Early Retirement is the North Star of Financial Goals
Early retirement? You? Seriously?
I can almost hear the wry amusement in your thoughts and see the skepticism on your face as you scrolled past the title just now. But just hold up a second! With all due respect, those aren’t the right questions.
Let’s try these instead: Early retirement? Is that really possible? What would that look like, exactly? How amazing would even a few extra years of enjoyment be? How could we make that happen? And why NOT you?
We live in complicated times, and most of us feel lucky just to keep our heads above water. Thankfulness is good; here’s to keeping perspective. Maybe we worry that shooting too high is somehow asking for trouble.
But there’s nothing in the equation that says appreciating what we have, or recognizing the challenges around us, requires us to settle for less than we could accomplish. Besides, I’m not going to pitch some crazy “get rich while you sleep” magic or ask you to do anything reckless. (I’m hurt you’d even consider the possibility.) In fact, quite the opposite.
Improve Your Odds for an Early Retirement
There are several practical, fundamental adjustments you can make to how you’re currently managing your finances and your life which can dramatically improve the odds of being able to retire early. Worst case scenario, these strategies will help you retire more comfortably whenever that might be. Along the way, they’ll help you strengthen your financial position, improve your credit score and credit history, and give yourself more options on better terms throughout the journey.
There’s really no downside. And if you decide NOT to take early retirement just because you could, that’s fine as well - but it will be out of CHOICE at that point, not out of NECESSITY. As we all know, that sometimes makes all the difference!
First Steps Towards Early Retirement
Most financial sites tell you the first thing you should do when considering retirement (early or otherwise) is run the numbers on how much you’ll need in savings and investments in order to meet your basic expenses. Fair enough. That’s always a good idea, and something many of us simply don’t sufficiently consider.
If we’re looking at early retirement, however, I respectfully suggest that the first numbers we want to concern ourselves with are those related to our current and future debt. We can’t really get serious about retirement plans until we’ve figured out how to eliminate the debts we owe now, or which we’re likely to take on in the future.
The Debt Distraction
Debt has a nasty way of sucking us in deeper and deeper even when we start off thinking we can handle it. The balances on our credit cards seem to keep going up no matter how long we’ve been making monthly payments. Stuff keeps breaking or requiring replacement, and our loved ones keep growing - or shrinking - or changing - and needing new clothes.
I strongly encourage you to start your early retirement planning by prioritizing debt reduction. This doesn’t have to mean living in austerity and selling off a few of the kids to reduce expenses. It does mean establishing a meaningful budget that reflects your true priorities and forces some tough decisions about income and spending. Too many of us just keep “winging it” when it comes to our personal finances, then wondering why we have trouble getting ahead. That’s like grocery shopping without a list then wondering why you can’t pull together enough ingredients for your favorite recipes.
Help Reducing Or Eliminating Debt
Here’s the good news: enough people have been where you are now and successfully climbed out of it that we pretty much know what works and what doesn’t by now. Eliminating debt has never been and will never be painless - anyone who promises otherwise isn’t being fully honest with you. But it’s never been more doable than it is today.
The internet is filled with all sorts of nonsense, but scattered in the mix are several reputable sites committed to assisting real people with their personal financial growth.
At Goalry, we combine insight and advice with access
to easy-to-use tools for more efficient budgeting,
saving, planning, and organizing.
At Debtry and Creditry,
you’ll find reality-based strategies combined with
practical encouragement to guide and motivate you every
step of the way. You can also join our social media
communities to hear from others who’ve been where you are,
and to share your own story as well.
Reducing or eliminating debt is quite doable - and it’s essential if you’re seriously considering early retirement.
What Do Credit Scores Have To Do With Early Retirement?
One major benefit of debt reduction, of course, is improving your credit score. Whether we like to think about it or not, our credit score determines far more about our options and opportunities than just the interest rate on our next loan. Lower rates and better terms means future purchases cost us less. When it comes to homes, automobiles, remodeling, or other major purchases, this can mean a difference of tens of thousands of dollars.
Stronger credit scores can impact your ability to live where you want, change jobs, or even how much you pay for insurance. We can debate whether or not this is “fair” or “right,” but at the moment this is simply the reality of things. A difference of only 20 - 30 points can mean paying off your home or automobile in less time or reducing your credit card interest by thousands of dollars over the years. That means less debt, and that makes early retirement much more possible than it might be otherwise.
“Nothing changes your life more, other than God and love, than moving your credit score 120 points!”
Like money, credit isn’t about bragging rights or an end in and of itself. It’s a tool that helps you accomplish more of what matters to you and take better care of those you love. That’s why we put so much time and thought into Creditry and our budget management apps. It’s foundational to almost everything else in our personal finances.
Don’t Just Save For Early Retirement - Invest!
Retirement requires resources. The most common response when someone asks, “How much do I need to retire?” is that you should plan on having at least 80% of your current income each year of retirement.
That gives us a starting place, but only as a reality check - not as a reliable answer. Retirement looks different from person to person.
If your home is paid for, your car is reliable, and your idea of a great week is binge-watching old Star Trek series, 80% of pre-retirement income might be enough to live quite comfortably. On the other hand, if your goal has always been to tour Europe or try every nice restaurant in the tri-state area or take up classic vehicle restoration, you’re going to need considerably more resources.
Keep in mind that BEFORE retirement, each additional dollar you earn goes back into your investments or savings. Interest accumulates not only on the amounts initially invested, but on the additional earnings you’ve re-invested. Once you start withdrawing, your overall returns will begin declining as well because you’re lowering the amount in question instead of continuing to raise it.
Your Money Shouldn’t Stop Working
The point of investing is to make your money work for you whether you’re still working or not. Once you’ve built a reasonable nest egg of savings - enough to live on comfortably for at least six months or so - everything else should be strategically invested.
The difference is that your savings mostly just sits there and stays the same. You may earn a few percentage points over time, but it’s rarely worth even doing the math at today’s rates. On the other hand, savings are usually immediately accessible. If something comes up and you need funds, it’s just a few clicks on your phone or a short trip to the nearest ATM. Savings are also generally very safe.
That’s a fancy way of saying that you might have to be a bit strategic with your choices if you have over $250,000, but otherwise, you’re fairly safe.
Investments, on the other hand, involve risk. Generally speaking, the higher the risk, the greater the potential return on your investment. Lower risk usually means lower returns - but still much higher than most savings accounts. The money you’ve invested is not always easy to access immediately, and some investments involve an early withdrawal penalty or additional taxes if you pull them out early. With the right planning and a little luck, however, you can build a comfortable and reliable long-term income for yourself.
Challenges of Early Retirement
I wouldn’t be doing my job if I didn’t point out a few of the potential downsides to early retirement as well. There’s much to love about having a few extra years to enjoy the fruits of your labor, but some experts insist that early retirement is almost always a bad idea.
First, make sure your home will not only be paid off before you retire, but that any major repairs or remodeling is complete. You don’t want to put off working on your home until you no longer have your full income or may no longer be able to do as much yourself. The same goes for any vehicles or other big ticket items. Fix or replace them a few years before retirement - close enough to the big day that they’re still “new” but early enough that they’re all paid for.
Second, make sure you have a plan for your health coverage. Many retirees don’t consider the gap between whatever coverage their employer provides and the age Medicare kicks in. You’re not going to enjoy your early retirement very much if you can’t afford to take care of yourself properly.
penalties for early retirement
Keep in mind that many retirement resources like Social Security or your IRA have penalties for early retirement. The specifics may vary from plan to plan or change between now and when you retire, but don’t overlook the obvious stuff in your planning. The system is weighted against early retirement. That doesn’t mean it’s the wrong plan for you, but it does mean you can’t rely exclusively on the mechanisms put into place to make retirement easier.
Goalry is here
We can’t make the decision for you. What we can do is help
you reduce your debt, make more informed investment
decisions, cut costs, and stay motivated.
Our goal is to help you plan out and reach your goals.
We offer insight, tools, and connections.
We believe that most of us are capable of
managing our personal and small business finances more
effectively if only given the opportunities and a little
encouragement. In a world where so much feels out of our
control right now, it sometimes helps to be reminded
that while there are no guarantees in this life,
you have far more potential than you've been taught
to believe and far greater ability than you
may want to admit. Once you get started, you
might be surprised what you can do - even in these
complicated times.
Achieve Your Financial Goals. Goalry Helps You Track Your Progress. Join Now!
In Conclusion
Be honest with yourself about what early retirement might mean for you personally. Are you really ready to spend so much more time at home, even if your friends are still working? However much you may love your spouse, being together 24 hours a day is very different than coming home to one another in the evening. If you manage the financial planning and can afford to retire early, consider volunteering somewhere part-time or getting involved in community groups or activities for a few hours a week. There’s nothing wrong with enjoying some time alone at home, but few of us do well if that’s ALL we have.