Early retirement is a concept that is talked about more and more by people as young as 25. However, most still wait till they reach the age range of 61-69 to make the decision to retire. Even though you can start withdrawing Social Security at age 62, it is recommended to put it off for as long as possible. Postponement of withdrawal will give you a higher monthly amount when compared to the early withdrawal amount. Knowing what decision you want to make with social security will help frame the path to financial freedom in retirement.
What’s Your Why
It’s important to know why you want to retire. Whether you’re tired of the daily grind of a job, or are wanting to travel and see the country or world, everyone has a reason. Some dream about the projects they can work on, volunteering in the community, or starting their own business. Understanding why you want to retire will allow you to know how you are planning to spend money, and to calculate how much you need to save to achieve your why.
Saving Money To Achieve Your Why
Before you can save money, you have to know how you’re currently spending it. Create a budget showing every bill, including streaming services and other automatic withdrawals. Once you have the list, identify which bills then you can make a plan to pay them off as soon as possible. Make sure to pay off any debit with a high interest rate as soon as possible, which not only saves you money in the long run, but will then allow you to put that money into paying another bill off. Next, you should determine if there are any unnecessary expenses that can simply be stopped, such as memberships to various companies or needless daily or weekly purchases. Take the money from those unnecessary expenses and put it toward bills or invest it.
Those who are able to put away more money than most people, attribute it to making sacrifices now in order to reap the rewards later. Examples of that might be to put more money, like bonuses or raises from their job, into a 401k. Alternatively, they might choose to contribute a higher percentage than they previously were. Others have chosen to have a side job, taking that paycheck and invest it, instead of spending. Those who strive to save money might take small, cheap vacations, or perhaps none at all. They will also curtail eating out, use coupons, and avoid purchasing unnecessary items. When they do make purchases, they don’t buy big or needlessly. A smaller house or low maintenance vehicle would be what they’re looking for.
Avoiding Delays In Achieving Your Why
Saving money and planning is a great goal to work on and achieve. However, there are a few things which can possibly derail your careful planning. An obvious problem is withdrawing from your retirement account early, which is subject to a 10% penalty by the IRS on top on income tax on the amount. What might sneak in under the radar is inflation. It affects everything eventually, and many don’t take it into consideration when attempting to determine how much money will be needed to live.
To avoid unnecessary delays or mistakes, it would be beneficial to look at your investments and attempt to not only diversify your portfolio, but also re-balance it. Consider diversifying to have a mix of a mix of non-qualified and qualified money, in which non-qualified is not subject to those early withdrawal penalties, should you choose to retire early. With re-balancing, it’s merely taking a look at where you have invested, and selling overvalued asset classes and purchasing undervalued asset classes.
The idea of early retirement is such a lofty goal, most people don’t realize the planning it takes to achieve it. Some people are able to do it on their own, and some consult an investing advisor. Ultimately it comes down to what you’re wanting to do with your retirement, and what you’re willing to do to make it a reality.