Lots of people would love to retire early, but many don't consider that more than a pipe dream, as it can seem impossible. It's not necessarily impossible, though. You do need to start planning early, though, and following these three tips can help a lot, too: Be smart about debt, investing, and taxes.
Selena Maranjian: One way to better your odds of being able to retire early is to be smart about debt. If you have a mortgage on your house, that's probably not a hindrance, especially in this period of low interest rates. If you plan to remain in your home for a long time, however, and your mortgage's interest rate is considerably higher than what banks are offering, consider refinancing to lower your payments. You might even refinance into a shorter-term loan, to lower your total interest payments and get the home paid off faster. It's good to be mortgage free by the time you enter retirement.
High-interest rate debt is a problem, though -- because it can shrivel up your net worth, and keep you from growing a nest egg with which to retire comfortably. Many credit cards, for example, charge 25% or more per year, which can cost you a whopping $5,000 per year in interest alone on a balance owed of $20,000. It's hard to get ahead when you're trying just not to get further behind.
Even if you're not saddled with steep debt, you need to stay on top of your credit life, and keep it clean. A sparkling credit record will give you a good credit score, and that can get you the best interest rates whenever you want to borrow money to buy a house or car. Lots of businesses, such as insurers, take your credit score into account, so having a good one can easily save you thousands of dollars (if not tens of thousands) over the course of your working life -- making you more able to retire early.
Matt Frankel: Being financially able to retire early isn't just about saving money -- it's what you do with it. It makes my blood boil every time I hear a friend say they managed to set aside a large sum of money, only to "invest" it in a CD or money market account.
On one hand, it's completely understandable for people to fear the stock market, especially the younger generation. After all, many people saw their parents get wiped out in the tech crash of the early 2000s, or watched their family homes get foreclosed upon during the financial crisis. However, these are two of the many crises throughout a history that clearly shows the market always does well over long periods of time. In fact, including all of the crashes, depressions, and recessions, the market has historically averaged returns of close to 10% per year.
To illustrate what an amazing power this can be, let's say that you're 25 years old, and want to be able to retire at 50. If you save aggressively, and manage to set aside $10,000 per year, you'd have about $282,000 at age 50 if you put your money in CDs at 1% interest. Now, how much would you have if you invested in stocks, assuming the long-term historical average return over the next 25 years? Maybe $500,000?
It might surprise you to learn that $10,000 per year invested in a diverse portfolio of high-quality stocks or low-cost ETFs could grow into a $913,000 nest egg in 25 years.
Smart saving and investing is the magic formula that could lead to financial freedom while you're young enough to enjoy it.
Sean Williams: Hitting your retirement number earlier than expected is everyone's dream, but not very many actually achieve it. One of the most-effective tips I can offer to help you reach this lofty goal is to be smart about your taxes. Making a few key moves could allow you to keep more of your money, as opposed to paying it back to the federal government.
If you qualify, opening up and maxing out your contribution to a Roth IRA can be an important wealth driver. As long as you don't make any unqualified withdrawals, money invested in a Roth IRA can grow completely free of taxation. This could translate into hundreds of thousands of extra dollars in wealth you'll get to keep and invest over your lifetime. Furthermore, a Roth IRA has no minimum distribution requirement, and no age limit as to when contributions have to stop, unlike a Traditional IRA. Thus, it's perfect for lifelong investors. To see if you qualify, take a gander at the IRS' income requirements.
Tax-deferred plans can be of assistance, too. Traditional IRAs and 401(k)s defer taxation on your investment accounts until you begin making mandatory withdrawals during retirement. You will pay tax on this money when withdrawn, but if you have a solid withdrawal plan in place, you can certainly minimize what you owe in taxes.
Lastly, understand that where you retire matters. Certain states tax retirement benefits and income at a higher rate than others. Choosing a state with a tax-friendly approach to seniors should allow you to keep more of your hard-earned wealth.
If you're serious about wanting to retire early, start developing and executing a plan now -- and be smart about debt, investing, and taxes.