There are three things you need to do to retire early. One, manage your expenses and reduce or eliminate debt.
Two, save and accumulate capital. Three, invest wisely.
Sounds easy, doesn’t it?
Actually it is, but it takes patience, self-control and above all commitment and clarity of purpose. So maybe I should sneak in a fourth: manage yourself.
1. Managing Expenses
Controlling your expenses and reducing or eliminating debt is the first step towards early retirement. Most families spend almost all of their income and save very little. It’s not uncommon for families to spend 20-30% of their income on debt service. (Even the Federal government doesn’t do that.) Credit card debt at 15-20% interest is the number one reason folks remain poor. If you don’t pay your credit card bill in full each month, start making plans to do so today. Just about everyone spends 20-50% more than they need to for their day to day expenses. Do you ever buy food at 7-Eleven? It’s probably much cheaper at the supermarket. Do you buy your clothes at the fancy department stores in the mall? You can get the same items at Marshall’s or SteinMart for half price. Think of what you could save if you bought generic rather than name brand. It really adds up.
2. Accumulating Capital
Once you’ve got your spending and debt under control you should begin generating a surplus (i.e., your expenses are less than your after-tax income.) Retire Early’s Generation-X Retirement Planner can show you how quickly this surplus can grow into some real money. Talking full advantage of tax protected vehicles like your employer’s 401k plan or even an IRA will make your nest egg grow even faster. It’s really amazing how fast your accumulated capital can grow, especially if you’re getting a good rate of return. Even a 7% return will double your money in 10 years. Prudent investors can do better than 7% over the long term.
3. Invest wisely
If you’ve been wise and frugal enough to accumulate some capital, it would be a shame to lose a large piece of it to excessive fees and commissions. Unlike dentistry or brain surgery, investing is one of those activities that you really are better off doing yourself. More than 85% of investment professionals under perform the market averages after you adjust their stated returns for the fees and commissions you pay up front. (See, “How much should I be paying in fees ?”) Unfortunately, it’s almost impossible to identify the 15% of investment advisors that outperform the market ahead of time. The investment world is a lot like baseball, last year’s batting champion tends not to repeat. You can easily add 1% to 2% to your investment returns over time by making your own decisions and minimizing what you pay in fees and commissions. Adding 2% to your investment return might allow you to retire 10 or 15 years earlier. The small amount of time you spend learning about investments and managing your own portfolio could be your most highly compensated hours of the year.
4. Manage Yourself
Don’t leave retirement up to chance. Qualified retirement counselors can sit down and help you find out just how much you need to save, how to invest, how much money the retirement you want will require, and what changes you need to make in your preparation and expectations. In many cases, people learn they really can have a well-funded retirement by using smart financial management techniques.
But money isn’t the whole story. There are plenty of people who amass a nice nest egg only to wind up sick and disabled in their senior years. They have the money, but they don’t have their health or mobility. If you don’t have an exercise program, start one now. It can be as simple as parking further from work and walking briskly to get there in time. The key is to get your heart rate up and breathe deeply. Recent studies show people who have good lungs live the longest.
Just as important, exercise your mind. Learn something new. Take up an entirely new hobby. Studies reveal teachers who learn all their lives suddenly stop learning when they retire. On average, a teacher lives just 18 months past retirement. Learning is essential to life.
Finally, build a network of friends outside work. When you retire, few things will be as important to your enjoyment of life as solid friends you can count on for companionship and help when assistance is needed.
