Retiring early sounds great, doesn’t it? But if you want to retire early with enough resources to guarantee a generous income, you’ll need to make an extra effort during your working years to prepare for the big day. Here are some steps you can start taking today to secure that coveted early retirement.
Make more money
The higher your income during your working years, the more you’ll be able to save for your nonworking years. Whether that means a raise, a promotion, a side gig, or an entirely new job, finding a way to generate more income — and then dedicating the extra income to retirement savings — is perhaps the single most important thing you can do to bring your retirement date forward.
That’s because you can set up your contribution schedule to take the extra money out of your paycheck before you ever see it, making you a lot less likely to end up spending the money on something else.
And if you jack up your contribution level every time your income goes up, you won’t feel deprived because you’ll be taking home roughly the same amount of pay that you were getting pre-raise.
Pay off your house
The housing payment is often the biggest monthly expense on the family budget. If you can get rid of your mortgage before you retire, your need for retirement income will drop significantly, which makes it a whole lot easier to retire early. Of course, you’ll still have house-related expenses such as property taxes, homeowners insurance, and repairs and maintenance. Be sure to budget for such expenses when calculating how much retirement income you’ll need.
Invest heavily in stocks (at first)
The higher the percentage of stocks in your portfolio, the higher the average returns you can expect — but more stocks also means higher volatility and risk. That’s why it’s important to heavily weight your portfolio toward stocks early on, when volatility is less of a concern.
If the stock market takes a dive when you’re in your 30s, you’ll have plenty of time for your portfolio to recover and then some by the time you retire, even with an early retirement date. But if the market dives when you’re in your 50s and you still have a very high percentage of stocks in your portfolio, early retirement may suddenly become impossible.
If early retirement is your goal, you may want close to 100% of your portfolio in stocks for the first couple of decades of your working life. The higher average returns that such a portfolio can generate may give you enough of a head start to move your retirement date forward significantly.
However, as you move into your 40s and 50s, you will need to shift some of your money away from stocks and toward more stable investments such as bonds. At this point, it’s wise to start using the asset allocation formula of 110 minus your age to determine what percentage of your portfolio should be in stocks.
Develop passive income
Having multiple income sources in retirement is always a good idea, because it gives you income redundancy. If the only sources of income you have are retirement savings and Social Security benefits, and something happens to one of those two sources of income, then at the very least you’ll have to cut back your standard of living.
For example, if Social Security makes up 40% of your monthly income and Congress decides to cut Social Security benefits in half, you’ll have lost 20% of your monthly income in one fell swoop. Imagine what would happen to your lifestyle today if you lost 20% of your income right now.
If some of your income is derived from passive sources, you’ll essentially have money coming in without having to work for it. The catch is that setting up passive income generally does require quite a bit of work on your part. If you get the setup work done for one or more passive income streams well before you’re ready to retire, then your retirement years can be pleasantly leisurely.
— Wendy Connick
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Source: The Motley Fool