The feeling of financial independence isn’t something you can tally up using retirement calculators. It’s also not something you can achieve on a whim. While the average American’s retirement age is 61, your lifestyle, both leading up to and during retirement, will determine your true feasible retirement age.
To help you retire early, I’ve laid out a few investment secrets I’ve learned over the years that allow you to scale your wealth quickly and sustainably for retirement.
Step 1. Determine How Early You Want to Retire
First, determine what early retirement looks like to you. Do you want to retire in your 60s, 50s, or maybe even your 40s?
For some people, the idea of freely traveling, relaxing, or pursuing hobbies is all the motivation they need to aggressively save during their working years.
Setting an “end date” is necessary because you have to work backwards from the age you want to retire to the age you are today to work out your investing strategy.
Step 2. Calculate How Much Savings You’ll Need for Retirement
Determine the “monthly nut” you’ll need to sustain your standard of living during retirement. Your nut can consist of housing, utilities, transportation, groceries, and anything else you pay for that allows you to “exist.”
An easy way to do this is to create a monthly average by looking at your monthly spending for the past six months. While some people think that coming up with a flat sum for their full retirement is the way to budget for retirement, it’s actually important to calculate your way forward based on monthly expenses to create an annual retirement need.
From there, you can see how much money you’ll need to cover your anticipated retirement duration.
Ideally, your monthly spend will not include a mortgage payment. The hard rule of retiring early is that your mortgage and other debts should be paid off by your retirement date. If your home has significant value, selling the home to purchase a smaller property for cash could be part of your plan for early retirement.
Generally, it’s recommended that you create a situation where you’re living on 80% of your pre-retirement income to enjoy a similar standard of living. The less monthly costs you can avoid, the earlier you’ll be able to retire.
For people retiring early, it’s necessary to rely on your own investments and savings until Social Security payments can begin at age 62. If you can hold off until 70 before cashing in, you’ll get the full benefits.
Step 3. Start Saving Money
Even the smallest expense burden you can cut today brings you an hour closer to retiring. If you’re doing retirement planning as someone who isn’t a millionaire, there’s no shame in “going cheap” for the sake of your end goal. Here are some ways to start cutting costs to get to the retirement finish line earlier than your peers:
- Aggressively pursue promotions and “job leaps” that will max out your earning potential as quickly as possible.
- Choose one streaming service that you like. Cancel all other subscriptions.
- Pay off or refinance high-interest debt.
- Open a short-term certificate of deposit (CD) for cash that isn’t already being invested.
- Invest in the annual family vacation fund instead of taking multiple vacations.
While this will help to build a nest egg, there’s only so much that cutting costs can do for your retirement plans. It’s just as important to grow money in anticipation of retirement.
Step 4. Grow and Compound Your Money
Open a retirement account to start putting your retirement funds to work early. Receiving a matching 401(K) is a good place to start, though I recommend opening a self-directed IRA (SDIRA).
An SDIRA allows you to invest your IRA in alternative assets like real estate and crypto, which can grow in equity or accrue monthly mortgage payments to fund your retirement. There are several ways to raise money for real estate using your SDIRA that will allow you to compound your earnings without going broke.
If you’re over age 50, take advantage of the IRS’s catch-up contributions for retirement investing. Other growth and compounding options that are simple enough for the average person without a financial and investment background to use include:
- High-yield savings accounts.
- Certificates of deposit (CDs).
- Bonds or bond funds.
- Money market accounts (MMAs).
- Real estate investment trusts (REITs).
- Dividend-paying stocks.
Step 5. Reduce Debt and Expenses
Pay off all debts before retirement to limit your monthly spending. If your final mortgage payment falls beyond the date you want to retire, consider refinancing to a 15-year mortgage if you’re in a position to make larger payments now in exchange for a mortgage-free retirement.
I still recommend investing your money before paying off debt, though aggressively paying off your debt early will allow you to avoid interest payments.
Step 6. Avoid Taxes
Many people lose a big portion of the money they’ve scrimped and saved for their entire working lives to taxes during retirement. If there is one secret the wealthy know that everyone else doesn’t, it’s how to avoid taxes.
If real estate is your investment of choice for funding your retirement, make sure you’re taking advantage of the 1031 exchange to jump from property to property without ever paying for capital gains on your earnings.
A Roth-structured SDIRA is another great option to avoid getting hit by taxes. With this option, all of your income and gains will flow right back into your IRA on a tax-free basis. That means you’re constantly building wealth without paying taxes on it until the day you need to take a distribution. Just remember to follow the IRS’s SDIRA rules.
Step 7. Budget for Healthcare and Other Expenses
The time from when you walk away from employer-sponsored insurance to when Medicare kicks in at age 65 is a long road. While it may seem like going without insurance can reduce your monthly nut, the truth is that one health emergency can leave you bankrupt in retirement.
A retirement health savings account (HSA) is one of the best ways to put aside money for care during retirement because it allows you to tuck away pre-tax dollars. If you’ve been carrying life insurance, consider swapping it for long-term care insurance once your policy terms are up.
The secret to retiring early is that nobody ever really stops working. That’s because managing your investments and finances will remain a priority for the rest of your life. If you feel the nudge to get out of the rat race early, the first step is working with a financial advisor to start planning a realistic retirement budget.