There's never enough time to do all the nothing you want. -- from Calvin and Hobbes by Bill Watterson
Calvin's statement above sums up the desire of millions of people who want to retire early. Furthermore, early retirement isn't necessarily a pipe dream, and it doesn't require you to be rich, either. For the vast majority of people who want to retire early, there's a simple recipe to achieve this goal:
- Live beneath your means.
- Keep debt low.
- Contribute to your retirement savings early, heavily, and regularly.
If you really want to retire early, keep reading to learn more about how you can do it and some major pitfalls to avoid.
Merely saving for retirement will fail -- you have to invest
Short-term (think five years or less) money like an emergency fund is best kept in a savings account or CD. But when it comes to your retirement savings, you have to invest it if you want to generate the returns that will afford you an early retirement.
Here's a look at the returns from setting aside $5,000 per year over 30 years at different rates of return, including the 10% historical average return of the stock market versus the 2% you would get today from a high-yield certificate of deposit:
As you can see above, the "safety" of a certificate of deposit yielding only 2% (which is higher than almost any yield you'd find today) would leave you well short of the kinds of returns you can expect to get from the stock market. And even if your stock portfolio doesn't net you 10% annualized returns, you're still far more likely to outperform any kind of savings vehicle.
Two important points: Individual stocks can be very risky, and investing in the short term can lose you money. But investing in a diverse portfolio of stable companies for the very long term has consistently been the key to growing people's retirement savings.
Let's take a look at two other things that can make or break your ability to retire early.
Housing costs can boost (or ruin) your early retirement plans
According to the Bureau of Labor Statistics, housing expenditures make up the largest single expense for those over age 65, at $15,838 for those 65-74 and $13,375 for those 75 and older, in 2013. This was more than the next two categories combined.
It's going to be much more expensive to retire if you're still paying a mortgage or rent. Renters also lose out on the benefit of home equity to cover expenses, especially later in life, while retirees simply need to have more set aside to cover mortgage payments versus those who have paid off their homes before retiring.
That doesn't mean buying a home today is the right answer for everyone, particularly if you are likely to move often and won't be able to build equity before you move and sell. But if you are in a position to stay in place for the long term, buying a home and paying it off before you retire can mean significantly reducing the biggest expense most retirees have.
Be prepared for higher care spending
While out-of-pocket expenditures for things like housing, transportation, and food typically decline the older you get, the amount you pay for health and long-term care is almost guaranteed to go up. Not only do older people tend to need care more often, but it tends to be more expensive, often specialist care.
In addition, the older people get, the more likely they are to need non-medical in-home care, which isn't covered by Medicare or medical insurance. And according to the Department of Health and Human Services, 70% of people 65 or over will need long-term care at some point. If you're married, there's a 90% chance either you or your spouse will need long-term care. If you want to retire early, making sure you'll have enough resources later in life to cover these increased out-of-pocket costs for care is critically important. According to the BLS, the average 65- to 74-year-old paid 19% more out of pocket for healthcare in 2013 than the average 55- to 64-year-old.
Also, you'll need to pay for private insurance in the gap between early retirement and turning 65, when you become eligible for Medicare.
Invest early and often, keep debt and expenses low, retire in comfort
You may have to make sacrifices today to reach your early retirement goals. Whether it's keeping your old car a few extra years, spending a week at the nearby lake instead of the Bahamas for your summer vacation, or dropping the premium channels from your cable service, lowering expenditures and increasing retirement contributions is probably the first place you need to start. However, there's a difference between frugality and being a pauper, and it's up to each of us to find the balance between spending to enjoy life today and investing for tomorrow.
If retiring early is the bigger priority for you, you probably have a lot of work to do. There's no better time to get started than right now.