The concept and idea of an early retirement, that is retirement from full time employment before the traditional retirement age range of 62 to 67, seems out of reach to many people. You may even feel that such a goal is impossible in today's world, with rapidly rising costs, job insecurity, the potential for tax increases, and the risk of cuts to long term social safety nets. However, the steps to an early retirement begin at home with planning for your future, increasing your income and investment returns, and discipline in your expenditures. Simply put, spend less, save more, and earn more.
The initial step that every early retirement wannabe should take is to reduce their expenditures. We all have costs associated with our everyday lives and some of those costs are fixed and some are variable. Examples of fixed costs include a mortgage payment, car payment, student loan payment, and any other form of debt that requires a fixed payment every month. Most of the time, these debts are at low, fixed interest rates and will be about the same every month until you pay them off. Examples of variable costs include things like utility bills, credit card payments, taxes, health care costs, and expenses for disposable items like food, clothes, and fuel. In the beginning, reducing the variable costs of life comes easiest. Simple ideas like cooking at home to save money, carpooling with others to reduce transportation costs, installing energy efficient light bulbs and appliances, and shopping for used items instead of new ones, can lead to a big reduction in your variable monthly expenditures. Then, after you have saved where you can with variable costs, it's time to look at your fixed expenditures and see if reductions are feasible.
Then, with reduced expenditures, cash should be freed up for saving and investing. Many experts recommend that you should save 10 to 15 percent of your income during your working lifetime for the typical retirement beginning at age 65 and lasting 20 years or so. However, early retirees will need to supercharge their savings percentage if they hope to escape the rat race early. It's not uncommon for an early retiree to save between 50 and 80 percent of their income and build a supersized investment portfolio at a young age. Now you may ask, Why so high a savings rate? Well, for starters, early retirement can begin at a much younger age that traditional retirement. Many early retirees start retirement in their forties and fifties, with some as young as thirty. This means that you could potentially spend one half to two thirds of your life away from full time employment. You'll need more money, over a longer time frame, than someone that retires at 65 and dies at 75. Also, the early retiree often does not qualify or can't take advantage of traditional sources of retirement income, such as a pension or social security, during the first part of their retirement. Therefore, they require a much more substantial nest egg to provide the income they need.
Finally, allocate your resources into investments that provide the best returns over the long term. These investments can be financial, such as purchasing dividend growth stocks when they are undervalued, or personal, like growing your own food, or purchasing tools to maintain your home and vehicles. Every investment idea that you pursue should meet one of the following criteria:
Does this investment increase my long term income?
Does this investment reduce my long term expenses?
Both criteria are important considerations for the early retiree. Both questions lead to the same result, lower portfolio requirements. This means less time working to build that portfolio, and that,my friends, means early retirement is within your reach.