Who wants to wait until 80 to retire? Nobody. No one in their right mind would want to keep on working until they drop. Even those who love their work or are meticulous about the businesses that they have built for themselves do not want that. They all have an age wherein they want to relax – or at least cut back on work. But never work full time until they can no longer physically work.
But sadly, early retirement is not possible for everyone. There are people who are in too much financial troubles that they have compromised their retirement. In SmarterLifestyles.com, it is revealed that 50% of retirees do not have sufficient retirement funds. Not only that, 25% have chosen not to participate in the retirement plan being offered by their employers. With the average person spending 20 years in retirement, those who are not prepared will be in for some tight financial difficulties. This is scary because retired individuals have health care needs that cannot be scrimped on because it can be a matter of life or death.
You do not want to put yourself in this situation. That is why you want to work hard to be able to afford an early retirement. Later on, we will discuss how you can do this.
Before you retire, it is very important that you are aware of the signs that you are ready to retire. Imagine quitting your job and realizing that you will outlive your money – that is a scary situation to be in. At that point, earning more will be difficult to do. But for pre-retirees who are seriously thinking about early retirement, you may want to look into the signs that will tell you that you are ready.
Signs you can retire earlier than expected
Here are the signs that indicates you can retire early and do so comfortably.
You have enough retirement money.
On top of the list is your retirement fund. You should have enough money to be able to buy the things that you will need. Since most of your funds will be in investments, you should check if your portfolio has enough funds to support your expenses. If it is diversified and the returns are enough for you to live by, then you can live comfortably. The easy way to determine this is to compute the 4% of your retirement fund and see if you can live on that amount. If not then, you need to grow your funds some more.
You do not have debt (or at least it is manageable despite a reduced income).
If it is difficult to save for retirement when you are drowning in debt, imagine how difficult it will be if you are already retired and still have too much debt. It will not be a pretty life for you. You need to consider if your debts will give you a hard time in the future. If you still have some credit obligations, then you cannot hope to have an early retirement. Pay them off first through the many debt solutions available in the market. The earlier you start, the more you can hope to retire early.
You have tried a retirement budget and you have adjusted to it.
Another sign that you can retire earlier than usual is when you have gone through a couple of months in your retirement budget and you have adjusted well to it. When you retire, you will be forced to spend lower than what you used to. That is because the income coming in will not be as big as it used to. You have to downsize your lifestyle to keep from overspending. If you cannot manage that, then you need to extend your retirement budget trial period.
You have a reliable health insurance.
One of the biggest concerns of retired individuals is their health insurance. According to published infographic in PWC.com, specialty drug spending in the US will continue to grow over the years. In fact, it will quadruple by 2020 to $401.7 billion – a very huge increase from the 87.1 billion spending in 2012. This data from the PwC Health Research Institute indicates that health care costs will grow over the years. You have to prepare for this and your lack of health insurance will make it difficult. What could happen is you will just skip the medical care for lack of funds. You do not want this to happen.
You have no one financially reliant on you (except your spouse).
If someone is still in college or you are helping out your parents, you might find it hard to push for an early retirement. Unless your retirement fund can finance all of your needs, then go ahead and retire early. But if not, then you may want to postpone it first.
You are emotionally ready to face retirement.
Lastly, you may want to check if you are emotionally ready for retirement. This will involve a lot of changes in your life. You might think that lounging all day is something that you can do until you drop. But trust us when we say that you will get bored eventually. You want to pursue an activity that will keep you healthy. You need to map out how you plan on spending your everyday – otherwise, you will feel the boredom creeping in.
All these signs are indications that you can already opt for early retirement but they do not have to be all in effect for you to pursue it. In the end, there is one important thing to remember: you need to learn how to make your money work for you.
The key to retiring early – making your money work for you
If you think that this is impossible, don’t. There is one guy (actually his whole family) practicing this. His web name is Mr. Money Mustache. He has a blogsite called MrMoneyMustache.com and he shared how he and his wife was able to retire by the age of 30.
They are not millionaires. They did not earn six figure incomes. They did not inherit huge sums of money.
Their secret? Frugality and investing. We have discussed Mr. Money Mustache in a previous article and we would like to expound on his techniques because they really make a lot of sense.
This is the best summary that you will get out of what they did:
Then we retired from real work way back in 2005 in order to start a family. This was achieved not through luck or amazing skill, but simply by living a lifestyle about 50% less expensive than most of our peers and investing the surplus in very boring conservative Vanguard index funds and a rental house or two.
Here are some snippets of information that we got out of his website.
- What happens when you can save more of your income? As it turns out, spending much less than you earn is the way to get rich. The ONLY way.
- If you can save 50% of your take-home pay starting at age 20, you’ll be wealthy enough to retire by age 37. If you already have some assets now, you’re even closer than that. If you can save 75%, your working career is only 7 years.
- I just saved about 66% of my pay without really noticing it, and in under ten years I woke up and realized I didn’t have to work for a living any more.
- If you can get 25 times your annual spending saved up and working for you, that is enough to live off – forever.
When you have saved that much money, what do you do with it? Here is what Mr. Money Mustache has to say:
- You invest it. In stock index funds, in paying off your own house, in rental houses if you are interested in local real estate, and in other sources as you continue to learn about making money work for you.
- My own retirement income comes from a dead-simple asset allocation: one high-end rental house with no mortgage, and some 401(k) and taxable stock accounts which pay quarterly dividends.
This is probably the best advice that you will get out of this site:
Your attitude determines your lifetime wealth much more than your knowledge of financial nuts and bolts. – Mr. Money Mustache.
True enough, you can memorize all the financial literacy books out there but if you cannot implement it and live it, financial success and early retirement will continue to elude you.
Here is a video that discusses how you can retire earlier by using penny-pinching methods.