The road to early retirement passes through the land of early and consistent action targeted at retirement. How define retirement will affect what you call early retirement and how you prepare. If retirement to you means no work and all play, then your retirement plans need maximum effort. This means you must be able to bank either in savings or investments by the time you pay off your home enough capital to sustain your lifestyle indefinitely.
For most people this is a tall order. The first step is to remain relatively debt free your entire working life except for the debt of your home. Even this debt needs to be set up to be retired by the time you’re 45 or 50 years old. This is usually about the age that most people target for early retirement. Maybe 55 if you don’t mind an extra five years of working.
This means you either set up your mortgage for a 15 to 20 year payoff or you start from the first payment making double principle payments. This isn’t as bad as it sounds because early in your payment period you pay only about $25 principle for a $300 payment. By the time the double payment gets big, your income will probably have grown through raises and inflation to make work. By doing this, you will turn a 30 year mortgage into a 12 to 15 year mortgage.
By nice used cars instead of new. As your finances get more established, you will be able to upgrade to better cars. Always pay cash or keep your payoff under 2 years. Work toward always paying cash even if it means looking harder for a good car that is a year or two older than you prefer. Try to buy the car you need rather than the car you want until you can afford more without compromising your future.
Begin a small investment program from the first day. Even putting $5 away per month, if you can put it to work, will grow to an account with about $2,000 over 20 years. Sometimes you can link a savings account to a small term life insurance policy and get a little protection while your account grows. Most of these will allow extra deposits if you choose to make them.
If you’re conservative, buy a savings bond per month. The interest isn’t great, but it’s inconvenient to cash bonds, and you will tend not to spend them on a whim. Remember, retirement is piecing together an income puzzle. If you start buying bonds in your twenties, a $25 investment will be worth close to $100 by the time you are in your mid-fifties.
Join the 401k where you work. If you make $30,000 per year, for every hundred you put in, it will cost you less than $80 after taxes. It gives you instant income to boost your retirement. You spend $80, and you invest $100. It’s a great deal. You need to do this as much as you can afford. If no 401k is available, then make an IRA deposit every payday. It will cost you the full amount when you put it in, but you get to deduct it next spring from your 1040. The money will come back to you. You just have to wait a little while for it.
Develop a side business that can grow. You can write, sell, make things to sell, or any number of other possibilities. Make it your hobby. Invest the profits into a mutual fund or bonds or the IRA. If you come up with something that requires only 10 or so hours per week, it may be your ticket to superior retirement income. You may choose to continue this money producing hobby in retirement. Most people find some consistent activity enhances retirement. Instead of drinking coffee and spreading gossip, you can keep building your estate without losing your leisure.
More than likely as you read this, you are already in your late 30’s. If so, you need to begin to develop additional income sources because you probably can see that you’re a little late to start much of this advice. Your early retirement can still happen, but it may be closer to 60 than 50. You probably won’t get to vote on that 10 or so hours of income-producing effort per week.
You also need to shovel about 1/5 of your income into retirement accounts or moderate growth to safe investments. Over the next 20 years, work hard to reduce expenses and retire debt. If you can accomplish all of this, you can enjoy retirement. If not, plan on working past 70.