The standard age of retirement is sixty-five, but that does not mean you have to wait until then to retire. Many people wait to retire until they are eligible to receive social security income which can then be used to supplement their retirement funds. However, if you have taken an aggressive approach to saving and investing, you could reach financial independence well before the standard retirement age. Does that mean you can afford to retire early?
For those who achieve financial independence early in life, early retirement is a highly sought-after option that allows individuals to continue working if they want, or switch to a job that is more about enjoyment than earnings because there is no longer reliance on a salary to make ends meet. Once you reach financial independence, you can afford to retire early and many people in this financial position do. Financial independence means having access to enough money through savings and investments to cover your living expenses for the rest of your life.
So, how do you know how much money you need to reach financial independence? Here are five ways to retire early, even with a five-figure salary:
1. Save, save, save
Generally, you should strive to have about twenty-five times your annual household expenses in savings or invested in safe stock funds. For many people, this means you need one to two million dollars stashed away to retire early – but fear not. While that may seem like an impossible number, especially if you earn the low end of a five-figure salary, savings can add up quickly when interest is accruing.
In calculating how much money you need to retire, it is important to consider your current salary, how much you contribute to your retirement, how much your employer contributes, and how the market performs in addition to considering your living expenses, financial goals, other income sources, and the potential for unexpected expenses. Save money where the interest rates are highest and yield the greatest return. The more money you can put away now, the quicker you can retire.
Read more about The Millennial’s Guide to Saving for Retirement
2. Supplement your salary
Most people invest between five and fifteen percent of their salary for retirement. However, by increasing your retirement contributions to between forty and eighty percent of your salary, you can accelerate your path to retirement by building the six-figure balance you need to retire early. Relying on a side hustle or secondary source of income for living expenses will allow you to invest more of your salary toward retirement which will grow your money quicker thanks to the investment rate of return which is often at least six percent. There is no limit to opportunities for supplementary income, from freelance projects to driving for a ride-share or grocery delivery service, and even creating and selling products online. Every dollar you make beyond your salary is another dollar you can invest toward early retirement.
3. Reduce your expenses
There are probably plenty of areas you can cut back on your spending without really sacrificing much. Cell phone bills, music, and television streaming subscriptions, and food costs are common places where we spend more than we need to. Shop around for cell phone plans and providers to find the best deal. Often, pay-as-you-go service providers use the same cell phone towers as major carriers for a significantly lower cost.
Many Americans pay for multiple streaming services for both music and television. There are plenty of free streaming options out there, so if you must pay for a service, be mindful of which service you choose to ensure you are getting the best value and the greatest benefit. Select only one streaming service to pay for and rely on free services as much as possible.
Food costs are full of waste. Spend a few weeks taking inventory of how much money you spend on food, both at the grocery store and dining out, compared to how much food ends up in the trash. Being mindful about your food costs by grocery shopping from a list, meal prepping to reduce the urge to pick-up fast food on your way home from work or buying in bulk, and freezing the food you do not need right away are just a few ways to reduce your costs without feeling the sacrifice. The money you save by reducing your food costs is more money toward your retirement.
Read more about how to slash your grocery budget
Other more extreme ways to reduce your expenses including trading in a vehicle on which you have monthly payments for a vehicle you can afford to buy outright or switching to public transportation, reducing your mortgage by downsizing, switching to an apartment or rental for a significantly lower monthly expense, or welcoming a roommate into your home for additional income.
4. Establish a bridge account
If your goal is to retire early, you will need to take into consideration the gap between your age of retirement and the age you can withdraw money from your retirement accounts without penalty. Unfortunately, some accounts have an age requirement at which point you can withdraw money without consequence – early retirement could mean extra expense to access these funds. To avoid costly fees and penalties for withdrawing money from your retirement accounts earlier than permitted, consider establishing a bridge account to rely on once you retire until you can begin drawing from your retirement accounts risk-free. A bridge account should be a taxable investment account that you can withdraw from upon early retirement, without fees, penalties, or other consequences.
5. Work with a financial advisor
Finances can be complicated. There is no “one size fits all” or standard formula for ensuring early retirement and life-long financial independence. Working with a professional who is knowledgeable about retirement accounts, investing, and taxes is a wise way to set yourself up for success. A financial advisor can help you identify the numbers you need to set yourself on the path to early retirement.
