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19 Moves That Will Help You Retire Early and in Style

Maryalene LaPonsie

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Do you daydream about retiring as you plod through your 9-to-5 job? Are you wondering how a neighbor or relative managed to quit working at age 59 and go traveling?

For many people, retirement — never mind early retirement — seems out of reach. But with focus and self-discipline, you could amass enough money to retire earlier than you might think possible. Here are 19 tips to get you started:

1. Spend less than you earn

The formula for retiring early starts with you actually saving money. Social Security benefits alone aren’t enough to live the good life during your golden years, and, as we’ll discuss later, you’ll want to put off taking that money as long as you can.

Some experts recommend you spend no more than 90 percent of the money you make and sock away the remaining 10 percent. If you have zero savings right now, first concentrate on building an emergency fund in a high-interest-bearing savings account.

2. Start saving early

Thanks to the power of compounding interest, a little money saved now can go a long way at retirement time. But to get the most benefit, you’ll want to start saving as early as possible.

Even if you can’t hit that 10 percent goal, every bit helps. Let’s say you’re 20 years old and can manage to put away only $100 a month into your retirement fund. Assuming you average 8 percent returns — optimistic but possible with good investments — you’ll have about a half a million dollars by age 65. Even better, over that 45-year period, you’ll only have invested $54,000 of your money to get all that cash in return.

If you wait until you’re 40 to start saving $100 a month, you’ll put in $30,000 of your money and — at that same rate of return — build a nest egg worth about $95,000 by age 65. Not bad, but wouldn’t you rather have half a million?

3. Don’t leave money on the table

If someone tried to hand you $100, would you say no?

That’s what you’re doing when you fail to take advantage of a 401(k) employer match. The company is basically giving you money with the only hitch being that you must pony up some of your own cash for the retirement fund too.

You won’t get rich by passing up golden opportunities like this for extra cash. If your employer offers a 401(k) match, make sure you are taking full advantage of it.

4. Minimize your taxes

The rich stay rich in part because they’re savvy enough not to let Uncle Sam take too much of their money.

When you’re investing your retirement money, use tax-sheltered accounts such as IRAs and 401(k)s whenever possible. In addition, be smart about which type of tax-sheltered account you use.

Traditional retirement accounts enable you to invest pre-tax money and then pay the piper once you make withdrawals in retirement. Meanwhile, Roth accounts enable you to invest post-tax money — and therefore not pay taxes on withdrawals.

For help determining whether a traditional or Roth account is better for you, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”

5. Take a little risk

You could put all your money in bonds and sleep well at night knowing you’ll probably never lose any of it. But with that approach, you’re not going to retire a millionaire either.

Stocks and real estate are where the money is to be made. There is always the risk of the stock or real estate market — or both — crashing. Take heart, though, in knowing that stocks and real estate have historically appreciated in the long run and offered higher returns than less risky investments.

6. Stay informed about your investments

Don’t mistake taking a risk with being dumb.

A smart risk may be investing in an emerging-market fund. A dumb move may be pouring your life savings into a speculative currency.

How do you know the difference? By researching available investments, weighing your options and selecting the amount of risk that works for your situation. For example, those nearing retirement age should minimize their level of risk, while recent college grads can be more daring because time is on their side.

Perhaps start your research by reading about how to invest in a mutual fund or how to select the right investment adviser.

7. Break free from the herd

When the stock market plummeted during the Great Recession, many people freaked out and sold their investments.

They only took a bad situation and made it even worse, though. By selling their investments right when the market was bottoming out, they missed out on the stock market’s rebound.

The people who are going to retire rich are those who snatched up stocks at bargain-basement prices after the 2008 crash and then saw their stocks’ value climb by double digits in the following years. Same thing goes with the housing market. When the past housing bubble burst, the smart people were the ones who were buying houses, not selling.

It’s easy to follow the herd, but if you want to be rich, you need to keep a cool head and make rational financial decisions, even in the midst of a crisis.

8. Put off Social Security

While it might seem counterintuitive, many people are better off waiting to file for Social Security benefits. While you can file as early as age 62, you’ll get a lot more money if you can wait until you’re 70.

As we explain further in “Maximize Your Social Security,” you can influence your eventual payout to a surprising degree by making such changes to your retirement plans.

9. Maximize your income potential

If you want to retire early, you need to maximize your earnings. That means no more settling for a dead-end job that pays pennies.

Look for ways to increase your income, which can, in turn, increase the amount of money you are saving for retirement. You’ll find all kinds of options — and articles like “50 Ways to Make a Fast $50 (or Lots More!)” — in the “Make” section of our website.

10. Marry/partner with the right person

That special someone’s love gives you such a thrill, but, remember, love won’t pay the bills. Although it’s not unheard of for people to ask about credit scores on the first date, it might be considered a bit tacky.

However, talking about other goals and about money management can be fine fodder for those ongoing getting-to-know-you chats.

As the relationship heats up, you do need to discuss essential money matters frankly. If the object of your affections is vague about future plans or careless about spending, ask yourself whether you want to do all the heavy lifting when it comes to cash.

After you’re married, stay that way: Divorce costs a lot.

11. Don’t have kids too early

An unplanned pregnancy can take a major toll on your finances, and also on your emotional well-being. That is especially true if it turns out that the person you thought was Mr. or Ms. Right is the wrong fit.

Even if you plan to wait to have children, remember that no birth control is 100 percent foolproof. That’s another reason you need to be on the same financial page with your beloved. The more organized your finances are, the more likely it is you’ll be able to cope with an unplanned pregnancy.

12. Consider a smaller family

“How many kids should we have?” is a good question to discuss before you get married. Some people opt for only one or two children due to the high cost of raising them. Others keep their families small because they feel fulfilled and happy with producing only a couple of outstanding new citizens.

Remember, it isn’t just a question of whether you can feed and clothe more than one or two offspring. Family size can also affect:

  • Your mortgage: A two-bedroom starter home won’t be large enough for your version of “The Brady Bunch.”
  • Your car payment: You cannot tote five kids in a compact car.
  • Your food and clothing bills: Hand-me-downs only take you so far. And of course there are all the activities kids do, from sports clubs to music lessons.

13. Don’t keep up with the Joneses

Why should marketing experts determine how you live? Champagne tastes on a Kool-Aid budget will translate into debt that might keep you from ever retiring.

That’s especially true when it comes to cars. Maybe you want a sweet ride that leaves others in the dust — and makes them feel envious to boot. The higher cost of a luxury or sports car plus the higher cost of auto insurance will siphon tens of thousands of dollars from your wallet, and that’s money that could otherwise be growing in your tax-sheltered retirement accounts.

14. Plan to base fixed expenses on Social Security benefits

Regardless of whether you file for your Social Security benefits early or late, once you start collecting benefits, let them dictate your lifestyle.

Hopefully, you have plenty of cash in your retirement fund. But there can be risk involved if that money is invested in the stock market. Your returns can fluctuate and, heaven forbid, the market could crash, taking your returns with it, at least temporarily.

Since Social Security could be your most reliable source of income in retirement, we recommend you make sure all your fixed and essential expenses can be paid out of that monthly amount. That means your combined housing, transportation, utilities, food and insurance costs should be no more than your Social Security check.

If you have no debt, no mortgage and a paid-off car, paying all fixed expenses with Social Security should be doable.

15. Start planning now

One of the best ways to ensure you’ll have enough money in retirement is to start planning early. But, whether you’re 20 or 60, get on it!

Planning for retirement is about more than counting dollars; it’s also about visualizing the life you want to lead. To plan properly, you need to have a good idea of where you’d like to live and what activities you want to do. You’ll also want to calculate your life expectancy and your expected Social Security benefits as part of the planning process.

Retirement planning can seem overwhelming, but don’t let that stop you from diving in.

16. Account for your medical care costs

You generally can’t apply for Medicare until you reach age 65. So if you want to retire before 65, you’ll need a plan for how you will get and pay for health insurance coverage until you turn 65.

Once you are on Medicare, your health care costs might shrink, but they won’t disappear. Many people erroneously believe Medicare will cover almost all health care costs in retirement. A Merrill Lynch analysis released earlier this year found that a married couple would need $259,000 just to be 90 percent sure that they could cover their out-of-pocket health care costs in retirement.

17. Fatten your emergency fund

Ideally, retirees should have enough cash in emergency savings to cover expenses for at least six months — and they should keep it super safe, in an FDIC-insured account. Some financial advisers also recommend keeping enough money to cover two to three years’ worth of expenses in cash or short-term investments, lest the next big stock market crash sneak up on you.

18. Pay off your debt

A generation ago, entering retirement with no debt was the goal. Today, mortgages are bigger and life is more complicated, if not more expensive.

It’s terrific to have all debt, mortgage included, erased before you retire. All your income, in that case, is available to support you. But there are different schools of thought on this today, as we detail in “Is It OK to Retire With Debt?

If you cannot retire debt-free, at least eliminate credit card balances, auto loans and other debt that represents consumption.

19. Have a backup plan

In this era of economic uncertainty, early retirees need a strong backup plan. Retiring earlier means your retirement will be longer, increasing the risk of surprises. No doubt you’ve read stories of retirees who faced unexpected expenses that forced them to return to work.

You can’t plan for every eventuality, of course. But you should have a concrete idea of how you’ll survive if your plans fall through.

What tips for retirement savings did we leave out? Share with us in comments below or on our Facebook page.

Maryalene LaPonsie, Donna Freedman and Ari Cetron contributed to this post.

This article was originally published on as '19 Moves That Will Help You Retire Early and in Style'.

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