Preparing for retirement is an arduous proposition in and of itself. Retiring early can seem nearly impossible. However, according to many experts, it’s not only possible, it’s actually not that difficult… if you are willing to make the necessary changes. Read on to learn more about how to afford early retirement:
Understand The Bottom Line
Before getting into the weeds of the situation too deeply, it’s important to break this thing down and get to the bottom line of it all. When you are able to retire is based on only one factor, believe it or not. It is: Your savings rate, as a percentage of your take-home pay. To break it down a bit more, it’s based on this:
- How much you bring home yearly.
- How much of that income do you live on.
The Relationship Between Take Home & Living Expenses
The yearly take home pay number isn’t hard to ascertain. What can be problematic is figuring out how much you can live on. It’s safe to conclude that if you spend 100% or more of your take home pay, you will NEVER be ready to retire. That’s obviously a scary thought, and if you want to retire early, this is an even scarier proposition. On the flip side, if you spend 0% of your income, you could retire today. Of course, spending none of your take home pay is likely impossible, unless you have wealthy parents who left you a trust fund.
It’s About Savings And Investing
Basically, being able to retire early is based on not spending everything you make and then taking that money and saving and investing it wisely. When you invest, your money starts making money of its own, which compounds and quickly snowballs into more and more eventual income. Once you can make enough from your investments to pay for living expenses, while leaving enough gains to invest again and keep up with inflation, you are in a position to retire. When this happens is up to you, but it is possible to do before age 65, if you are disciplined and understand how to utilize compound interest.
What Percentage of Money Should be Saved
This tool allows you to calculate how much money you would need to save verses what you can live on and how those numbers will increase enough for you to retire. Here is a table outlining the savings rate as it correlates to the years it will take you to get to retirement. The most important factor, as you can tell from all this information is being able to live off of less than you make. While this might seem impossible, it is doable with enough focus and the proper plan. Just think, cutting off your cable and skipping a few lattes could boost your savings as much as 15% or so and help you retire a whole eight years earlier. It’s also vital to understand that it is always more effective to cut your spending than to increase your income. This is so important to understand when properly evaluating your savings and possible early retirement. So, while the concept of cutting spending and decreasing living expenses in order to get to retirement earlier is easy to understand, it’s notably hard to implement.