There is no perfect formula for retirement, as everyone's path to retirement is different.
Yet the fact remains that around half of all retirees aren't able to leave their job on their own terms, according to a Gallup poll conducted in May. Gallup's survey showed that 49% of all retirees were forced to leave their job early through either a forced retirement or for health reasons. It's a disappointing revelation, considering most people would prefer to be in control of their own financial destiny.
How to retire early in five easy steps
However, this doesn't have to be the reality for half of the working population. Retiring early and on your own terms could be within reach if you stick to the following five steps.
Step 1: Set your target
The first step toward retiring early is to set your monetary target. People who lay out clear goals are more likely to save for their retirement or feel confident in their ability to meet their financial needs in retirement than those who haven't put in the effort to determine their long-term expenses.
In a recent study of American workers by Financial Finesse, 80% of respondents said they felt unprepared for retirement. Of the 80% who proclaimed their unpreparedness for retirement, 76% hadn't run a retirement projection to see how much they'd need in order to comfortably retire. Conversely, there was a 76% improvement in financial retirement planning preparedness among respondents who had done multiple financial wellness assessments.
Of course, you'll want to keep in mind that retirement goals should be somewhat fluid, too. Chances are, you'll encounter a number of big changes in your life such as buying a home, getting married, or having children, for example, which can move your retirement number up or down.
Step 2: Create a budget
Once you've set a retirement goal, the next step is to run your numbers on a monthly basis in order to formulate a budget. Not all early retirees have necessarily kept a budget, but Financial Finesse's study data shows that the proof is in the pudding for those who fully understand their cash flow.
Based on the study data, 83% of respondents who feel as if they're on track for their retirement have a handle on their monthly cash flow, including a keen understanding of how much they spend and save each month. Comparatively, only 59% of those who proclaimed themselves not to be on track for a comfortable retirement have a handle on their cash flow. Budgeting might seem rudimentary, but it's an important foundation that needs to be set before you build your retirement nest egg.
Step 3: Save early and often
Building upon the first and second step of how to retire early is the increasingly important third step of saving as much of your income as you reasonably can.
The reason it's so important to start saving early is that time and compounding gains are your greatest ally as an investor. Waiting even 10 years to start investing could make a substantial difference in how much money you have when you do eventually decide to retire.
As an example, let's say you have $10,000 to invest in the stock market. In one scenario, you begin investing at age 20, while in the second, you don't open your investment account until age 30. Assuming an average appreciation of 10% per year, which is pretty much in line with the historical average return afforded by the stock market, an individual looking to retire early at age 50 would see a greater than $100,000 difference between the two results. Beginning at age 30 would yield $67,275, while investing at age 20 would net close to $175,000!
The key is to allow time and potentially dividends to do all of the hard work for you.
Step 4: Choose an in-demand profession
What you do for a living can also make an impact on whether or not you have the opportunity to retire early. This isn't to say a well-run portfolio couldn't help anyone reach their goal of retiring early, but having an in-demand job that pays well is liable to lead to better cash flow and more investable money.
According to the Bureau of Labor Statistics, there are more than 20 jobs that paid a median salary of $119,480 or higher in 2012. These included physicians, air traffic controllers, dentists, and orthodontists, to name a few. Yet MarketWatch also reminds us that public-sector jobs, such as police work and firefighting, have more modest pay but can allow individuals to retire early and collect a pension for the remainder of their lives.
Step 5: Don't sell!
The final step of retiring early is perhaps the easiest of all: Don't sell! As we established above, time is your greatest ally, so the longer you can let your winning stocks run, the more money you should theoretically wind up with.
It's worth noting that just because you do decide to retire early, it doesn't necessarily mean you've stopped investing for your future. Investing is a lifelong adventure, because none of us knows exactly how long we have to live. With life expectancies on the rise, people need to plan for their money to last well into their 80s, 90s, or even 100s.
This also means taking the steps to protect as much of your income as possible in tax-advantaged retirement accounts such as a Roth IRA, which allows your money to grow completely tax free, or a traditional 401(k), which is taxed as ordinary income when you begin making withdrawals after age 59-1/2.
Retiring early is within reach; you simply have to be willing to do some hard work early in life in order to be able to put your feet up and enjoy yourself later in life.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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