5 tips to know to retire early
Traditionally, workers have planned retire in your 60s, or even older, but the growing popularity of the Financial Independence, Early Retirement movement, often referred to as “FIRE” for short, is changing all that.
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While the idea of retiring at 40 or even 30 sounds appealing on many levels, you’re going to have to take some drastic steps to achieve that goal. If your mind is set on retiring early, even if it means being in your early 50s, Here are some tips to help you get to where you want to be.
Maximize your retirement plan contributions
A workplace 401(k) plan is your best bet for getting ahead of the retirement savings game. Annual contributions are not only relatively high — $20,500 for tax year 2022 and $22,500 for tax year 2023 — but your employer is also likely to offer matching contributions. Let’s say your employer matches 100% of the first 6% of your compensation. If you earn $100,000, this means your employer will contribute up to an additional $6,000 to your 401(k) plan on your behalf. If you can earn an even higher salary, your matching contributions will also increase. This means that in 20 years you could get $120,000 or more in “free” money from your employer, on top of the $410,000 you could contribute for yourself at the maximum in 2022. But since the 401(k) contribution limit increases with time, you will be able to contribute even more. These types of large contributions to your 401(k) plan will be necessary if you intend to retire early.
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Open an HSA
A health savings account is one of the most underrated retirement savings vehicles available, and you may be eligible to contribute if you have a high-deductible health plan. The intended use of an HSA is generous enough, since it is essentially triple tax-free. First, you get a tax deduction on any contributions you make, and you also benefit from tax-free growth on your investments while in the account. Lastly, when your distributions are used for qualified medical expenses, they are also tax-free. However, there is also a retirement planning angle to an HSA. If you wait until age 65, you can withdraw money from an HSA for any purpose, without taxes or penalties. Although you can’t use the money for general purposes at age 45, for example, without paying a 20% penalty, you can use other funds to bridge the gap between retiring early until age 65 and then having a tax-free triple retirement . savings nest waiting for you in the form of your HSA.
Acquire multiple streams of income
Investing is key to retiring early because no matter how much you earn, it’s hard to get rich just off a salary. But the only way to invest a lot is to earn a lot. Since a salary can only go so high so fast, it’s a great strategy to find as many sources of income as possible. And since there are a limited number of hours in a day, it’s important to find as many passive income opportunities as possible. One of the most common examples of this is the real estate industry. If you can own several different rental properties, you can generate many streams of income with limited daily effort on your part. Having side jobs in fields you enjoy can be another way to earn more money without “working.” For example, if you’re an expert in your field on a particular topic, you might speak on weekends or evenings for companies or organizations that will pay you just to hear you talk about what you love or how you’ve been successful. Get creative and see how many aspects of your life you can turn into income generating opportunities.
Adopt a conservation mindset
One of the biggest advantages of the FIRE movement is that it encourages young people to maximize their retirement plan contributions and invest as much as they can. But the truth is, without also adopting a conservation mindset, it’s unlikely that your FIRE dreams can come true. Any time you can reduce your expenses, you are effectively earning more income. If you’re looking to retire early, you’ll have to commit to making some major sacrifices. This means more than just giving up your daily latte. To really retire at age 30 or 40, you’ll probably need to save 70% or more of your income. To achieve this, you’ll need to not only avoid pleasures like eating out or traveling the world, but also reuse things as much as possible and only spend on items you really need to survive. Committing to this type of lifestyle is probably the most important and most difficult step in retiring early.
Deposit all your ‘extra’ money
An almost inviolable tenet of the FIRE movement is that you cannot fall prey to lifestyle. As you earn more money, it’s natural for most people to start spending more and improving their quality of life. But to retire early, you’ll need to put any extra money you earn in the bank. This applies to all forms of “extra” money, from a pay raise to year-end bonuses, tax refunds, inheritances, or any other kind of money you receive other than the salary you use to survive. Putting all that “extra” money into investment accounts will help speed up your early retirement schedule.
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Daria Uhlig contributed reporting to this article.
This article originally appeared on GOBankingRates.com: 5 tips you should know to retire early
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