What do you consider to be an early retirement age? What’s the strategy to get the financial independence you need to make that happen? In this generation, super savers are enjoying life without working, and some are even getting there in their mid-30s. There are many theories about how one can retire early, and they all include well-thought-out investment plans and some heavy savings goals.
Financial Independence Through Your Early Retirement Fund
Welcome to the World of Super Saving
What is considered super saving? Super saving involves making the sacrifices necessary to put away 50 percent or more of your income, like driving an older car, limiting the number of vehicles you own and eating home most days of the year. A frugal lifestyle leaves you with more money to put away towards an early retirement strategy.
When you’re young, it’s easy to put off worrying about retirement income until later in life because it seems so far away. The super saver starts building a nest egg maybe even before graduating from college, getting married or starting a family.
Needless to say, the earlier you start, the better. Developing good savings habits is something that will pay off for your entire life, especially when you get to the point where you are ready to make a change.
Calculating a Savings Rate
Maybe saving 50 percent of your income seems like more than you can manage — that’s okay, and it doesn’t mean that you shouldn’t save at all. Figure out your current savings rate by calculating your total after-tax income with your 401(k) contribution. That’s what you make, plus the 401(k) contribution, minus your average taxes. Now, divide how much you typically save in a year by that number. For example, if your after-tax amount is $40,000 and you manage to save around $7,000 a year, the calculation looks like this:
(7,000/40,000) * 100 = 17.5 percent
This means you save 17.5 percent of your available money for retirement. The higher that number, the easier it will be to justify early retirement. At around 20 percent, the interactive guide at Minafi suggests that you can expect to work for about 30 years before retiring. That still means you could possibly retire earlier, although not by as much as you would if you saved say, 30 percent. At that savings rate, Minafi says that you can expect to be financially independent after about 27 years of work.
If you take this to the extreme, the interactive guide says that super-savers with a 50 percent savings rate only need work for about 20 years. If you start saving at age 18, you would be able to retire by age 38. If you invest wisely, you could be living the good life by age 35.
What About a Compromise?
Maybe you don’t want that early retirement stress but do want a break of some kind. How about partial retirement? It’s a choice many people make even if they decide to work until full retirement age. Technology has opened the door for this option in many ways. You could work as a contractor, for example. If you spent your career doing graphic design for big firms, with some smart savings, you could be working for yourself by age 40. With fewer hours at work, you’d have more time for the other things you want, like travel or family.
Many employers offer flexible work schedules too, so you can pick your hours or only work a few months out of the year. For instance, Amazon hosts an RV park for retirees that want to work at fulfillment centers during the holiday season.
Tips to Get You There
Any good plan starts with, well, a plan. If you want to retire early, that’s the place to begin your journey. Without a structured retirement plan in place, you’ll find yourself floundering or putting-off when you should be saving. That plan should include tracking your money and holding yourself accountable for spending.
Make your decisions based on your retirement strategy and your goal of early independence. You can learn to live with less if it means saving more — fewer nights out, less living space and fewer amenities.
Finally, learn how to put your money to work, so no matter what your saving rate, it grows. Get to the point where you consider money only as something to invest and not as something you should spend. That way, you’ll see financial independence early enough to really enjoy it.
Do you believe saving can help you achieve financial independence and achieve an early retirement age? Let us know in the comments section below.