Who doesn’t dream of hitting Retirement Beach as soon as possible? Trading traffic, watercooler gossip, and a micromanaging boss for endless amounts of free time, a glass of wine with lunch, and unlimited travel? Where do we sign up? The good news is, with a little bit of planning and preparation, you don’t have to wait until 65+ to retire. In this post, we’ll go over all the numbers you need to know when it comes to preparing for retirement so you can make retiring early a reality.
Retiring early: how to do it
The primary factor determining whether or not you’ll be able to retire early is how fast —and how much—you save your money or invest your money into income-producing dividends.
You’ll need to invest in a well-balanced and diversified investment portfolio geared toward long-term growth. One popular investment method that people use for retirement is low-cost index funds, especially for people who still have a while to go before retiring. The money can grow as the years pass by with minimal effort required from you.
The closer you get to your planned retirement date, the more you’ll want to start shifting a small amount of your savings into a more liquid and safer asset type so you can access the savings without worrying about having to sell your investments and take a loss. You can do this with a year or two of expenses, but keep the rest invested and slowly shift it to cash as you need it, rather than taking out large lump payments at once. This will help your money continue to gradually increase.
To save and invest as fast as possible, you should also aim to increase your income while decreasing expenses. Getting used to living on less will also allow your money to stretch much further when you’re retired since you won’t have erroneous costs to keep up with.
To adjust your lifestyle and cut expenses to retire earlier, consider the following:
- Get rid of all debt, including your mortgage.
- Take up a second job on the weekends or start a side hustle to increase your earning power.
- Lower your retirement budget.
- Go through all monthly expenses, such as subscriptions and fees, and eliminate those you love or need.
Retiring early: the numbers behind it
To calculate the number you’ll need to retire early, use the following figures:
- Current age
- Your annual income (after taxes)
- Yearly expenses
- Total current investments and annual investment contributions
- Expected rate of return on investments
- Current savings account balance and rate of return
- Your estimated annual retirement expenses
Then take the following steps:
- Multiply your current expenses times the number of years you have until retirement.
- Deduct any income you earn from investments and your expected rate of return on those investments.
- Deduct your current savings account balance and rate of return.
- You will be left with the number you need to retire comfortably.
Generally, to figure out how much you’ll need to retire comfortably, you should multiply your current expenses times 25. Say you spend $50K each year on groceries, utilities, health insurance, and other must-haves. That would mean you will need $1.25M to retire comfortably.
If you invest or own any assets that produce income, such as real estate, deduct the amount you earn in passive income each year from your annual expenses, and you’ll be able to retire with less. If you’re going to use social security or a state pension as retirement income, don’t forget to subtract that amount. Just remember not to add in the social security or pension amount until the age you can start collecting it.
Maxing out your retirement account is another excellent way to speed up your path to retirement. Employer-sponsored retirement plans and IRA accounts provide some pretty sweet tax advantages that no other plans can offer. Of course, there is a downside to these types of retirement accounts. You won’t be able to withdraw any of the funds from your 401(k) account until you turn 59.5 without a pretty steep tax penalty. However, you can dip into a Roth IRA account if needed without worrying about being hit with a tax bill.
How Ark7 can help
With extra planning, consideration, and sacrifices, you can learn how to prepare for retirement and enjoy your retirement earlier than age 65. The good news is that cutting down your budget and investing as much money as possible can help you achieve that goal more quickly.
Ark7 can help you start diversifying your investment portfolio to limit your portfolio’s risks and reap the benefits of a healthy and diverse portfolio in retirement.
We look forward to helping you.