Do you daydream about retiring as you plod through your 9-to-5 job? Are you wondering how a neighbor or relative managed to quit working at age 59 and go traveling?
For many people, retirement — never mind early retirement — seems out of reach. But with focus and self-discipline, you could amass enough money to retire earlier than you might think possible. Here are 19 tips to get you started:
1. Spend less than you earn
The formula for retiring early starts with you actually saving money. Social Security benefits alone aren’t enough to live the good life during your golden years, and, as we’ll discuss later, you’ll want to put off taking that money as long as you can.
Some experts recommend you spend no more than 90 percent of the money you make and sock away the remaining 10 percent. If you have zero savings right now, first concentrate on building an emergency fund in a high-interest-bearing savings account.
2. Start saving early
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Thanks to the power of compounding interest, a little money saved now can go a long way at retirement time. But to get the most benefit, you’ll want to start saving as early as possible.
Even if you can’t hit that 10 percent goal, every bit helps. Let’s say you’re 20 years old and can manage to put away only $100 a month into your retirement fund. Assuming you average 8 percent returns — optimistic but possible with good investments — you’ll have about a half a million dollars by age 65. Even better, over that 45-year period, you’ll only have invested $54,000 of your money to get all that cash in return.
If you wait until you’re 40 to start saving $100 a month, you’ll put in $30,000 of your money and — at that same rate of return — build a nest egg worth about $95,000 by age 65. Not bad, but wouldn’t you rather have half a million?
3. Don’t leave money on the table
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If someone tried to hand you $100, would you say no?
That’s what you’re doing when you fail to take advantage of a 401(k) employer match. The company is basically giving you money with the only hitch being that you must pony up some of your own cash for the retirement fund too.
You won’t get rich by passing up golden opportunities like this for extra cash. If your employer offers a 401(k) match, make sure you are taking full advantage of it.
4. Minimize your taxes
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The rich stay rich in part because they’re savvy enough not to let Uncle Sam take too much of their money.
When you’re investing your retirement money, use tax-sheltered accounts such as IRAs and 401(k)s whenever possible. In addition, be smart about which type of tax-sheltered account you use.
Traditional retirement accounts enable you to invest pre-tax money and then pay the piper once you make withdrawals in retirement. Meanwhile, Roth accounts enable you to invest post-tax money — and therefore not pay taxes on withdrawals.
For help determining whether a traditional or Roth account is better for you, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”
5. Take a little risk
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You could put all your money in bonds and sleep well at night knowing you’ll probably never lose any of it. But with that approach, you’re not going to retire a millionaire either.
Stocks and real estate are where the money is to be made. There is always the risk of the stock or real estate market — or both — crashing. Take heart, though, in knowing that stocks and real estate have historically appreciated in the long run and offered higher returns than less risky investments.
6. Stay informed about your investments
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Don’t mistake taking a risk with being dumb.
A smart risk may be investing in an emerging-market fund. A dumb move may be pouring your life savings into a speculative currency.
How do you know the difference? By researching available investments, weighing your options and selecting the amount of risk that works for your situation. For example, those nearing retirement age should minimize their level of risk, while recent college grads can be more daring because time is on their side.
7. Break free from the herd
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When the stock market plummeted during the Great Recession, many people freaked out and sold their investments.
They only took a bad situation and made it even worse, though. By selling their investments right when the market was bottoming out, they missed out on the stock market’s rebound.
The people who are going to retire rich are those who snatched up stocks at bargain-basement prices after the 2008 crash and then saw their stocks’ value climb by double digits in the following years. Same thing goes with the housing market. When the past housing bubble burst, the smart people were the ones who were buying houses, not selling.
It’s easy to follow the herd, but if you want to be rich, you need to keep a cool head and make rational financial decisions, even in the midst of a crisis.
8. Put off Social Security
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While it might seem counterintuitive, many people are better off waiting to file for Social Security benefits. While you can file as early as age 62, you’ll get a lot more money if you can wait until you’re 70.
As we explain further in “Maximize Your Social Security,” you can influence your eventual payout to a surprising degree by making such changes to your retirement plans.
9. Maximize your income potential
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If you want to retire early, you need to maximize your earnings. That means no more settling for a dead-end job that pays pennies.
Look for ways to increase your income, which can, in turn, increase the amount of money you are saving for retirement. You’ll find all kinds of options — and articles like “50 Ways to Make a Fast $50 (or Lots More!)” — in the “Make” section of our website.