Many Americans dream of early retirement, but very few are able to fulfill that dream.
According to one study from the Boston College Center for Retirement Research, the average retirement age for college-educated men and women has risen to 65.7 and 62.8, respectively.
Building a nest egg for early retirement is not difficult. The equation for wealth creation is the function of money, time, and rate of returns.
However, very few people succeed in creating sufficient wealth to lead an early retired life, due to a lack of effective action.
The challenge is not in understanding the basic principles of building wealth, but in converting that understanding into fruitful results. Here are eight tips to help you strategize effectively for an early retirement.
Chart a clear financial plan
Detailed plans with clear goals and milestones provide a definitive focus to any activity. A financial plan keeping early retirement in mind depends on several factors that can be hard to predict over such a long period of time.
The main objective should be the utilization of your working years to build a level of passive income that exceeds your expenses.
Cut down expenses
Be prepared to make sacrifices if you want to achieve your goal of early retirement. Track your current spending constantly and keep looking for ways to cut costs, whether it is an avoidable service, costly entertainment, or a high utility bill.
Periodically revisit and rationalize larger expenses like car insurance, home repairs, overseas holidays, etc.
Debt automatically lowers your income, which is the critical weapon in your wealth creation arsenal. It reduces the amount available to you to save and invest for your early retirement.
List all your debts and start with paying off high-interest debt first. The only form of acceptable debt going forward would be to purchase productive assets, such as a rental property.
Each time you reduce an expense or add to your earnings, try to redirect the money saved or earned either towards eliminating debt or augmenting your retirement savings. The more you save, the quicker you reach your wealth and retirement goals.
Control housing expense
The big-ticket expenditure for an average household is the housing costs. Most financial advice you find says that the housing costs should be up to thirty percent of your income, but if you are aiming for early retirement you must bring it down between 15 to 20 percent.
Downsize, refinance, get a roommate or a second job to pay off home loans. Do whatever it takes to reduce your housing costs.
Pay attention to tax planning
Taxes have the potential to add or subtract large amounts of money from your bottom line. Carefully planning and reducing your tax burden can translate into savings that you can invest in for your early retirement.
You can also plan your future taxes for after you retire by considering moving to a cheaper state with lower tax rates or no taxes at all.
According to certain studies, early retirement can mean a shorter lifespan. Plans to stay engaged and active, with people to see and places to go, are crucial for your mental, physical, and emotional well-being.
Have a job in retirement
Early retirement is not about never working again. It is more about freedom and flexibility to pursue passions, start a new venture, or travel.
Looking for the right job, even if it’s part-time, can mean not just a steady income but a chance to do what you want on your own terms at get paid for it.