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3 Things You Need to Do to Retire Early

By Maurie Backman - Mar 7, 2020 at 7:36AM

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Follow these steps, and early retirement could end up being your reality.

Is early retirement a goal of yours? It's something many people strive for. But retiring well ahead of your peers requires lots of planning and even a bit of sacrifice.

The good news? If you commit to that goal early on, it's more than doable, especially if you follow these three steps.

1. Follow a tight budget

To retire early, you'll need to save money. And a good way to scrounge up that money is to live below your means. To that end, it helps to follow a budget -- one that gives you enough money to pay for essentials and enjoy modest luxuries but also ensures that you're carving out plenty of money for savings month after month.

If you're not used to following a budget, setting one up is easy. Open a spreadsheet and list your monthly expenses. Then, comb through your bank and credit card statements to see what those expenses typically cost you.

Add up your total monthly spending and compare that number to your earnings. If you have plenty of room left over to save money, you're golden. If not, you'll need to rethink some of your expenses so you're consistently able to sock money away for the future.

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2. Avoid debt

You're probably aware that debt is generally an unpleasant thing to have. But the more of it you rack up, the more money you'll throw away on interest -- money you could otherwise be putting into an IRA or 401(k) plan.

Now to be clear, if there's one type of debt you shouldn't shy away from, it's mortgage debt. Most people can't afford to buy a home outright, and with mortgage interest rates being relatively low, you're actually better off financing a home than putting down its entire purchase price and losing the opportunity to invest those funds. But aside from your mortgage and maybe a vehicle, you should aim to be perpetually debt-free.

3. Invest your money aggressively

The money you save each month by living modestly and steering clear of debt can go directly into retirement savings, and the more you're able to set aside month after month, the more feasible early retirement will be. But if you really want to increase your chances of getting to leave the workforce early, you'll need to invest your nest egg aggressively to fuel its growth. For the most part, that means loading up on stocks, especially when you're young.

If you go heavy on stocks so that your retirement portfolio generates an average annual 7% return (which is actually a few percentage points below the stock market's average), and you manage to sock away $600 a month over 35 years, you'll wind up with $995,000. That could very well be enough to leave the workforce a number of years early.

But watch what happens when you play it safe in your portfolio by focusing more on less lucrative investments like bonds. If you only see a 4% return in your retirement account, you'll wind up with $530,000, assuming that same monthly investment and time frame. That's not a small amount of money per se, but it may not be enough to let you leave the workforce several years ahead of schedule.

Make early retirement happen

Though many people dream of early retirement, it doesn't always work out. To increase your chances of getting to end your career when you want to, live on a strict budget that allows you to save consistently, stay away from debt, and invest your nest egg wisely. It won't always be easy, but in the end, it will be well worth the effort.

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