Early retirement is something many people desire. And sometimes, early retirement comes as a matter of necessity, not choice -- such as when people are forced to end their careers due to health issues.
But hopefully, if you end up retiring early, it'll be because you want to, not because you have to. And if you know already that early retirement is something you're interested in, then it pays to take these important steps in your 40s. Doing so could make it possible to end your career as early as your 50s.
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1. Boost your savings rate
Your earnings might really take off in your 40s due to the career experience you've accumulated to date. Instead of spending your extra income on a nicer house or a car with cool features, pump that money into an IRA or 401(k) plan. The former limits you to an annual contribution of $7,000 per year if you're under 50, or $8,000 if you're 50 or older. But with a 401(k), you can contribute up to $23,000 this year if you're under 50, or up to $30,500 if you're 50 or older. It's important to try to boost your savings rate at a time when your money still has an opportunity to grow.
In fact, let's say you're 42 years old with a current retirement savings balance of $200,000. If you have a 401(k) and start funding it to the tune of $1,500 a month over the next 15 years, and your portfolio delivers an average annual 8% return, which is a bit below the stock market's average, by age 57, you'll have over $1.1 million. That could be enough to allow for an early retirement.
Do keep in mind that 401(k)s generally require you to wait until age 59 1/2 to take withdrawals penalty-free. However, there's an exception known as the rule of 55.
If you separate from your employer in the calendar year you turn 55 or later, you can take withdrawals from that employer's 401(k) penalty-free even if you're not yet 59 1/2. So if you're 57, for example, with about $1.1 million in your current employer's 401(k), and you decide you're comfortable retiring early on that sum, you should be able to take withdrawals penalty-free.
2. Invest your nest egg in stocks
You don't want to take on too much risk in your portfolio when retirement is close. But even if you're aiming for an early retirement, you should be in a position to invest heavily in stocks in your 40s. And if you don't, you may not amass enough wealth to make early retirement possible.
Let's say that in the above example, you had a more conservative portfolio generating just a 5% yearly return instead of an 8% return. In that case, your balance by age 57 would be about $804,000.
That's still a nice sum of money. But would it be enough to make you feel comfortable retiring early? That's questionable.
3. Pay off high-interest debt
If you're carrying a credit card balance or high-interest loan, every dollar you pay in interest is a dollar you can't save and invest. So if you're in your 40s with costly debt, do your best to shed it.
A good strategy to employ here is to tackle your debt with the highest interest rate attached to it and then work your way downward from there. So if you're looking at a $5,000 credit card balance with a 20% APR, it makes sense to tackle that and then move on to focus on your $5,000 loan that's costing you 9% a year in interest.
Early retirement is something that may be totally feasible if you save and invest accordingly. And getting rid of high-cost debt is another good way to free up money for your nest egg so you can build a large enough balance to make early retirement a reality.
