Save and Invest Your Money. Rinse and Repeat!
The biggest factor in successfully retiring early will be your ability to save and invest a portion of your income over long periods of time.
Start as young as possible. Even if you can only put back $50 per month, do it. If you want to retire early, consider saving 15% to 20% of your income starting in your 20’s and 30’s. If you’re playing catch up it will likely have to be more than this. Focus on what you can control and save and invest as much as possible.
Review your expenses and consider saving an additional 5% to 10% of your income. If you and your spouse work consider living on one income or saving between 30% and 50% of your income. Put any raises into savings. All these things will help get you closer to the finish line.
If you can do this for multiple years you will accumulate an impressive nest egg faster than you think. Develop these habits early and you can automate the savings and investing process.
This will help you stay on track. Once this is set up you will notice the reduction in your income but only the first couple of pay periods.
Save at least 15% of your gross income if you’re starting in your 20’s or early 30’s. This will need to be increased if you’re behind and playing catch-up.
Take Advantage of Retirement Accounts
The big advantage of retirement accounts is the ability to grow your money tax-deferred or tax-free depending on which accounts you choose.
Each year you have funding limits on retirement accounts. These include employer-sponsored plans like 401k’s and IRAs on the individual side.
Think of it as a use it or lose it contribution, so you want to take advantage of the accounts and fund them annually if you can.
Retirement Accounts Funding Order
You can argue multiple points to which accounts you should fund but a good rule of thumb would be as follows:
- Contribute up to the match in any employer plans. This is free money so be sure you capture the company’s matching percentage.
- Max out Roth IRAs for you and your spouse.
- Revisit your employer plan and max it out.
- Once you’ve maxed out your retirement accounts you can fund a taxable account. There are no limits on amounts you can contribute or take out, so you have some flexibility.
Everyone’s situation will be different depending on their income and tax situation.
As I said, your main focus should be saving as much as you can and getting that money invested.
Invest in a globally diversified portfolio, low-cost, and be aware of taxes. Fees and taxes can eat into returns over time so do your best to keep these at a minimum.
That said, don’t let the tax/fee tail wag the dog. What I mean by this is to not let these things completely dictate your investment decisions or prevent you from making decisions in general.
Some people will only focus on not paying taxes, or think fees are the worst thing in the world. This prevents them from diversifying their portfolio or from investing at all.
Develop a Plan and Monitor
- Get a savings plan in place.
- Then get your investment plan in place.
- Monitor it as time goes on to make sure you’re on track.
- Keep saving and investing.
Start a Business
If you have enough time and money, consider starting a side business or go full-time in your business.
In my opinion, ownership is the key to financial success if you can pull it off. Manage the risk and start slowly if it interests you.
If you can build a cash flow positive business, this will pay dividends and could be of substantial value over time.
This will no doubt help with retirement should you sell. Alternatively, you can still have an interest in the business but let someone else run it.
This way you have the asset on your balance sheet and you can receive income from it. It just depends what you want and how you would like to set it up.
The main thing is to be diligent in reviewing your budget and to make savings a priority. This will give you options as your assets accumulate.
It will also help you avoid lifestyle inflation and teach you how to live within your means. Developing a plan is essential to accomplishing your retirement goals. You need to have an idea of when and how you want to retire.
This will look different for everyone and will change throughout life. The key is to be adaptable and make changes accordingly.
If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™ and owner of True Equity Wealth Management LLC. Email him at [email protected] or fill out a contact form.
This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.