Early retirement is the dream of many.
The idea of paying your dues, saving up, investing smart and retiring at some point before the “traditional” retirement age of 65 has a strong pull.
For many, early retirement is something that might even happen in their 40s.
If you are considering how you can retire early, here are 3 ideas that can help you reach an early retirement goal:
1. Disciplined Saving and Investing
One way you can build up a sizable nest egg is to practice disciplined investing. Consider how much you will need in your investment portfolio to create an income stream that you can live off of.
You will have to consider your age, how long you are likely to live, and the asset allocation you will need to provide reasonable growth, but not leave you over-exposed to the vagaries of the market. A long-term approach can help you.
If you are 30, and plan to retire by age 50 or 55, you might be able to amass $522,063.08 if you start with $10,000 and invest $1,000 a month for 20 years, assuming a 6.5% return — compounded quarterly — on your portfolio. (Note, though, that returns will vary according to market conditions, and there is always the risk of loss.) You can end up with more than $1 million if you double that to $2,000.
When you start living off your retirement portfolio, though, you will need to make sure you are not withdrawing so much that your nest egg can’t support you. You can maximize your efforts by investing in tax advantaged accounts and making use of your employer’s company match program. But you need a plan, and you need to be disciplined enough to stick with it if you go this route.
2. Cultivate Multiple Income Streams
Another idea for early retirement planning is to begin cultivating multiple income streams, rather than relying solely on your ability to build up a massive nest egg to get you to retirement. Instead, make a plan to pay down your debt (including your mortgage) by your early retirement target date.
Try to rid yourself of as many obligations as possible, so that you will have fewer expenses during retirement. Make a plan to pay down this debt while preparing for the future. Figure out how much money you will need each month to support your retirement lifestyle and then begin cultivating different income streams to create that income.
While there are rules that allow you to begin withdrawing from an IRA early, you likely won’t have access to Social Security benefits during an early retirement. You can consider your early withdrawal from an IRA if you must, but consider other sources of revenue. You can establish a web site that helps you earn residual income, write a book that results in royalties, start a business that can provide an income stream, or even engage in income investing.
It is, of course, possible to cultivate a number of income streams at once, diversifying your income sources. Start now to develop these streams so that they are established and mostly automatic by the time you are ready for early retirement.
3. Take Mini-Retirements
Tim Ferriss, author of The 4-Hour Workweek, made the idea of a mini-retirement somewhat popular. If you want to enjoy life now, and aren’t concerned about having a huge chunk of time to try and kill when you are older, you can plan to take mini-retirements, living in a different place for one to six months. You do have to be willing to quit a job — and try to find a new one — in some cases.
An alternative that appeals to me is having a job you can do from anywhere. I work from home as a freelance writer and I could actually whittle my workload down to a couple hours a day for a few months, and take my job on the road. I’d be living in a state of almost retirement, and it would work as long as I had access to the Internet. Consultants and other freelancers, as well as online entrepreneurs, could make this work. After all, if you can manage to work on reduced hours, and have time to do what you want, you won’t need the same size of large nest egg.
Bottom line: There are even more paths to early retirement, and it might be that you combine different efforts to come up with a method that works well for you. The important thing is to decide what you want to do, and then make a realistic plan to accomplish it.
Source: goodfinancialcents.com