Finance Tips for Early Retirement | Matthew Littlemore

 

Since the Great Recession, an increasing number of people have been looking into the concept of early retirement. Less than one percent do so before the age of 50, however, and the average retirement age continues to fall between 62 and 65. Retiring early requires some serious financial planning, and here are some tips that can help make it happen.

Start Early

Those who are interested in retiring early will want to make sure that they start the process early. Starting early provides more time for the power of compounding interest to work its magic. Those who have 20 or 30 years until retirement will see their money turn over several times. On the other hand, those who wait until a decade before they intend to retire might only see their initial investments double once or twice.

Live Frugally

Common sense dictates that spending everything that comes in will not lead to retirement riches. This means that those who want to retire early will want to cut expenses as much as they reasonably can. Every dollar that’s not spent is a dollar that can go into a retirement account.

Invest In Retirement Accounts

Many early retirees are able to amass a large sum of money because they leverage their retirement accounts. Many employers will match employee contributions. Additionally, it’s possible to put off some of the taxes that would otherwise erode a retirement nest egg’s value using tax-advantaged retirement accounts. This defers tax payments until a future time and rate.

Pay Yourself First

Most people pay their bills and then save and invest what’s leftover. These people will find that there’s usually little leftover. Those who retire early follow the advice to pay themselves first, within reason. They save and invest before paying other bills, and if there’s a shortfall, they find a way to fund it creatively.

Look At Side Hustles

Many jobs pay the bare minimum that people need to exist. This can make it hard to save for early retirement. Finding a side hustle or a second job will go toward retirement savings. With the advent of technology, picking up a side hustle has never been easier.

Early retirement is a goal many people have. However, relatively few are able to achieve it. Those who put these recommendations into action are more likely to retire early with a comfortable nest egg.

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Expenses That Can Eat into Your Retirement Savings

It is frustrating when you spend your life adding to your retirement savings only to watch it slowly drain away. Retirement for most retirees usually means living on a fixed income. Nevertheless, you should not be worried if you are spending within reason. But there are expenses that may threaten your financial well-being in retirement. The following are some costs to monitor.

The first expense to watch is your debt. Debt is another monthly bill to worry about and can get worse when you make the minimum payment. During your working years, make this debt a priority. Minimize this debt by paying off your debt starting with the debt having the highest interest rate. You can also allocate a percentage of any bonuses you receive towards paying this debt.

A second expense that can eat into your retirement savings is health care costs. This can be true even if you have insurance. For example, your insurance could have high deductibles, or you could need care your insurance does not cover. Retirement planning may have taken these contingencies into account, but if not, health care expenses could “eat up” much of your retirement savings.

A third expense that can eat into your retirement savings is care-giving. Sometimes, retirees have living parents who deplete their retirement savings and rely on their children. Some retirees have their adult children back home with them because of the child’s mismanaged money or rotten luck. Remember, you cannot control how other people (including children or parents) manage their money. However, you can have a say in the financial support you provide them. Adult children can pay rent to you and help reduce the financial burden on you in other ways.

A fourth expense that can eat into retirement savings is taxes. You can minimize your taxes by being aware of your contributions and withdrawals from your retirement accounts. These retirement accounts reduce taxable income when you contribute to them but require tax payment when you withdraw. During retirement, know your tax bracket and monitor how much you withdraw from which type of investment account. You can have money in different accounts, but the account that will give you a larger tax break should be your favorite option.

This article was originally published on MatthewLittlemore.net