Want to retire early? The fastest way to do that is to step up your savings game. So here are some suggestions on how to build up your retirement fund at a quicker pace.
Crunch the numbers
You don’t have to be a math wiz to calculate how much you’ll need to save, and at what pace, to retire early. According to financial expert Harrine Freeman, there are sites like Your Money Ratio$ that will help you determine how much you need to save monthly to meet your retirement goals.
“Use technology to provide a helicopter view of where you are, where you want to be and how much money is needed to close the gap to achieve your retirement goals,” she says.
Maximize tax deductions
As someone who’s self-employed, I’m keen to maximize my tax deductions to minimize my tax liability. The less I pay the government means the more I get to keep for myself — most of which goes to savings.
Scale back expenses
Sometimes it’s easier said than done to cut back on expenditures, especially if you’re already on a tight budget, but reducing your payables by even a modest amount can put a few hundred dollars back in your bank account every year and every little bit counts.
Freeman recommends an aggressive approach to expense reduction, suggesting you scale back by 30% to 50%. As you might surmise, such a drastic reduction could call for drastic measures.
“Trade in a luxury car for a cheaper model or move to a smaller home, or consider moving to a less expensive area, or states without an income tax,” says Freeman.
Consultant a financial advisor
I think financial advisors are one of those frivolous expenses that can be avoided if you’re proactive regarding your financial health — but some people need extra help in getting and staying on track. We all need a helping hand somewhere.
Take advantage of salary increases
Did you get a raise at work? You know what they say — mo’ money, mo’ problems. Unless, that is, you make a conscious effort into putting that extra cash toward retirement instead of buying new toys and creating new debt.
Don’t skimp
One-third of my income goes to savings. Of course that may not work for everyone — but that’s the number you should be striving to save, ideally. If you can’t pull one-third of your income, reevaluate your expenses to see what you can reduce or eliminate. Or pick up an extra job to make up the difference. Nobody ever said retiring early would be easy.
Keep debt low
You’ll need to chip away at any substantial debt you owe before you can really put the pedal to metal in terms of retirement savings. If you’re in a low-debt situation, try to keep your debt accumulation to 15% or less of your monthly income after taxes — and have a firm plan to pay it off quickly. In addition, avoid making large purchases. If you don’t need a new car or furniture or anything else that will make a dent on your credit card that you can live without, skip it. You’ll thank yourself later.
Control your risks
When it comes to saving for retirement, risk reduction is vitally important. Start by investing in various mutual funds that are a combination or low, medium and high risk to limit your losses. “Perform an asset reallocation yearly to rebalance your portfolio, reconfirm your risk tolerance and diversification and ensure you remain on target to meet your retirement goals,” suggests Freeman.
Reduce fees
Those annoying fees that are associated with many of our accounts — whether it be investment and banking accounts, retirement and mutual funds, or really any money-minded service — can take away a decent chunk of change if you’re not vigilant. To combat this attrition, Freeman recommends reducing “retirement plan fees by investing in no-load or low-fee funds that reduce return-erosion on your investments over time.”
Maximize your contributions
If your employer offers contribution matching to your 401(k), you should absolutely be taking advantage of this free money. Doing so will allow you to reach your savings goal in half the time.
Never give up
Thanks to special rules for older workers, it’s never too late to begin saving for retirement. If you’re retirement piggy bank is empty or nearly-empty, then be sure to “take advantage of catch-up contributions that reduce taxable income and allow additional 401(k) contributions for employees age 50 or older,” Freeman says.
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I still don’t get this whole retire early thing. No one retired early before so why now? Espcially when you are going to be living longer. Look its not a homerun at work every day but … why live like a poor person so you can quit your job and live some more like a poor person?
You know … that’s a great question, Nicholas!
I love this. Thanks for sharing your insights. I will definitely put this to good use.
Im often conflicted because I like the idea of retiring as early as possible (NOT FIRE, Id like to retire with plenty of money to enjoy it), but also live life in the present. Id regret directing every penny I made into investments just to die in a car crash or get diagnosed with a terminal illness next week.
My problem is figuring out what that balance is between living in the moment (and building that pool or going on that trip), and setting myself up for a very well off retirement (if I make it there!)
Thank you for the tips. Ensuring you have a comfortable retirement requires such a huge investment!