Early retirement is a dream most of us have but few of us are able to achieve. In fact, 50% of Americans say they'd like to retire by 60, yet only 33% of them realistically expect to be able to do so, according to a survey from TD Ameritrade.
This is primarily a result of workers' lack of retirement savings. A study from Northwestern Mutual notes that one in five Americans has nothing at all saved for retirement, and a third of baby boomers have $25,000 or less stashed away.
Of course, if you're struggling to save, it's going to be difficult to retire -- let alone retire early. But if you're serious about jump-starting your savings and enjoying early retirement, you can take a few tips from people who have managed to do just that. In a recent survey by TD Ameritrade, researchers discovered a group of "Super Savers." These people save, on average, nearly 30% of their income, and the majority of them are either financially independent or on the path to becoming financially independent. And there are a few things they all have in common that help them achieve their financial goals:
1. Avoid high-interest debt
While not all forms of debt are necessarily harmful, high-interest debt (like credit card debt) can be toxic to your wallet -- and 65% of Super Savers say that avoiding this type of debt is key to retiring early and becoming financially independent.
Credit card interest rates vary widely based on the card, but you could face an APR of anywhere from 13% or 14% to upwards of 20%. That means you could be throwing away hundreds (or even thousands) of dollars on interest payments alone until that debt is paid off -- which is money that could be better invested in your future.
The best way to avoid high-interest debt is to live within your means and pay your credit card bills in full every month so that you don't rack up any debt in the first place. If you already have credit card debt, start paying off the cards with the highest interest rates first, and consider opening a balance transfer card -- or cards that offer 0% APR introductory periods -- to give yourself a break from the high interest payments while you chip away at your debt.
2. Maintain a strict budget
It's not enough to simply know where your money is going every month; you also need to set limits so that you're not overspending in certain areas. Sixty percent of Super Savers adhere to a strict budget, allowing them to cut back in spots so they can put more of that money toward their savings.
The first step is to map out all your expenses to find out exactly what you're spending each month. You can do this the old-fashioned way by examining your bank and credit card statements, or you can use an app to track your expenses for you. Once you know where your money is going, look for trends to see if you can trim the fat in certain areas. For example, if you're still paying for that subscription service every month that you rarely use, consider getting rid of it. Or if you realize you spend hundreds of dollars each month on takeout, use that as a wake-up call to cut back when you can.
Then, set limits for each spending category -- from groceries to hobbies to gas to dining out -- and stick to them. If you overspend in an area one month, take it out of next month's budget. It's crucial to hold yourself accountable, because if you don't, you're only hurting yourself financially.
3. Invest in the stock market
When Super Savers save money, they don't just throw it in a savings account -- they invest it. In fact, 58% say they invest in the stock market, compared with just 34% of non-Super Savers. With the Great Recession still fresh in the minds of many wannabe retirees, putting your hard-earning money in the stock market may seem like too great of a risk. However, if you really want to see your money grow, it's your best option.
The best high-yield savings accounts have interest rates of around 2%. If you're going to need that money in the next few years, that's the way to go. But long term, that growth won't even keep up with inflation. And putting your money in "safe" investments like CDs and money market funds will yield similar results, as they typically only see returns of 2% to 3% per year. To see significant gains over time, you'll need to invest in the stock market.
Now, investing in the stock market doesn't have to mean becoming a Wall Street whiz and uncovering the latest and greatest up-and-coming stocks. Rather, you can simply invest in index funds and mutual funds -- or collections of dozens or hundreds of different stocks -- to limit your risk and diversify your investments. If you're putting money in a 401(k), you're probably already investing in the stock market, as most 401(k) plans invest in a variety of mutual funds.
While you'll still see ups and downs even with the "safest" stock market investments, over time, you'll very likely still see positive returns. In fact, the average annual return for the S&P 500 is around 10%. So although you won't see 10% returns every year, if you leave your money untouched for several decades, you'll see your returns steadily climb over time.
4. Start saving as early as possible
This is arguably the most important factor to accumulating wealth at an early age -- to retire early, you have to start saving early. Fifty-four percent of Super Savers started saving before age 30, and of those people, 26% started between ages 21 and 25.
Thanks to the magic of compound interest, the earlier you start saving, the less you'll need to save each month to see huge gains over time. For example, say you want to save $1 million by age 60. If you start saving at 18 and are earning a 7% annual rate of return on your investments, you'd need to save around $375 per month. But if you wait until age 30 to start saving, all other factors remaining the same, you'd need to put aside around $900 per month.
This isn't to say that you can't catch up if you've gotten off to a late start. But if you want to see the biggest impact and truly make the most of your money, you'll need to start saving today. The longer you put it off, the harder your money will have to work.
You don't have to be rich to be able to retire early; you just need to be strategic about how you manage your money. Even if you don't earn a six-figure salary, you can still become financially independent as long as you make healthy financial choices.