7 Keys To Retiring Early

Editor’s Note: This is a guest article from Ally Tobias

retirement-planning-3019936At 20, most fresh graduates are optimistic about the future. I’m young, the perfect job is out there, and I have all the time in the world to find it. If I’m smart about my money, I can retire by 40. At 35, many of them are still plagued by job insecurity, or are jobless—and have maybe a few thousands saved for old age. They certainly won’t be retiring in five years’ time.

Can one still retire early in this economy? Yes, but for the post-baby boomer generation, it will take some work. For one thing, most early-retirement models assume that one starts earning regularly at age 20, whereas today’s workforce, opting to take their time with family, grad school, or some other pursuit, tends to start much later. If you’re bent on retiring young, here are some points worth keeping in mind.

1) Find Your Magic Number

How much do you need to retire comfortably by age 40 or 50? Most people can only give a rough estimate. But it’s important to know your “magic number” if you want to live up to your post-retirement expectations. A Bankrate.com report shows that people who make solid plans find their retirement not only meet their needs, but find it more comfortable than they expected.Calculating how much you need for retirement involves, first of all, an evaluation of your spending style. This is a good time to map out a monthly budget, if you don’t have one already. Experts say you should plan to get by on at least 70% of your pre-retirement income—the more conservative ones say you should play safe and plan for 100%.

2) Save Early, and Automatically

As we’ve mentioned, saving for retirement ideally starts at age 20. Make it a point to put a token amount off your salary into savings, whether it’s for a company-managed retirement fund, a government account, or your personal investments. Set up your bank account to make pre-authorized deposits into the fund every month. Think of it as living on a little less to train yourself for retirement.How much should you save? That depends on how old you are, when you plan to retire, and what you will be spending on. A typical company retirement plan takes away 10% to 15% of your salary, so if you want to quit a little earlier, move that up to 20% or more. It can be hard to pretend that one-fifth of your salary just isn’t there, but the payoff is more than rewarding.

3) Quit the Debt

It’s not rocket science: the more debt you have, the less you’re able to save. Start paying down your debt early and try not to accumulate more unless you really have to. Pay off credit cards, personal loans, and car loans first—these are “expensive” debts that cost you more the longer you make them wait. Interest paid on mortgages is usually tax-deductible, so they can go lower on the priority scale.Now’s also a good time to rethink your housing options, particularly if you’re still renting. The housing market may be in bad shape, but home ownership still has its merits: instead of the rent going toward your landlord’s equity, your monthly payments count towards your own. To make sure your mortgage doesn’t eat up too much of your savings, get the smallest place you can be comfortable with in a relatively healthy market.

4) Make the Most of Your Retirement Plan

Contribute as much to your retirement fund as your employer-sponsored plan will let you. This changes every year, so make sure to stay up to date. Some employers, when you make a minimum annual contribution, will offer a company match where they match your savings, usually at a rate of 50% to 100% (so for every $10 you contribute, your company pitches in $5 to $10). Look into your options and ask your HR department if they can set up automatic deductions on your account.Make the most of your raises as well. If you get a 4% raise every year, raise your contributions accordingly—if you can’t afford to put the entire difference into retirement, do so little by little. Even increments of 1% can add up nicely over time, and you hardly even feel the difference.

5) Invest Smart

The best way to make your money grow is to put it in effective investment vehicles. Most retirement experts advise putting your money in the Vanguard 500 Index Fund or the S&P 500 Index, both broad-based funds that have historically shown consistent growth. When it’s time to withdraw, your only responsibility is the long-term capital gains tax you’ve earned, which isn’t so bad considering your tax time after retirement.Try to steer clear of your company’s stock as much as possible, unless you really believe in the business. Don’t buy in just because you work for them. The stock market is risky enough as it is, and putting too much money in one stock compounds the risk. CNN Money recommends putting no more than 10% of your money in company stock.

6) Account for Inflation

Failing to factor inflation into your savings is probably the biggest mistake in retirement planning. Let’s say you’re 25 and saving up with the goal of having a million dollars in the bank by age 70. That’s more than enough to live on today, but at the historical inflation rate of 3.75% per year, your million dollars will be worth less than $200,000 in 45 years. And when you start living on a fixed income, you’re even more vulnerable to these changes.The best way around this is to make sure your investments are earning interest, not just adding up. Long-term investments may be stable, but the returns may hardly be worth anything by the time they reach maturity. Try to stick to short-term investments like a money market account, and keep reinvesting so you can take advantage of good rates when they come along.

7) Size Down

A recent study suggests that most working adults are confident that they’ll be able to live comfortably after retirement. But a further look at their spending habits shows that if they are to maintain their comfortable (read: debt-powered) lifestyles past age 60, they will need to save at least $2 million by that age, adjusting for inflation.Unless you’re able to set aside that much, you will have to give up some comforts when you retire. For one thing, you don’t drive to work every day anymore, so maybe you can settle for an older car. You may not need new clothes every season or eat out more than once a week. Little changes like these will free up funds for the things you’ve always wanted to do, be it travel, gardening, or charity work.

About the Author: Ally is part of the team that manages Australian Credit Cards, a free purchase cards service in Australia. Before joining ACC, she was a Media Planner with McCann Worldgroup Philippines, Inc., with award-winning executions, including the Levi’s 501 “Live Unbuttoned” global campaign.

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