There may be nothing more in keeping with the American Dream than achieving a level of financial security that allows for early retirement. Yet most people fall short of that goal. In a bid to change that, three of The Motley Fool's analysts share their best ideas on how to retire early. Read on to learn what they suggest.
A Forbes analysis revealed that if people started saving 10% to 15% of their annual income at the age of 20 to 25, they were generally able to retire comfortably (i.e., with their current living standards) by their late 60s. For those who wait until age 40 to start a savings account, that percentage soars to 43.2%. But if a person can save up 30% to 40% of their annual income at the age of 25 -- which might be achieved by scoring a high-paying job, living frugally, or working overseas -- an early retirement could be a realistic goal.
Those alarming figures highlight the importance of contributing to your Roth IRA and building up a stock/fund portfolio as early as possible. Maxing out your annual Roth IRA contributions and your 401(k) contributions, then investing the remainder in well-researched stocks or mutual funds could pave the way toward an early retirement.
That plan doesn't take into account student debt, job changes, or family emergencies. But the key takeaway is to constantly have an annual savings percentage in mind and to strive to meet that goal every year.
If you want to retire as early as possible, it's important to take advantage of the retirement savings options available to you, such as your 401(k), IRA, or other tax-advantaged retirement account.
For the 2015 tax year, the IRS will allow you $18,000 in elective 401(k) contributions (or $24,000 if you're 50 or older), which doesn't include any employer match or mandatory contributions. And you can save an additional $5,500 ($6,500 if you're 50 or older) in a traditional or Roth IRA. If you're self-employed, there are several other tax-advantaged options to you, such as a SIMPLE IRA, SEP-IRA, or individual 401(k) plan, so look into those options if they're available to you.
Just to put the power of these accounts and their tax-free compounding into perspective, consider that if you max out your IRA and 401(k) contributions ($23,500 per year) and achieve 8% average annual returns on your investments -- a realistic return, given that the S&P 500 has averaged 9.4% over the past 20 years -- you'll have over $1 million in just 20 years. After 27 years, you'll hit the $2 million mark. And these returns don't even consider any additional 401(k) contributions from your employer.
So, by contributing as much as possible to the tax-advantaged retirement accounts available to you, you can achieve early retirement more easily than you may think.
As both Matt and Leo point out, investing as much as you can as early as possible will certainly improve your odds of being able to retire early. But the part of the equation that many people never address is clamping down on your expenses as much as possible, getting any debt you've incurred paid down as soon as possible, and then setting aside as much of your paychecks as you can to go toward your investment accounts.
Learning to live with less has a dual benefit in terms of retiring early. Not only will you be able to save more, but you won't need as large of a nest egg to support a more modest standard of living than you would if you had more expensive tastes.
How best to achieve reduced expenses varies from person to person. Some people are comfortable living in lower-cost areas of the country or moving to different places across the globe that are more affordable. But you don't have to make extreme moves in order to save more. In many cases, simply being mindful of the money you spend every day will put you in a position to make painless cuts that will leave you with more to put toward savings -- and thereby hasten the day you can retire for good.