocks/investing. A lucrative side-job can make a huge difference for your future.
A second stream of income can help generate money to cover some of your monthly bills and essentials. That leaves more money to put in your retirement savings or paying off debt. Additionally, having more than one source of income can help you reach those financial goals much faster.
However, with your 40-hour a week regular job and your family and obligations, it’s hard to balance everything and still have time left to for a second job. That is why passive income is probably the best option for you. Investing in dividend stocks and bonds is usually the right choice since it doesn’t require a lot of money to start and it will allow you to slowly grow your wealth. To enjoy a comfortable retirement, keep in mind that you should focus on long-term investment goals rather than on short-term ones.
Jeff Rose, a financial planner who writes for Forbes, suggests diversifying your investments, starting a passion project, or selling something to create multiple streams of income.
In the old days, retiring meant not working anymore and not having an income. Nowadays, things have changed which brings us to one important question: how do you envision your early retirement? What is your definition of it?
Your further planning and savings strategy will largely depend on this. Perhaps you have a passion project in mind that you hope to focus on more diligently once you retire. Or you have dreamed of starting a home-based business that will likely bring you a decent monthly income while allowing you to relax at the same time?
Whatever the case may be, ask yourself what retirement means to you before you venture into retirement planning.
Lastly, don’t forget that consistency and discipline are key skills you will need for achieving your long-term financial goals but not at the cost of starving yourself in the present. Save as much as you can, but don’t forget to live a little too and reward yourself for your hard work from time to time.
Michael Deane has been working in marketing for almost a decade and has worked with a huge range of clients, which has made him knowledgeable on many different subjects. He has recently rediscovered a passion for writing and hopes to make it a daily habit. You can read more of Michael's work at Qeedle.
January 28th, 2021
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