Looking to retire before the traditional retirement age of 65? It’s a big feat and unless you win the lottery, you might find it a difficult goal to achieve. The good news: It can still be done. Here’s how to save for early retirement in five steps:
- Know your numbers
How much money do you need to retire early? It’s important that you know the amount of money you need to live on in retirement. You’ll need to know the annual amount of income you’ll need and the amount of retirement savings you’ll need to generate that income.
- Boost your savings rate
Many financial planners recommend that you save 10 to 15 percent of your income for retirement and that you start saving as early as you can. If you’re going to retire early, you might need to save more than 15 percent. It’s essential to start saving early and regularly. By doing so, you’ll increase your compound earnings. If you start saving later in life, you’ll want to bump up your contribution rate to catch up and meet your goals.
- Cut back on your expenses
If you want to retire early and stretch your savings for several decades, you should cut back on expenses. Review everything you spend and create a cost-benefit analysis. Even if you think you’re living frugally, you might find that you aren’t. How often do you dine out or stop for coffee on the way to work? Non-essential expenses add up!
- Eliminate debt
It’s ideal to have your mortgage paid off by the time you retire and have any student loans long paid off. Having these expenses paid off will significantly reduce your expenses.
- Save as much as you can in a qualified retirement plan
If your employer offers a 401(k) or other savings plan, put aside as much money in it as you can. Contributions to your employer’s plan are tax deductible, and earnings from your investments can grow tax-deferred.