First you gotta ask yourself: is this what you really want?Depending on how old you are, work could really be getting you down, and early retirement might sound awesome. It is for some: Andrew Van Fossen retired at age 37 from his management consulting job and is now, primarily, a stay-at-home dad, although he does spend some leisure time blogging about investment and finance. Of course, Van Fossen is a multimillionaire. He was making close to $200,000 per year when he realized that he not only wished to exit the rat race, but also that he could because he'd planned ahead. From the moment he graduated from college and began working at a healthcare technology company, he was making smart choices about his money—smart choices like these. Within five years, he'd saved enough to get his MBA from the University of Chicago, which he parlayed into a six-figure salary. He started by maxing out his retirement fund contributions, which he invested carefully and profitably in a combination of conservative mutual finds and higher-risk equities. Van Fossen has never looked back. He was fully prepared for the more-relaxing rhythm of life that awaited him. But here's the rub: NOT everyone is suited to retiring early. "Too many people rush off to a life of leisure, only to find out that they're bored," notes Minneapolis-based financial planner, Derek Hagen, CFP, CFA. "Retiring too early can cause regret, both financial and personally," agrees Roger Cowen, a Connecticut-based retirement specialist. Retirees are sometimes surprised to find themselves missing the social connections, explains Cowen, as well as the sense of purpose that comes from having work-related goals.
What to keep in mindEven if you're certain that retiring early is the right personal decision, other factors come into play that can make retiring early a tricky move. For example:
- Health insurance, the cost of which can be significant when you're no longer part of a group plan. Half of all wannabe retirees say that keeping health insurance or other benefits is a major reason they continue to work, according to Cowen.
- Financial risk, and your tolerance for it, both emotionally and financially. "Can you stomach a few recessions?" asks Craig G. Bolanos, Jr., CMFC, AIF, a Founding Partner and Chief Executive Officer of Wealth Management Group, LLC. The longer you're retired, the greater chance there is that you'll end up cycling through at least one market downturn. "Be honest with yourself as to whether or not you (and your portfolio) can stomach a few recessions throughout a longer retirement," Bolanos suggests.
- The high cost of inflation. "If you retire in your 40s, you could have another 40 years ahead of you to live off your savings," says Matt Hylland, Financial Adviser with Hylland Capital Management. "Even with modest inflation, you have to expect your purchasing power to erode over time." even with modest inflation, your original purchasing power erodes." So, before you make your plans to retire early, you really need to consider how much it will really cost to live several more decades. "Those who are honest with themselves have a much better chance at having a successful retirement lifestyle," agrees Warren A Ward, CFP, of WWA Planning & Investments.
Don't just save: invest
First you need to learn about investing—check out what you need to know before you enter the stock market. And then readjust the way you think about your money: "Don't think of it as saving, but as investing," clarifies Robert Johnson, PhD, CFA, president and CEO of the American College of Financial Services, a non-profit, accredited, degree-granting institution in Bryn Mawr, Pennsylvania. Dr. Johnson could have retired years ago, but continues to do what he's doing because it's a "noble mission."
"When you think in terms of saving," Dr. Johnson says, "you think about not taking chances. But the way to build wealth is to embrace risk in the equity markets." That's because the reward over time has long been documented: since 1926, the stock market has returned 10 percent compounded annually (compared with long-term government bonds and corporate bonds, which have returned in the neighborhood of 6 percent annually). Although there's more risk when you invest in the stock market, if keep your portfolio diversified, you'll reap the returns, Dr. Johnson advises.If "diversification" is a foreign concept, you can still enjoy the benefits of the stock market's long-term success rate by investing in mutual funds that invest in the stock market. "Invest in broad market index funds," advises Alexis Hongamen, founder of Federal Retirement Advice. An index fund is a type of mutual fund that is designed to match or track the components of a market index such as the S&P 500. You'll also want to engage in dollar cost averaging, according to Karen Lee, CFP, who could have comfortably retired by the time she was 50 but has continued to work because she loves what she does. Dollar cost averaging means that you're investing roughly the same amount in the same investments, repeatedly over time, the result being that when the market is up, you'll be buying fewer shares, and when the markets are down, you'll be buying more. "Over time, this systematic approach gives your portfolio a boost," Lee says. "Just set it and forget it." If Lee's advice about investing sounds a bit like Lalvani's advice about saving, it's not surprising, according to Peter J. D'Arruda, MRFC, President of the International Association of Registered Financial Consultants, as well as an Investment Advisor, fiduciary, and founder of Capital Financial. "You don't have to choose between saving and investing," he says. "You should be doing both." In the stock market, D'Arruda points out, "you're not up until you're out." He's not advising you to take your money off the table, but to realize some of your gains and sock them away in what he calls a "core" account. A "core" account should insure you a lifetime income for the rest of your life when you retire," he explains. Over time, you'll want to strike a balance between "core" and "explore." Your "core" money shouldn't depend on the market. The "explore" money can then fluctuate without you losing sleep.
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Put your money to work, literally
Investing in the stock market is one way to get your money to make money for you. Another is to invest in your own business, whether it's one that will serve as a long-term income stream or one that you plan to sell for a profit down the road. That's how Sophia Bland has found herself on the path to retiring early. She co-founded a professional services firm that provides interview coaching and conducts mock interview."I invested a lot of capital into the company," Bland says, "and I'm also entitled to a healthy portion of the profits." As time goes on, the business is increasingly streamlined, which means that Bland needs to spend increasingly less time pushing things along. Brad Kingsley retired in his mid-40s after selling the business he started in his 20s for a seven-figure profit. And Dennis Bethel, MD has socked away a nest egg by investing in real estate properties that he rents. "The stable streams of passive income can create a perpetual retirement income," Dr. Bethel notes.
Live on lessWhether you make big bucks or a modest salary, if you want to retire early, you should learn to live on less, starting as soon as you make your first paycheck (if not before!). That's how Ilene Davis, CFP, rolls, and it's served her well. Although she's not yet retired, it's only because she loves what she does; she's had the resources to retire for years now. And just because she has the resources, doesn't mean she spends them wildly. "I make most of my own meals," she says, although she could easily eat out every night. And she prefers having friends to her house, rather than going out. She sews her own clothes and uses coupons for shopping. Davis doesn't have to be so frugal, but she's conscious of the fact that once she does retire, she'll have an extra 40-something hours per week in which to spend her money! If you're figuring out how to save for retirement, but being frugal isn't exactly a strength of yours, you might want to read up on how to spend less money.
Get out of debtBrad Kingsley, who retired in his mid-40s after selling his business, has another piece of advice for those who want to retire early: Pay off your debt. "During our highest earning years, my wife and I paid as much extra toward our mortgage as we could," he says. "This of course came from cash flow after retirement contributions. Between a small gain in the value of our house, and the large equity we built up, we had significant value in our home. As part of our early retirement we decided to downsize and use the equity to purchase a much smaller house that we could cover with cash." Michael Cirelli, a financial advisor in Illinois couldn't agree more. "Avoid debt like the plague," he advises. "Large sums of debt squander any hope you may have of retiring early." And by debt, he's talking about credit cards, car loans, student loans, and anything else you might be using to buy now and pay later. Can't quite pull yourself out of debt? At least learn to reduce your debt-related stress.
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Get a side hustle
Marry the right person
YAKOBCHUK VIACHESLAV/shutterstockIt might seem to go without saying, but most of our experts gave us this same bit of advice, and it doesn't mean marry and heir or an heiress. That means marry someone who's going to be a partner in your dream of retiring early. Here are the signs that your partner is a keeper. "You both need to be on the same page and on board with saving enough to make early retirement a reality," agrees Los Angeles certified financial planner, David Rae.
Location, location, locationgpointstudio/shutterstockOne simple way of keeping your costs on the lower side is to find a place to live where the cost of living is lower, such as what Andrew Van Fossen did when he moved from Los Angeles to North Carolina. It's advice that fuels the Taxes by State page of Tommy Sullivan's retirement information website, Retirement Living. "It's a collection of information we condensed from sources such as the Federation of Tax Administrators, The Tax Foundation and National Conference of State Legislatures," Sullivan says. "It should help provide you with information on state income, sales, and fuel taxes, taxes on retirement income, property taxes, and inheritance and estate taxes, and it's intended to provide insight into which states may offer a lower cost of living for retirees." Some retirees even end up living abroad to save bucks, according to Brent Dickerson, a certified financial planner in Ohio. "Some of my clients choose to live abroad while retaining their American citizenship," says Dickerson says, whose advice is to choose locations where the dollar goes a long way. "Obviously there are risks involved with this, but clients I work with find that pairing down their life-style and living part-time in multiple locations around the world is a great way to stretch their retirement savings." Got the travel bug? This infographic is your ultimate guide to where to travel when if you want to get the biggest bang for your buck.
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