When would you like to retire? Even if the answer is later versus sooner, most of us would like the freedom to decide. To do this, consider what it would take to create financial independence in retirement. Here are some ideas to help plan for an early retirement.
- Start early. Establish your desire to retire early as soon as possible. Have a discussion with your spouse and loved ones to ensure you have the same retirement date goal. With this stated goal, meeting savings targets and establishing spending priorities get much easier.
- Know what you want to do. Have you always wanted to visit national parks? Do you have a passion for art? If you have a dream that can be fulfilled in retirement, it makes any hardships to get there more tolerable. Once you set retirement goals, creating a plan to get there will have more meaning.
- Pay yourself first. People who retire early have higher savings rates than most of us. Consider saving in excess of 10% of your earnings. To do this might mean holding off on a big vacation once in a while or delaying a major home improvement or purchase. While a hardship, knowing the long-term dividend makes it worthwhile. The larger your savings become, the more flexible you are in acquiring assets that generate more wealth for you.
- No debt and credit cards paid in full. It’s hard to retire early if you are making large loan payments. Having a mindset to save money before you buy something versus taking out loans is the way to go for prospective early retirees. Why pay the credit card company interest when you could use that money during your non-working days?
- Financial independence mindset. Save enough to not have to worry about Social Security or other government programs to take care of you. Said another way, never over-spend your own resources as you will need to depend on yourself and not others for your financial independence.
- Use common sense when investing. Many investment alternatives may no longer make financial sense when compared to the income potential of the underlying asset or property. For example, if you own rental property, determine if the cash flows create a reasonable rate of return for the price you paid for the property. If you use common sense, more of your investments may help generate income in retirement.
- Other resources. Go through a retirement planning process with a qualified expert. This exercise can help you understand what your projected financial needs will be during your retirement years. Project your potential savings. Look into other sources of projected income from pension plans and retirement savings accounts. Create an estimate of possible Social Security benefits. Understand what other resources will be available to you during retirement.
While this list is not meant to be all-inclusive, it should help start the conversation toward your early retirement dream. Remember to ask for help to understand your situation and to develop your own personal plan.