Retiring early from working life is a goal for many people who grind away every day for a paycheck. However, for a growing number of working people, early retirement is more of a fantasy than an achievable goal. Without proper budgeting, projecting and planning, retirement can be a scary prospect. Here are some of the basic steps to take to ensure that you can retire early and in style:
1. Draft a budget. You can't know how much money you will have to save for retirement if you don't track what comes in and what goes out every month. If you simply decide to save whatever is left at the end of the month, you will often find that there is little if anything left over. Plan your spending and track it in a personal finance program or even just a spreadsheet. Ensure that your budget includes debt pay-down.
2. Project out a retirement budget. Knowing how much money you will actually need every year if you retire early will help you decide how much to save now. Take into account changes in retirement from your current budget, such as no more mortgage payments, or credit card or loan interest. It is as detrimental to over-estimate retirement needs as to underestimate them. Also, retiring early may mean reduced or no pensions for several years, so plan for that reduction in retirement income.
3. Pay down debt aggressively. Retiring with debt was once touted as a valid and even favored financial strategy. Financial planners encouraged customers to invest in retirement funds rather than pay down their mortgage and even to borrow to make retirement deposits. This is a very risky strategy, however. Any debt remaining once you no longer have a working income leaves you vulnerable to rapid interest rate increases. Plan to pay down your debt quickly and then invest in retirement funds.
4. Adjust your mix of investments to reflect your planned retirement date. Your current retirement fund mix of investments may be based on an average retirement date but, if you are planning to retire early, this mix should be adjusted. As you get closer to the retirement date, your portfolio should consist of fewer equity investments and more fixed income investments, such as bonds and notes. The value of equity investments can fluctuate substantially with changes in the markets. The closer you are to retirement, the less time you have to ride out any negative swings in value.
5. Don't stress out. Although early retirement does take careful and detailed planning, be sure to keep some of the excitement about the prospect alive. This will help motivate you to keep at the plan so that you can reap the rewards of all of your hard work.
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