Retiring comfortably is a dream many have, but studies show most people don't feel prepared. Relying solely on Social Security isn't a great plan considering the program only replaces about 40% of pre-retirement income on average.
You need to take matters into your own hands, and steady saving and investing is the best way to get there. The good news is 51% of Americans retire by age 61, according to The Motley Fool, with another 23% retiring between 62 and 64. If you're looking to retire early while maintaining a comfortable lifestyle, here are some essential steps you should take to make your dream a reality.
Start early
Here's a scary statistic: 25% of non-retirees have no retirement savings. Ask someone older (and wiser) about their regrets, and many will say they regret not putting money aside earlier. Even if you have decades before your goal retirement age, it's time to begin. An easy way to start is by investing in the S&P 500 index through a vehicle like the SPDR S&P 500 ETF Trust (SPY 0.95%).
The S&P 500 has returned an average of 10% annually over the last 30 years, and it gives investors exposure to some of the most successful companies on Earth while also paying a dividend. The index's current yield is about 1.4%. However, even that modest amount can add up to a lot over time, thanks to the power of compounding. It's important to remember the market is not guaranteed to rise 10% each year. There will be up years and down years, but 10% is the index's average return over time. Investing always involves risk, but the longer the timeline, the lower the risk.
And time in the market is vital as you can see below. A $25,000 investment in the SPDR S&P 500 ETF 30 years ago grew into nearly half a million dollars (without ever adding a penny more of savings).
Data by YCharts.
The earlier you begin saving and investing, the longer you have the power of compounding working in your favor.
Capitalize on tax-advantaged accounts and employee benefits
There are several tools to help investors save for retirement such as individual retirement accounts (IRAs) and 401(k) plans. These accounts come in two main varieties. A traditional IRA is funded with pre-tax money, so your savings accrue tax-free until you begin withdrawing money, while a Roth IRA is funded with after-tax dollars. Since you already paid taxes on the money in the Roth account, withdrawals are tax-free. There are limits and rules regarding each option, so be sure to consult a tax professional.
Many employers offer 401(k) plans too. Besides the tax advantages, their biggest appeal comes from employers matching your contributions up to a certain dollar amount or percentage of your income. CNBC reports the average company match is 4.7% of an employee's salary, but only 60% of people with access to 401(k) accounts take advantage of it.
Regular contributions can add up to a lot over time. Starting with the same $25,000 above, contributing $583 monthly (the 2024 IRA annual contribution limit is $7,000), and earning 10% on average through the SPDR S&P 500 ETF would leave you with well over $1 million after 25 years. By starting to invest in your 20s, you could seriously consider retirement as early as your 50s.
Consider dividend-growth stocks
Dividend-growth stocks also help a lot of people meet their financial goals. Companies that pay a rising dividend tend to be profitable with stocks that are less volatile than growth companies. In this category, Dividend Kings are the cream of the crop as they have increased their annual payout for at least 50 straight years. This consistency can lead to massive returns over time.
For instance, Coca-Cola and Lowe's have paid rising dividends for over 40 years, and this consistency has led to massive returns over time.
Data by YCharts.
Collecting and reinvesting dividends from such companies is a terrific strategy for any portfolio.
If you want to live out your golden years on your terms, take advantage of the tools outlined here to help get you there.
