Most of us who read money blogs like the Simple Dollar do so because we have real-life financial goals. If you’re like me, your goals are fairly simple – you want to enjoy relative financial freedom, take care of your home and your family, and have a little fun along the way.
My husband and I are also extremely interested in retiring early – real early. While we’re not dedicated enough to belong to the extreme frugality movement espoused by FIRE (Financial Independence/Retire Early) gurus like Mr. Money Mustache and Jacob from Early Retirement Extreme, we don’t want to work until we’re 60 – or even 55, really. Ideally, we’ll spend enough to enjoy ourselves while socking the rest away until we stop working in our late 40s.
Right now, we’re on the right path to make our early retirement dreams come true. Not only are we maxing out our Solo 401(k) contributions every year, but we’ve purchased a few rental properties (one is paid off already), have our primary home almost paid off (nine more payments to go), and have managed to avoid many of the consumer trappings that hurt most people’s ability to save. We’re both 38 years old, so we have a decade more to go.
Will we make it happen and retire by 50? Since we’re self-employed with a variable income, it’s hard to say. And, of course, nobody knows what the economy will bring, including the type of returns we’ll see in our investment accounts. But I do know one thing: We should succeed if we stick with our plan without fail.
Worst case scenario, we’ll work a few years longer than we planned, but give ourselves more options than we would have otherwise.
If you’re angling for early retirement or wishing you could make it happen, try to remember that the process isn’t rocket science; it’s simple math. The more you can save and invest now, the more you’ll have later.
And, because of the power of compound interest, you’ll have a better chance at early retirement if you start preparing your finances now. Likewise, waiting to save for retirement or putting off financial goals will only make them harder to achieve.
Here are three steps that can help you move toward your goal of early financial independence:
#1: Pay Off Your Mortgage Early
The debate on whether to prepay your mortgage will always wage on, and there’s really no “right” or “wrong” answer that works for everyone. Many experts argue you’ll earn a lot more money if you invest extra money instead of putting it toward your mortgage, and that may definitely be true.
Then, there’s the cost of real estate to consider. If you live in a high cost area like Los Angeles or Boston or New York City, for example, it may not even be feasible to own a home. Obviously, you should take all of these exceptions into account as you consider this advice; in some cases, prepaying a mortgage could be a costly mistake.
But, if you’re in your forever home and you can afford it, paying your home off can absolutely help you retire early. Not only will you save money on interest over the long haul, but you can reduce your living expenses, too.
With lower living expenses, you’ll need fewer assets to retire early. And with your mortgage out of the way, you’ll have a “free” place to live for life. Just don’t forget to account for the cost of taxes, insurance, and upkeep, as you’ll still need to pay for those expenses once you retire.
In our case, we took out a 15-year fixed mortgage at 3.75% APR around four years ago. Our monthly payment is around $1,400 including property taxes and insurance. By the time we pay off our home next year, we’ll have paid around $15,000 in interest on the loan — but we’ll save around $25,000 in further interest by paying it off early.
Our home is worth around $250,000. Because the stock market is at an all-time high and we already max out our retirement contributions, this has been an easy decision for us. Once our home is paid off, we’ll need to pay around $3,000 per year in property taxes and homeowner’s insurance plus maintenance and repairs. Keeping our housing costs low is just one strategy we’ll use to reach retirement sooner.
Related: Should You Pay Off Your Mortgage Early?
#2: Boost Your Retirement Savings
While paying off your mortgage can make sense in certain situations, saving more for retirement is plainly one of the best ways to ensure you’ll have enough assets to retire early. Especially if you get an employer match with your 401(k) plan, you should go out of your way to contribute as much as you can, provided you like your investment options and the fees aren’t too excessive.
Thanks to the power of compound interest, the difference that even a small boost in contributions can make can be absolutely amazing. Imagine you’re 30 years old and earn $75,000 per year. If you contributed 10% of your income (inclusive of an employer match) for 20 years until age 50 and earned a 7% return, you’d have $328,988 in your retirement account. (Ideally you’d get raises along the way, of course, which would in turn increase your contributions — but we’ll keep the income flat for simplicity’s sake.)
If you boosted your retirement savings to 15% (including your employer match) and achieved the same return, you would have $493,483 after 20 years. But, if you maxed out retirement at the current 401(k) maximum contribution of $18,000, you’d have $789,573 in your account. Add another five years of work for 25 total years of savings and you’d have $1,217,176 – that’s an enormous difference.
Since my husband and I are self-employed and each have a Solo 401(k), we’re able to stash away a little more than average – $18,000 each, plus 25% of our annual profits, up to a grand total of $54,000 each. While we may not be able to maximize this benefit for our entire working years, we’re doing so for as long as we can.
#3: Avoid Debt
When it comes to retiring early, too many people underestimate the compounding effects of avoiding debt – all debt. This includes more than credit card debt and extends to car loans, personal loans, and other debts as well.
Keep in mind that the average indebted household owes $16,883 on their credit cards. If they maintain a similar balance in perpetuity and have an average APR of 15%, they could pay as much as $211 per month – or $2,532 per year – just in interest. Over the course of 20 to 25 years in the working world, avoiding this debt could save you $50,640 to $63,300 in interest payments alone. And that doesn’t even include the investment gains you could be making on that money if you weren’t handing it over to creditors.
The same idea applies to car loans, too, except the savings are slightly harder to quantify — because most Americans do need a car, whereas nobody needs credit card interest payments. However, you don’t need a particularly nice car — a used one will still get you to work and back just fine. The average new car payment was $509 per month in early 2017, according to credit bureau Experian. That’s $6,108 in car payments per year and, if you’re on a perpetual trade-in cycle, $61,080 over 10 years, and an astounding $152,700 over 25 years.
If you trade in your car every few years and pay a “new car payment” for your entire working life, this is how much you can expect to fork over – and that doesn’t even include additional costs of buying new, such as more expensive license plates or pricier insurance.
If you could save even half of that by driving your cars longer or buying used instead of new, you could be a lot closer to early retirement in less time than you think.
Related: Two-Sided Coin: Should You Always Buy a Used Car?
And obviously, the less debt you have as you approach retirement, the easier it will be to reach your magic “retirement number” – the amount you need saved to cover your post-retirement living expenses.
This is yet another way my family is staying on track toward early retirement. We only have a single, paid-off vehicle for now, but we’ll pay cash if we buy another car down the line. And, while we use credit cards for rewards, we never carry a balance or pay interest. Over time, this has allowed us to pay down our mortgage faster, save more money for retirement, and spend money on family vacations and other splurges without sacrificing our goals.
The Bottom Line
If you have you eye on early retirement, the formula to achieve your goal isn’t as complicated as you might think. You mainly need to spend less, avoid debt, and invest as much as you can. If you complete these three steps regularly for years, your efforts will eventually snowball on themselves.
There are a ton of different ways to work toward early retirement, but the long, consistent approach is the one that usually wins. Like any other goal, however, you can’t retire early if you never start planning.
You don’t need to be perfect, but you do need to start.
Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.
How to Retire Quickly
Five Key Things to Think About if You’re Considering a Path to Early Retirement
Why Self-Employment and Early Retirement Go Hand-in-Hand
How Much Do You Need to Save to Retire Early?
Do you plan to retire early? Why or why not?