Retirement is an oft-discussed phase of life, especially with the baby boomers on the verge of leaving work for good. With terms like “Roth IRA,” “401k,” and “Social Security” on everyone’s mind, retirees are sure to have a significant impact on the economy of the United States moving forward into the second half of this decade and the 2020′s. Whether it be through an increased need for medical care and homes for the elderly, or by the effect of retirees on the companies where they leave a job vacancy, few in this country will not be touched by the massive wave of retirements that we are just now starting to see.
While this is a problem for the government — which will have to dole out increasing amounts of social security — for many people it presents an opportunity rather than a curse. The business of catering to the needs of retirees, many of whom will have significant amounts of money to spend, is already one that totals well into the millions.
However, many retirees are facing the opposite problem. They don’t have enough money to spend. In some cases, this has led to older people going back to work, if only part time, or at the very least many retirees have begun to drastically cut back on spending. The question is, how do you prevent such a scenario from happening to you?
Here are 8 tips for crafting a plan that will let you retire early and comfortably.
Diversification, the age-old tip for investing in the stock market, applies to retirement accounts as well. Diversify not only within different sectors and indexes in the stock market, but also between different types of assets such as stocks, bonds, and real estate. A properly balanced portfolio will be able to capitalize the best on long-term market trends in the various assets, which is exactly what you want your retirement fund to do.
Keep in mind that retirement money is not the cash to speculate with. This is certainly an instance where the tortoise will beat the hare. In addition, don’t be put off by downturns in the price of the various assets. By taking variance in stride, you will be able to avoid selling low, which is when losses really begin to add up.
7. Have a Roth IRA and/or a 401K
Crafting a retirement plan around one of both of these types of accounts is usually a good idea, especially if you’re sure that you’re okay waiting off until your ripe old age to lay your hands on the money. Roth IRAs allow tax-free withdrawals, which is a good option if you think that taxes are likely to go up in the future (as many analysts do.)
On the other hand, 401ks allow contributions without paying taxes up front, but will be subject to taxes in the future. Either way, they are both great options to make sure that you have enough money to pack it in early.
6. Start Saving Early
It may sound like an overly simplistic tip to say that retiring early requires saving early, but it’s something that surprisingly many people ignore. Consider the old Rule of 72, meaning that, if you take an interest rate and calculate 72 divided by that number, a given amount of money will double in that many years if it is compounded at that interest rate. So, if you think that your money can earn 8 percent returns, it will double in 9 years.
This illustrates how important it is to save early. Money put away 45 years before your planned retirement date, at 8 percent, will be worth 32 times what it was when you put it in (this is without inflation, of course.) In addition, it means that, for every 9 years you wait, if your money is earning 8 percent, your retirement account will be halved.
5. Know Your Employer’s Plans
Always be aware of what programs your employer or employers are providing. That’s not to say that you always have to contribute to maximum if you can’t afford to, but being cognizant of any opportunities is very important if you want to retire as early as possible. Some employers will match contributions to pension funds or offer special programs that can let you better manage your tax bracketing, both of which are good enough value that they should not be passed up.
4. Plan How Much You’ll Need in Retirement
Retiring early is good and fine. That is, it is good if you have enough money to last all through your retirement. Knowing exactly how much you will need is a great place to start. While you may not need 100 percent of your current income level (or your future income level,) most people have a difficult time adjusting to a significant drop in income, especially with other costs that will prop up as old age sets in.
In addition, plan for how long you will need the money. Average life expectancy may be in the 70s, but, if you’re already in your 50s, or even in your 30s or 40s, your average life expectancy is much higher because you’ve made it past a decent number of years already. When you’re retired, it’s a real party pooper to have to go back to work because you’re running out of money, so plan ahead to avoid that occurrence.
3. Don’t Count on Social Security
If you want to retire early, social security is not your best bet. Not only does the government service provide a barely livable income for retirees, but the payouts are drastically reduced if you retire early. In order to get the full benefits, you need to wait until 66, and you don’t even get the highest payouts unless you wait even longer.
2. Pay Off Your Mortgage
Investing in your future isn’t just limited to retirement accounts. Putting money into a house is almost as good as putting money into your pension fund. Having a paid off house in your later years has value in several different ways. Not only does it mean that you won’t have to worry about paying rent or mortgage payments when calculating your retirement budget, but it gives you an asset that you can translate to cash or borrow against if you absolutely need the money. In addition, it can provide a nice burst of cash if you decide to move once you retire when you sell the property.
1. Every Little Bit Counts
Don’t be fooled into thinking that small contributions — no matter how insignificant they may seem — are too little to warrant consideration. Remember the rule of 72, and that small contributions now may be worth significantly more in the future.
Make sure not to neglect pension money that may have accumulated at part-time jobs as well. This is especially true if you have worked for an institution that is run by the government, such as a school or a national park. Often times, even small jobs, such as being a sports coach, can carry with them a small pension, and that small pension could pay big dividends later in life.