Retiring early has been a dream of many workers for decades. Yet even though years of tough economic times and subpar investment performance have forced many savings-strapped workers to consider working beyond their ordinary retirement age, it's still possible to retire early. To be successful, though, you'll have to make it a priority, and that involves some big sacrifices.
Below, I'll give you some ideas on where to start in your quest to retire early. First, though, let's take a look at just how much the early retirement story has deteriorated in the past 10 years or so.
Where we've been
Back in the late 1990s, when the bull market in stocks had lasted for well over a decade, many investors sitting on massive profits in their portfolios planned to retire early. With many young professionals having started their careers at Internet-related tech start-ups, enormous gains combined with freely distributed stock options as compensation led to even rank-and-file workers having substantial amounts of wealth, and young Internet millionaires who were smart enough to cash out before the inevitable bust ensured their financial security for life.
After the bear market of 2000 to 2002, though, workers had a harder time generating big payoffs from employer stock-related compensation, and investors didn't find as many high-growth prospects. By the time the financial crisis came, many workers found themselves overburdened by mortgage debt and far behind on their retirement savings, making it nearly impossible even to consider retiring early. Nowadays, with high unemployment and a lukewarm economic recovery, most workers don't feel secure enough in their financial prospects to contemplate voluntarily quitting early.
Where you want to go
But retiring early isn't all that complicated, and you don't have to find the ultimate multibagger stock in order to get there. Rather, you need to change your approach toward money, most specifically by emphasizing future spending over current consumption. Among tips to consider:
1. Save as much as you possibly can.
In most cases, saving nearly to the point of excess is the key to successful early retirement. Many young people starting out in a new career have scrimped throughout their college years, and once they get a paycheck, they take the opportunity to catch up on pent-up spending impulses. Others have more immediate financial priorities, such as buying a home.
Successful early retirees often report being able to save half or more of their take-home pay. Through the use of strategies like maxing out 401(k) and IRA contributions, you can use tax-favored accounts to minimize your tax bill and put even more money toward saving. Moreover, by saving that much, workers get used to a more frugal lifestyle that allows them to retire early without having to put as much money aside as those who would want more lavish budgets in their retired years.
2. Don't forget insurance.
One of the biggest obstacles to early retirement is the high cost of health care. With most health insurance coming through employers, not having a job before you're eligible for Medicare can require you to buy extremely expensive individual coverage. New health care laws may make that process easier, but even so, it's a big expense you have to plan for.
3. Invest well.
With relatively high amounts of savings, investing may seem like a secondary consideration. But because early retirement shortens your time horizon for investing, it's essential to make the years you do have count.
Early on, aggressive growth stocks can provide huge boosts to your overall wealth. But as you approach early retirement age, you'll want to shift more toward dividend-paying stocks in order to generate the income you'll need. Dividend ETFs Vanguard Dividend Appreciation (NYSEMKT:VIG), SPDR S&P Dividend (NYSEMKT:SDY), and Vanguard High Dividend Yield (NYSEMKT:VYM) are reasonable places to start. Remember, income from investments will be especially important during your first years of early retirement, as Social Security won't kick in until age 62 at the very earliest.
Don't give up!
Retiring early may seem like a pipe dream, but it doesn't have to be. If you're willing to sacrifice to get the job done, you can reach your goals even in a challenging economic environment.
Fool contributor Dan Caplinger owns shares of Vanguard Dividend Appreciation. You can follow him on Twitter @DanCaplinger. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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