The statistics on retirement in America are quite sobering. According to a survey by Bankrate.com, 36% of Americans haven't saved a dime for retirement. Those who are saving won't have nearly enough. The average 50-year-old, for example, has just $43,797 saved up for retirement. That won't go very far, as the projected medical treatment costs alone for a couple over 65 with an average 20-year retirement are expected to reach $215,000. With statistics like that, most Americans will struggle just to make ends meet in their retirement.
Yet despite these worrisome numbers, it's quite easy to achieve a comfortable retirement in America. In fact, by following three simple steps, many Americans can not only retire eventually, but even retire early. Here's how it can be done.
Step 1: Stop wasting money!
Credit card interest and ATM fees are just some of the many wasteful expenses that eat into people's income. These bad expenses really add up. For example, the average American carries nearly $4,878 in credit card debt, while the average APR on a credit card with a balance is 12.73%. That means that the average American is forking over $620.95 per year in credit card interest payments alone. It must be a top priority to pay these cards off as soon as possible and then avoid carrying a credit card balance in the future except in emergencies. That would free up hundreds of dollars each year that could be invested and earning interest for an early retirement instead of earning interest for the credit card company.
Likewise, ATM fees can take a bite out of a budget. The average ATM fee is $4.13 each time an out-of-network transaction is made. Compound that with the fact that the average consumer takes cash out every seven to 10 days, and it really adds up. In fact, just using these averages suggests that an ATM user could be forking over $150 per year in out-of-network ATM fees alone. Needless to say, out-of-network ATMs should be avoided at all cost.
Then there are the superfluous purchases we make without realizing the cost. For example, ordering soda or alcohol at a restaurant can cost us anywhere from a couple of bucks to $10-plus, whereas water is free. Avoiding these purchases except on special occasions can really add up to big savings over time. For example, one $2.50 drink purchase each week adds up to $130 over the course of a year. If that money were invested in a tax-deferred retirement account earning 7% per year, it would add up to more than $13,000 after 30 years. That's just one of many ways to save money (and calories) so you can enjoy a better retirement.
I could go on, but you get the idea. There's at least one wasteful expense that needs to be cut. This means there are potentially hundreds, if not thousands, of dollars being wasted that could be used to pay back debts or to invest -- both of which could help you achieve an early retirement. So, by simply cutting out wasteful spending, we'll have a little extra money each month as we make our way toward retirement.
Step 2: Live below your means
It goes without saying, but anyone who hopes to retire -- let alone retire early -- needs to spend less than they make. This takes cost-cutting to another level by delaying gratification on many purchases.
The first step is knowing what comes in and what goes out. Tracking software like Quicken or Mint.com, or even an Excel spreadsheet, is a must here. From there it will be easier to determine where too much money is leaking out so that those leaks can be plugged.
Then comes the hard part: determining where to make cuts. It could mean cutting the cord on cable and relying on cheaper entertainment options. Perhaps you should pack a lunch for work instead of heading to the cafeteria or a fast-food joint. It might even mean not upgrading smartphones each time a new model comes out or holding on to the car for one more year.
Living below your means isn't about depriving yourself and living on Ramen noodles. It's about having enough margin in your budget that you don't live from paycheck to paycheck and you have money left over to put toward retirement.
Step 3: Invest the excess
We can only get so far on the road to early retirement by slashing costs. At some point we need to put these savings to work on our behalf. That's where investing comes into play. Here we can take the simple route that even Warren Buffett recommends. In Buffett's latest annual letter to investors, he discusses how he thinks his heirs' money should be managed. He said:
My advice ... couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the ... long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions or individuals -- who employ high-fee managers.
The beauty of index funds is that they allow us to match the performance of the entire stock market, which, over long periods of time, has consistently performed well. They also make investing much simpler and less demanding, as we don't have to spend hours researching individual stocks. If we take the money we've saved by living frugally and plow it into an index fund every month, we can build up one heck of a retirement fund over time. As fellow Fool Matt Frankel recently pointed out, simply maxing out IRA contributions starting at age 25 and investing in nothing but an index fund could yield a retirement portfolio of more than $2 million by age 65.
