It’s a myth that early retirements are only for those who earn huge incomes or inherit millions of dollars. The truth is that almost anyone who wants to retire early can make it happen. Preparing for an early retirement is not a complex process; it simply involves merging your desire for financial independence with the discipline needed to achieve it.
If you want to retire at a young age, following the three steps below can help you get there.
Contribute 20 Percent of Your Income to Retirement Savings
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To retire early, contribute at least 20 percent of your income to your retirement fund. Try to max out your 401(k) if your employer offers a matching contribution and good investment options. For 2019, the 401(k) contribution limit is $19,000 per year and $25,000 if you’re 50 or older. If you don’t like your company’s 401(k) investment options, contribute enough to get your employer’s match and invest the rest in an IRA.
If you don’t have a 401(k) offered through an employer, invest in an IRA. The contribution limits are much lower — $6,000 per year or $7,000 per year if you’re 50 or older. Put any money you have left over after reaching your limit into a taxable investment account.
Taxable investment accounts don’t give the tax advantages of a 401(k) or IRA, but they do give you a range of investment options. You can also withdraw funds from them before the age of 59 ½ without penalty.
To retire early, you’ll need to take an aggressive investing approach. For most people, this strategy involves keeping the majority of your money in the stock market instead of in bonds and money market accounts. While investing in stocks carries risk, the market has historically averaged an 8 percent rate of return.
Even accounting for the risks involved with the stock market, you’re still likely to average 8 percent growth, and possibly more, each year. This percentage is a much better rate of return than you’d get by investing in bonds, even though bonds carry less risk.
Start Saving as Soon as Possible
The more time you give your money to grow, the more it will accrue. For example, assuming an 8 percent rate of return, if you put $600 a month into a retirement account starting at age 25, you’ll have $1.24 million at age 60. If you wait until age 35 to start saving $600 each month, you’ll have less than half that amount, about $526,000, at age 60.
As you can see, starting to save for retirement at age 25 gives you an advantage over waiting until 35. The 10-year head start means you’ll add $72,000 to your retirement fund but end up with an additional $700,000 thanks to the extra time your money has to grow.
The road to retirement can feel long and challenging. You can be tempted to give up and resign yourself to more years in the workforce. However, with the right planning and discipline, you can retire early. Invest early, often, and aggressively. You won’t regret it.