Retire early in your 40's
Many people have questions on early retirement, and how to be financially independent despite challenges from taxes and health insurance.
Can I really retire early?
Most people capable of earning an income of over $50,000 (more or less) have the opportunity to retire early by saving money on a monthly basis.
How much do I need to retire?
This depends on your budget as a retiree. An early retirement budget would be about $20,000 a year in today's dollars. In order to earn $20,000 from investments, you will need roughly 25 times this amount in investments, or $500,000. This is a small retirement income, used as an example, and you may want to have more retirement income than this. (ie. $40,000 or $1,000,000) Bear in mind that whatever budget amount you come up with will have to cover healthcare, insurance, taxes and a variety of other post retirement expenses.
How much do I have to save each month?
A good goal to start with is roughly the amount that you would like to retire on each month, and to increase the amount that you save by 5% each year. As an example, to achieve the retirement income of $20,000 per year, adjusted for inflation, you could start with saving $1500 per month.
How long will it take to save?
Using our example of $1500 per month, increasing the savings amount 5% each year, it will take 15 years to save $500,000. This is assuming a 5% real return on your investments, and includes an adjustment for inflation.
Where should I invest the money?
If you are starting out and have 15 years to go, use a tax deferred savings program like a 401k, and invest in low fee index mutual funds, for example, a Vanguard S&P 500 fund. As you build up your savings and approach your retirement, you will want to reassess your investments every year or two.
How do I get the money to save?
Assuming you have maximized your income potential, learn to live well on a budget, and consider lifestyle changes that may reduce your expenses.
I don't want to sacrifice my lifestyle today!
Saving for early retirement is not for everyone. But by trying to make the right financial decisions, and learning to live well on little money, you may be able to improve the quality of your life and still reduce your household budget enough to save for early retirement.
Wouldn't it be nice to choose what you want to do with your time?
Time goes by quickly. If you start your savings plan now, you will enjoy the rewards sooner than you might think.
Wouldn't it be nice not to be tied to a job that you dislike?
For most people, the alternative to saving for retirement is to work until you turn 65 years old. There is another way!