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By Veronica Baxter
Special to the Financial Independence Hub
So you think you want to retire early? Here are five proven steps to take to make that happen, if by “retiring” you mean no longer working.
Step #1: Work Wisely
Notice that this does not say work hard, or work 80 hours a week. To work wisely means to choose a job or a career that is lucrative and that you get some satisfaction from. You don’t have to love or even enjoy your job but you do have to tolerate it and feel a sense of self-respect in being paid to do it.
If you are still in school there are career services where you can seek counseling about what sort of careers pay well that you might be able to do and feel satisfied doing. Oddly enough, right now our economy needs more tradespeople because the boomers brought their children up to expect to go to college and get a white-collar job. As a result, there are fewer workers in trades such as plumbing, electrical, carpentry, and these people are in high demand.
Whatever you choose to do, ideally, you want to be your own boss eventually. That way you have control over the quality and quantity of work and you also have control over business expenses, which you can then keep to a minimum. Then if you can grow your business and eventually have employees work for you, you can multiply your earnings by however many people work for you. Then, eventually training someone to supervise the work means you can step back and… perhaps retire!
Whatever you decide to do, craft a 2-year plan, a 5-year plan, a 10-year plan, and a 20-year plan. These plans should include training or education goals, financial goals, and a vision of what your work life looks like at every stage. Revisit these plans in an annual self-audit to keep yourself on track, and revise them if necessary. You’ve heard of the phrase, “fail to plan, plan to fail”? Well, it’s true. Harness your imagination and dream big. Reach for the stars, you may get the moon.
Step #2: Pay Yourself First
This is crucial. When you craft your household budget, the first expense you must pay is into your savings or retirement account. What percentage of your income you put aside is up to you, but first, you will need an emergency fund of 6-8 months’ living expenses, then you will need to put money aside for retirement.
There are online calculators that can help you figure out how much you will need to live off the income from investments, or, you can seek the advice of a financial planner to help you figure out how much to set aside and to select the right investment vehicle for your goals. Keep in mind that if you plan to retire before age 40, you will need investment vehicles in addition to traditional tax-deferred retirement plans because you will be too young to withdraw from those.
Step #3: Live Below Your Means
Whatever percentage of your income you decide to set aside, you should figure out how to live comfortably on 80% of the remainder. Why? Because having what you perceive as “extra” money at the end of the month gives you a mental boost like nothing else. When you feel like you are in control of your finances and you have more than enough money to do what you need to do, you are activating the law of attraction.
What do you do with that “extra” money? Take a small portion and treat yourself in some small way to reward yourself for being frugal, then invest the rest in your business or deposit it in your investment accounts.
Step #4: Maintain Good Credit
It is crucial that you pay all bills in full and on time. Take out and use credit cards, especially if there is some sort of reward for use such as cashback or airline miles, but pay them off every month. Get a car loan.
Why? Because creating and maintaining a good credit history means you will be able to borrow money at a lower interest rate. It will cost you less to borrow. You will qualify for lines of credit, mortgages, and personal loans at a much lower rate of interest and save that money over time.
For example, let’s say Sally and Terry are hoping to purchase the same make and model of car that will cost $25,000. They both want a five-year loan. Sally has a FICO credit score of 605, and Terry’s score is 665. Neither are “prime” borrowers (scores over 760) or “subprime” borrowers (scores below 580), but with a difference of 60 FICO points, they will each pay very different amounts when borrowing the same amount of money. Sally will be offered a loan with interest as high as 14%, while Terry’s loan will carry as little as 7%.
What does this mean? Sally will pay $582 a month for a total of $34,902 for her car, and Terry will pay $495 a month for a total of $29,702 for her car. A 60 point difference in credit can cost you $87 a month and $5200 total. That’s $5200 you could invest for retirement, or invest in your business!
Step #5: Cultivate a Side Hustle
If you are your own boss and have trained employees to work for you and a supervisor to manage them, then you have a ready-made part-time job overseeing the business in your retirement.
If you have not taken this route, you will need a small job following your retirement. You will be young when you retire, so it is time for that second act. Perhaps you’ve dreamed of being a potter, or a musician, and you’ve done these things as hobbies all along. Now you can parlay your skills into a part-time job that will keep you from relying solely on your investments.
What does your retirement life look like, in your mind’s eye? You can only lie on a beach sipping a cocktail so many hours a day. Do you surf? Teach surfing. Do you like to work out? Become a personal trainer. Do you enjoy fine art? Become a docent at your local museum.
Plan for your retirement “side hustle” now so that when the time comes, you are ready to leap in with both feet. Good luck!
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.
