Saving for Early Retirement: A Practical Guide to Your Finances

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Would you love to retire before your peers? Are you wondering if the right money management strategies can help you live a life of leisure before you dreamed it was possible?

Believe it or not, saving for early retirement may not be as difficult as you think. If you watch your money and invest it wisely, you can retire as early as your late 40s or early 50s.

Here’s what you need to know about saving money and planning for retiring early.

Why Early Retirement?

Maybe you’re the kind of person who loved a more flexible schedule during your college years. You enjoyed sleeping in, hitting the gym a few times a week, and having the time to fix healthy meals for yourself.

The days of the work-a-day grind may have come as a shock to you. Suddenly, you’re sleep-deprived and shoveling quick and cheap options in your mouth at your desk for lunch every afternoon.

The idea of early retirement is very appealing to those who love a schedule they can fill their own way. You can work all kinds of fitness options into your day, including nature walks. It’s also possible to have time to shop for healthy options and even cook separate meals for you and your partner.

If you love to travel, early retirement can give you the time off you need. Maybe you’d like to jet off to Italy for a week or to Colorado for a ski trip, but you never had the time. Early retirement also means that you can take advantage of off-peak rates for lodging and airfare.

Some early retirees have kids in college who they’d like to move closer to. Others have friends or relatives in other states, and they’d love to be able to pack up and visit at a moment’s notice.

Or maybe you’d like to start a second career or look into interesting part-time work. Retiring early means that you can expand your horizons and get away from work you’ve grown bored with or discouraged by.

Retiring early can be a wonderful goal during your working years, and it can motivate you through some tough days. Getting there, however, takes some real planning and creativity.

Know Your Retirement Expenses

Before you retire early, it’s important to know how much you’ll actually need to live on. You know, for example, that you’ll need somewhere to live, and will have to pay for utilities, groceries, and transportation. Your ideal retirement may also include some travel and leisure expenses.

Before you retire, you will have ideally paid off all of your debts, including your mortgage, credit card debts, and student loans. If you anticipate still needing to make some of those payments, it’s important to figure them into your budget.

Next, you can calculate exactly how much you’ll need in order to retire. One way to do this is to figure out your yearly expenses and multiply them by 25 or 30.

The amount you will come up with may seem overwhelming at first, but keep in mind that you’ve got years to prepare!

Adjust Your Budget For Retirement Savings

Those who wish to retire early have learned to live on significantly less of their income, sometimes even reducing their monthly expenses by 50%. You can do this by spending less, earning more, or finding some combination of the two.

Creating a simple monthly budget can help you meet your goals. Decide where you can cut costs, such as not eating out or finding less expensive grocery stores.

Cancel any subscriptions you don’t use. You may also be able to find less expensive options for things like dry cleaning or your morning coffee.

You may also want to consider finding extra side jobs to boost your income. In the long run, the forethought and sacrifice can really pay off.

Put As Much As Possible Into Your Retirement Accounts

If you want to retire early, you should be focusing on putting as much money as you’re allowed into your retirement accounts. A traditional IRA will allow your money to grow tax-free. A Roth IRA also allows you to make certain withdrawals on a tax-free basis.

If you’re under 50, you’re allowed to contribute up to $6,000 to an IRA account. If you’re over 50, the amount is $7,000.

Your heirs can also benefit from your contributions to an IRA account. You can pass along the funds and they won’t have to pay taxes on them.

Employer-provided 401K plans, or those similar to them, are also tax-sheltered. This lowers your taxable income and may even put you in a lower tax bracket. You can also take the account with you if you switch jobs.

In 2021, you can contribute $19,500 annually to your 401K if you’re under age 50. If you’re over 50, the limit is raised to $26,000.

It’s also possible to consider investing in alternatives in order to really make your money grow. Hedge funds, for example, generate positive growth in both rising and falling markets. The funds can also be managed aggressively.

If you plan to retire early, it’s critical to make sure you’re investing as much as you can now. This may mean that your current leisure activities will require a bit of curtailing. However, having enough to live the life you envision in the future can make any current sacrifices well worth it.