Have you ever noticed the happy couple leaving the workforce in the early 60s and getting a start on retirement? How do they do it?
While early retirement may seem like a difficult thing to pull off, the reality is that it is an easier goal to achieve than you might think. Here’s what many people do to make it happen.
1. Save from a young age
Social Security retrieves only a modest portion of your total retirement tab. You need to plan for the majority of your retirement income to come from your savings, and if you want to retire early, you need to fund your IRA or 401 (k) from a young age so you have the flexibility to stop contributing to your plan a few years ahead of your peers.
Example: If you start financing a retirement plan with $ 420 per annum. Month at age 22 and continue to do so for 40 years, you will end up with over $ 1 million in savings – provided your investments in that account deliver an average annual 7% return, which is possible if you top up equities. Just wait five years to start contributing the $ 420 a month and you end up with $ 697,000 instead of assuming the same return.
2. Have a health care plan
Medicare eligibility begins at age 65, meaning early retirees are often forced to pay a private insurance fortune when they stop working and give up employer plans. If you want to retire early, you need a way to pay for health care during the years when you are not working but are not yet entitled to Medicare coverage, and this is a good chance to fund a health savings account or HSA.
With an HSA, you contribute dollars before tax to health care expenses, but any funds you do not spend right away can be invested for further growth. Since HSAs do not expire, you can contribute to one throughout your career, so if you e.g. Facing a three-year gap between when you retire and when you can sign up for Medicare, you have a dedicated source of income to pay for health insurance out of pocket.
Debt is a dangerous thing because it can monopolize much of your income, making it harder to fund your retirement plan or HSA. If you really want to retire early, make a point not to take on unhealthy debt during your working years.
That does not mean you can not or should not get a mortgage. Mortgage debt is healthy because it allows you to build equity into an asset. Instead, avoid credit card debt and other loans that do not get you financially in any way. The less interest you accrue on debt, the more money you have available for early retirement.
While it is true that some early retirees have money thanks to high-paying jobs or large inheritances, early retirement for many seniors is a matter of hard work, diligent savings, and careful planning. If you intend to retire early, fund an IRA or 401 (k) from as young an age as possible, set aside money for health care, and avoid dangerous debt. And then go out there and enjoy the early escape from the abrasive you have arranged for yourself.