How to Make Early Retirement Happen

So you’re interested in retiring early? That’s not an easy goal to reach. However, with some financial discipline and a little knowledge about the future, you can quit your job earlier than some of your peers.

Here’s how to make early retirement happen.

Know How Much You’ll Need

Before you can determine how to retire early, you’ll first need to know how much money you’ll require to maintain a certain type of lifestyle after you stop working. As a rule of thumb, your annual income will need to be about 80 percent of your current income. However, your situation may be different. If you are paying off a mortgage on an expensive house or have car payments to make after you plan on retiring, then that’s going to add to how much money you’ll need.

Pick one of the many retirement calculators that are available online and plug in the numbers about how much will be available to you under your current retirement savings plan. Then, subtract that from what you’ll need overall. That difference will dictate how to adjust your strategy.

Stay out of Debt

As a rule of thumb, debt is your enemy if you want to retire early. However, it’s important to differentiate between good debt and bad debt.

Good debt is debt that’s invested into something that appreciates in value. Typically (but not always), real estate will increase in value over time. That means any mortgages you have are good debt. College debt is also good debt.

However, credit card debt and auto loans are generally considered bad debt. That’s because your vehicles and whatever you bought with your credit cards will almost certainly depreciate in value over time.

If you want to retire early, limit the good debt as much as possible and eliminate the bad debt completely. Otherwise, you’ll put so much money into credit card payments and debt relief that it’s not likely you’ll be able to reach your financial goals before even the standard retirement age.

Save More Than You Think You Can

If you want to retire early, then you need to adopt a “devil may care” attitude and start saving a lot of money. Of course, that means you’ll have less spending money now, but that’s the best way to reach affordable retirement.

Take a sizable chunk from each paycheck (30 percent or 40 percent isn’t out of the question) and tuck it away into an IRA or savings account. Note that it’s not likely that you’ll be able to put 40% of your income every year into an IRA because there’s an annual maximum on IRA contributions. However, you can max out your 401k at work and contribute to an IRA as well. Once you hit your maximums, though, you’ll have to put the remainder into a mutual fund or savings account. Consult your tax adviser about the tax ramifications.

It’s great that you want to retire early. However, you’re almost certainly going to need to make some sacrifices now so that you can enjoy your sunset years later on.