Early retirement is something to aspire to whether you are in your twenties or already in your fifties. The freedom to worry about winning your next paycheck opens the door to living your life on your own terms. But to get there, you need to save and invest, good financial planning, and maybe a little luck.
If you’ve been dreaming of early retirement, here are four ways you can jump into the New Year.
1. Track your spending
You can’t plan for retirement if you don’t know how much your life is costing. The start of a New Year is a great time to start tracking your spending. (Although there is never really a bad time.)
You don’t necessarily need to budget or cut back on spending. Just track your spending for a few months. You can use a spreadsheet or software related to your bank and credit card accounts to help you.
After a while, you will have an idea of what you are spending in a typical month. You may also notice that you are spending a lot in certain categories and the expenses are not in line with your values. For example, you might spend a lot on dining out, but you prefer to spend time cooking a nice meal at home with your partner. If you can spot any inconsistencies, try to consciously align your spending with your values.
Once you have an idea of how much you are spending per month and you are optimizing your spending to provide the most happiness in your life, you can get a rough idea of how much you need for retirement. Multiply your annual expenses by about 30 to get an idea of how much you need to retire with a reasonable and safe withdrawal rate.
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2. Boost your savings rate
If you want to retire early, you need to save more than average. Not only are you relying on your investments to fund your retirement, your retirement will be longer than average. This increases how much you have to save.
For those who find it more difficult to save, a useful method is to “pay yourself first”. One example is using a 401 (k) plan, which deducts contributions directly from payroll, so the money never even reaches your checking account. You can mimic this mechanism by setting up automatic transfers from your checking account to your brokerage account every month (or at the frequency you choose).
Your savings rate is one of the main determinants of how early you retire. A person saving half of their income will be able to retire sooner than a person saving a quarter, regardless of their income. That’s because retirement is a two-sided coin: your savings should cover your expenses. If you save more, you spend less, and if you spend less, you need less savings to fund your retirement.
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3. Increase your income
There are several ways to increase your income. You can negotiate a raise at your current job. It can be as simple as asking for one, or you might need to secure a competing job offer and bring your best negotiating skills to the table. Another option is to make a lateral transfer to a new company offering a raise in pay from your current employer.
One of the less risky options is to start a side business. There are countless opportunities today to start generating additional income. You can work freelance, start an exciting project, or do carpools or deliveries.
Starting a side business also opens up the possibility of using independent pension plans like a 401 (k) solo or SEP IRA. These are great options for additional tax-efficient savings and can help you reach retirement even faster.
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4. Take control of your taxes
One of your biggest expenses each year will be taxes. If you don’t plan for tax savings, you’ll pay more than you need to. But you can have more control over your tax rate if you also save a lot of money. Keeping your tax bill low can save you tens of thousands of dollars over the course of your life.
The easiest way to lower your tax bill is to save in tax-deferred retirement accounts like a 401 (k) or IRA. An HSA can also be an option if you have a qualifying health insurance plan.
Most people interested in early retirement will benefit the most from tax-deferred retirement accounts. When you contribute to a tax-deferred account, you save on your taxes at your marginal tax bracket. When you make a withdrawal, you will pay income taxes on the withdrawal, but these will likely be at a rate lower than your current marginal tax rate. Plus, you have more control over your retirement income, so you can exercise more control over your taxes as well.
Contributing to tax-deferred accounts can also reduce your adjusted gross income, allowing you to qualify for tax credits such as the child tax credit, savings credit, or ACA credits.
If you have investments that show a loss on paper, you can also tax the crop of losses and offset any capital gains you generated that year and up to $ 3,000 in other income after that. It can also help reduce your AGI.
Basically, early retirement is about increasing the gap between your income and your expenses. Focus on the big picture and the rest will fall into place.
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