5 Decisions To Make Now If You Want To Retire Early
Your 401(k) and so much more...
According to a 2020 Employee Benefits Research Institute (EBRI) study, nearly 43 percent of American households are projected to run short on retirement savings. So if retiring in your 50s (or earlier!) is on your bucket list, it’s important to develop some hard and fast savings tactics and get on track with your money management, stat.
There’s a lot to think about when it comes to saving for retirement, like where you see yourself retiring, what kind of lifestyle you want to lead, and how much money you’ll actually need. Once you’ve figured that out, it’s time to start thinking about the right retirement savings plan for you, and how much money you should be saving every month to reach your goal. While it may seem like a lot to think about, keeping your finances in order now can reduce stress and even improve your health so you can enjoy your golden years for longer.
To help you plan for your financial future, we tapped Charles Schwab's resident personal financial expert Carrie Schwab-Pomerantz CFP®. Based off of her invaluable advice from her Ask Carrie column, here are five decisions to make now to help jumpstart your savings.
1. Decide How Much Money You’ll Need To Retire
Everyone has different dreams for retirement. For some, it’s growing old near their grandchildren, while others desire to travel the world. “To retire at any age, you have to save, save, and save some more,” Carrie says. How much you need to save depends on where you plan to live, what kind of lifestyle you want to lead, and your timeline.
Schwab’s Retirement Savings Calculator can help you determine a ballpark figure of how much you’ll need to accumulate to retire on your own terms. Once you have a figure in mind, you can establish a plan based on your retirement goals.
2. Identify Where You Could Be Saving More
In order to start saving, you need to get a handle on your current spending. Even if you’re paying your bills on time and setting aside a certain amount for savings every month, there’s a good chance you could be doing more.
Get your finances in check in record time with Charles Schwab’s 30-day Financial Cleanse. Each week, you’ll be tasked with a new challenge and set of tasks that will help you better understand your finances, identify areas where you could be saving more, and articulate your financial goals. Once you’ve pinpointed your top priorities — like retiring early — you can optimize your spending and saving habits to align with your goals.
“Even small changes in your spending habits can make a big difference,” Carrie says. “Think about it. Spend just $5 a day less on lunches or coffee and you could save over $1,800 a year.”
3. Choose Your Debt Wisely
"Debt" is a scary word, but not all debt is terrible. For example, if you plan to go back to school, taking out a loan that will help you earn a better salary in the future is a responsible form of debt that can have a bigger payoff later. Providing you don’t borrow too much, a mortgage is a practical necessity for most homeowners and can provide you with financial and non-financial benefits — like getting into a good school district or shortening your commute.
However, nondeductible consumer debt — like your credit card balance — is another story. Before you start saving, make paying this off a priority. Paying off high interest consumer debt can provide you with a much better payoff than investing. For example, paying down a credit card with an interest rate of 17% is like getting a guaranteed 17% rate of return from you investments (which you can’t get in real life). “If you have multiple cards, pay off the one with the highest interest first,” Carrie says. “Once you're no longer paying off debt, you can put that money into savings.”
4. Pick A Long Term Savings Plan
“If you can take advantage of an employer-sponsored retirement plan like a 401(k), don't waste another minute,” Carrie says. “Contribute as much as you can, certainly up to any company match. This is one of the best, automatic ways to save.” If your contributions are pre-tax, it can help you save money come tax time and probably won’t affect your take home pay as much as you think.
Other popular retirement savings accounts include a traditional Individual Retirement Account (IRA) or Roth IRA. An IRA may offer additional control and investment choices compared to your 401(k). Retirement accounts like these allow you to contribute toward your retirement, and allow your earnings to grow tax-deferred (or tax-free in a Roth IRA, which can be withdrawn after the age of 59 1/2), which can raise your growth potential significantly over time. If you already have an employer-sponsored 401(k), you may even want to consider opening an IRA to maximize your retirement savings.
There’s a lot to consider, so it may be in your best interest to talk to a financial advisor about which options are best for you. But no matter what you decide, make sure your contributions are regularly scheduled, and automatic.
5. Decide On An Investment Strategy Early
Investing makes your money work for you, with the goal of growing it over time. While there’s always risk associated with investing, a way to help mitigate market downturns is having a long-term approach.
“It's easy to get hung up on choosing investments — there are so many!” Carrie says. “But fortunately, broad-based mutual funds and exchange-traded funds, which pool the money of many investors to purchase a variety of securities, give you a simple way to begin.”
These options allow you to automatically invest in a variety of stocks, bonds, or both so you don’t put all your money in one investment. Do a bit of research on performance and fees, or talk to a financial advisor about your options so you can get started ASAP. And remember — the more time you have to invest, the more time those returns can have to add up.
Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.
This article is sponsored by Charles Schwab. Visit Ask Carrie to help you on your way to achieving your own money goals in the future. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
Investing involves risk, including loss of principal.