We all wish we could retire right now.
Unless you’re sitting on a pile of money, or have the greatest returns on your investments that money can buy, you’ll probably need to plan ahead for a financially sound retirement plan.
Read on for tips on how to achieve this.
For what will your retirement be?
People use their retirement for different things.
Some like to continue working part-time, either by drastically reducing hours, or by trying out some other more enjoyable trade.
Others like to travel the word and experience the things they may have missed out on due to working hard and raising a family in their twilight years.
That in itself is a hugely fulfilling and worthy thing to have done, but everything comes at an opportunity cost.
Or some like just to kick back and do nothing much at all.
Plenty of reasons to do that as well.
Or how about carrying on your education?
Learning is a lifelong process after all.
Or you could volunteer for a worthy cause that you never got around to in your busy life of working.
The more time and money you give yourself to do these things, the more pleasant the experience will be.
Experiences are often determined by their endings, and in many ways, life is no different.
You don’t want a stressful retirement to ruin a good run.
Early retirement is possible if they adhere to financial prudence and planning.
All of the above is possible if you take the steps to ensure your days in the sun have less of a time and financial constraint.
What follows is a list of tips on how to retire early and retire with a lovely savings pot to see out your days.
Retiring is more than just getting old
Some people are deciding to ditch the term retirement altogether, and instead use the terms ‘financial independence’ or ‘economic freedom.’
This is part of a wider move away from viewing retirement purely regarding age.
Retirement doesn’t mean withering away in a rocking chair on your porch for the rest of your days.
The ‘tire’ in retirement is less and less relevantIn this age with the wonders of modern medicine.
The word originally comes from the French to draw back, to a place of safety or seclusion, but retirees are often the most active and energetic members of society.
Retirement is now about having the social and economic freedom to do as you please.
Some of you might have heard of Mr. Money Mustache, the website, and blog dedicated to how to live economically and retire early.
Pete (the writer) and his wife retired in their mid-30s and the blog details how they did it and the tricks you can use to copy their success.
They are living the life of their dreams with no need to work another day in their life.
Their tips are simple:
– Save money
– Spend less
– Invest wisely
Of course, there is a little more to it than that, and you will need to head over to his website to learn more about his early retirement strategy.
But those three principles will hold you in good stead.
And you don’t need to be made of money to do this.
Almost anyone can support an early and fruitful retirement.
All that’s required is that you have enough money to create an income of the future if you will.
A salary that you will eat into only later in life.
And this salary will depend entirely on how much you need.
One of his blog posts tells us that the biggest factor that determines whether your finances will be sound enough to retire is how much you spend now.
This may seem like common sense, but you’d be surprised how many people the only factor in their spending habits later on in life as retirement approaches, rather than take a long-term view of their current practices.
Track your spending
Where is your money going now? Do you go to the gym enough for that membership to be worth it?
Maybe going for a run would be a better idea.
How about flying budget instead of first class?
Gets you there the same.
Decisions like these will have long-term significance.
Monitor your spending and see where money could go into your savings instead of on the here and now.
Lowering your spending habits now will also reduce your spending needs in the future, as you will accustom yourself to the habit of saving money.
Thus the less you need to save for the future you, and the further those savings will go.
There are many websites that you can use to track your spending habits.
Free online services such as Mint.com can link to your card or bank and offer an online tally detailing exactly how much you are spending.
Or you can just open up an excel spreadsheet and start tracking your ins and outs.
Your personal balance sheet.
There is a reason some companies last for hundreds of years, and that reason is sound finances.
Hell, get a piece of paper and pen and list all the things you spend money on each month and how much you’re bringing in.
Putting them on paper can elucidate things, and doing so takes you out of the moment of impulse buys that may be holding you back.
Those little extra expenses can be viewed in the grand scheme of how much you are spending, which can make it clearer.
It can also show you the benefit of shopping around for cheaper deals on regular necessity spending like phone bills, insurance, the internet, and groceries.
Your spending will change once you retire.
It will probably decrease, though this is not certain.
Many people find that their expenses increase once they retire.
As the graph below shows, while it decreases the median hovers around 0%, for many there is no change at all level.
And for some, it even increases.
Things that may increase your spending
You may see your healthcare costs go up as your health deteriorates.
Working less and spending more time in the house also tends to lead to a desire to renovate the home to make those days more pleasurable.
Suddenly you may find yourself not liking the color of the walls or the size of the furniture if you are faced with them for more hours of the day.
As you age, you also become the final bastion of financial support for a wider array of people, as your children have children of their own.
With a more comprehensive network of dependants, the chance of needing emergency reserves for exceptional cases increases.
Don’t be surprised to encounter unexpected spending requirements.
And then you may want to travel more.
And in old age, you may find yourself less willing to shack up in budget hostels with a bunch of overly active teenagers.
And hitch-hiking might not offer the same adrenaline rush that it did when you were younger.
Traveling older is more expensive.
And you may want to do lots of it, as many retirees do.
So don’t assume retirement means spending less.
This expectation can be a risky one.
The Money Mustache blog mentioned earlier claims that Pete and his wife saved $600k and managed to pay off their mortgage before they quit their full-time jobs.
Along with their young son they live off a mere $25,000 a year, which is nothing much if you know anything about the costs of living.
Getting control of spending habits as soon as possible is the first, and perhaps the most pivotal step in determining when you can retire.
Another blogging couple who retired early and told the tale of how they did it is Aikasha and Billy Kaderli, whose words of advice can be found at RetireEarlyLifestyle.com.
They are in their 60s but retired when they were both 38.
They have given themselves the ability to travel the world on a budget of 30k a year.
This is a common theme among early retirees.
A relatively ascetic lifestyle and frugal habits.
No fancy car, and always one shared between two.
Cars rip into your finances left, right and center, so look there first for savings.
Their method for tracking finances is centered around working out costs on a daily basis.
They track all their spending, and over time work out their daily average over the years.
It remains remarkably constant and shows just how important keeping track of your long-term spending is.
Mr. Money Mustache doesn’t keep a scrutinized budget with his wife.
They just calculate at the end of the year what they spent on their credit card (they spend most things on the credit card).
Our third couple we would like you to meet is Gaby and Skip Yetter.
Yes, those are their real names.
They quit working in their 50s and travel the world while working with a financial adviser.
They profess how early retiring , and simple living made them realize how much they wasted money earlier on in life and how a frugal lifestyle brings them just as much happiness.
However, don’t expect financial planning to be a guarantee.
After all, it is only a plan, not a certainty.
There are always going to be hiccups and so always be prepared for bumps in the road.
For example, no one knows how long they will live for and so meticulous planning can only be so accurate.
Some retirees like to stick by the 4% rule, whereby the first year of retirement sees you withdraw 4% of savings and each year that same dollar amount with inflation added.
This means that if calculated you would be saving 25 to 30 times your annual spending requirements that you currently have.
Work yours out and see how much this rule of thumb says that you will need.
Recently some financial experts have attacked the 4% rule as too optimistic considering the fragility of the world economy and the disastrous effect any downturn would have on people’s savings.
However, many current retirees have said the rule held them in good stead even in times of downward economic performance, such as the 2009 financial crisis.
As long as you have the flexibility of lifestyle to trim costs by the general economic climate, you should be okay.
So far we’ve only talked about spending habits and how getting them under control and observation can hold you in good stead for planning your retirement finances.
Investment is also crucial if you want to make those savings give you a pleasant retirement.
You could invest in a mutual fund that tracks an index such as the S&P500 shares index.
As it gains in value, so does your fund.
These will also have smaller charges than micro-managed funds that are invested in a portfolio of stocks.
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The graph below shows a possible trade-off between fees and returns.
The secret to early retiring lies in shrewd investment.
– Be disciplined in your investment tactics
– Diversify your investments
– Use low-cost funds as a backbone to your investment strategy
The MarketWatch website has great resources for those looking for simple investment advice for a retirement fund.
One of these is its series of Lazy Portfolios.
These are eight sets of investment targets made up of a mixture of funds with even diversity to weather economic storms.
The portfolios range from 11 to 3 mutual funds.
Here are some examples of the funds and their returns over the last three years:
– Coffeehouse Portfolio: 8%
– Dr. Bernstein’s No Brainer Portfolio: 9%
– Second Grader’s Starter Portfolio: 10%
The third and best-performing one, is comprised of only three mutual funds:
– Vanguard Total Stock Market Index Fund VTSMX (60%)
– Vanguard Total International Stock Index Fund VGTSX (30%)
– Vanguard Total Bond Market Index Fund VBMFX (10%)
The point of these guides is not to do an exact copy cat of the funds.
If everyone invested in all of these the costs charged may change, and it would no longer be the bargain that it currently is.
The point is to use them as guides and get an idea of what an adequately diversified portfolio looks like, and in what kind of funds to invest.
There is no need to scour over educational books about investment and try and become one yourself.
While educating yourself is certainly useful, and we would recommend you get an understanding of the basics, don’t try and do what the investors spend their entire lives doing.
Sometimes it’s best to leave it to those in the know.
For you, these guides are enough to steer you in the right direction.
Should you be investing in a 401(k), your investment options will be a little different, but these guides will still be useful for you.
While you don’t need to invest in Vanguard, the company has low-cost funds which are why it is a big target for the average investor.
Although it’s sensible to leave the details to the expert, it is also wise to track your investment and keep tabs on its movements.
Follow the guidelines set out in resources like MarketWatches portfolio list, like the types of funds to invest in and the ratios (e.g., 60% dedicated to stock market index funds).
If the stock market performs fantastically, as it is currently doing, you may want to rebalance to ensure you are getting the most out of your fund.
Cost of Housing
We mentioned earlier couples that managed to pay off their mortgages before they retired.
This is very useful in the USA where mortgage costs are high, and housing costs are expensive.
However, we also mentioned that retirement saving is about creating a future salary for yourself.
If this can cover your mortgage costs, then you can easily get away with not paying it off by the time you retire.
You will need to assess your finances to determine what is best for you.
Aside from the financial side there is the obvious psychological value of being completely out of debt when retiring.
Knowing that you are in the clear is a huge sigh of relief and can make those days in the sun feel that much sunnier.
However, in a world of low-interest rates, some have made the choice to hold their mortgage and invest in financial markets with the money they would have used to pay it off.
This is perhaps a shrewd move in the long run if you are willing to stay in debt a little longer.
However, paying off your mortgage and selling your home can be an excellent way to give yourself financial and social freedom.
You could use that money to buy a smaller home, now that your kids are independent.
There are also plenty of ways to live free nowadays with the power of social media platforms cutting out middlemen and linking people to economize modes of living, including:
– House Sitting
WWOOFing is where you work a few hours a day in return for life and food: while maybe not the best for older retirees, this is a great experience as well as a free way to live.
WWOOF is mainly done on farms, but it has been extended to virtually every industry.
Housesitting websites like TrustedHouseSitters.com mean that the Yetters can now live rent-free for 70% of the year.
If you are willing to move around and explore the world, you could do this too.
AirBnB is the paying version of this, but great deals can be found.
Of course, relying on home equity in this way means assuming that the local housing market is healthy and not too much of a bubble.
Worst case scenario the housing bubble crashes and your home lose its value.
But again, retirement planning must take into account the possibility of the most unfortunate happening.
An example of the co-operatives is what the Kaderlis’ do.
They own a home in a community Arizona, which is at a reduced cost as it is simple and they are not there most of the year.
The rest of the time they rent, housesit and travel.
They book longer stays which enjoy a discount and go in the off-season.
As mentioned, their total spend is only 30k a year, taking into account:
– Health-care costs
– General living expenses
Health care costs
As mentioned before, this is a big one to consider.
It is also something that varies with each person.
Some are blessed with perfect health for most of their life, while others drew the short straw and had high health care costs.
Pete, Mr. Money Mustache, said he has a low-cost high-deductible plan, which costs around $275 per month for him and his wife and son.
The Yetters spend around $120 month on a plan from World Nomads, which gives them insurance wherever they go.
It’s cheap because healthcare around the world is cheaper than the US.
By a long way. When they are in the US, they buy temporary coverage.
The Kaderlis pay out of pocket when they are in the rest of the world.
Again, they manage because health care costs are so low in the rest of the world, while they get temporary insurance policies when in the U.S.
Taxes are a big one to look at.
It’s one thing to save money; it’s another to watch taxes once you hit retirement.
Retirement planning needs to include assessment of this important detail.
Withdrawing from IRA’s and 401(k)’s makes you eligible for income tax.
Doing it early (before you hit 60) means a 10% penalty.
Read up on the 72-T rule that allows you to avoid this penalty should you need to withdraw early.
Social Security benefits become taxable if you are a high earner.
And those benefits you do gain will be reduced if you carry on working or do consulting after you retire.
So there you have it.
A few thousand words worth of sound retirement advice.
To sum up, you will need to consider:
– How much to spend
– Investment planning
– Housing costs
– Healthcare costs
– Tax liabilities