Would you like to retire early? Maybe even as soon as your late 40s? Having the freedom to do whatever you want each day, before you're too old to enjoy it, definitely has a huge appeal. But it likely won't be achievable if you don't take action. Here are some things that might prevent you from retiring early, and what to do about it.
You don't save enough. You'll need to save a pretty large sum to be able to retire early. You could need upwards of 25 to 30 times your current salary, depending on the age you are shooting for. Getting to that level of savings is no easy feat. If you depend on your job income alone, it could mean saving around 50 percent of your income. You'll be able to save more by starting up automatic savings contributions and then gradually increasing your savings percentage each year as you get raises and make room in your budget.
You don't save effectively. It's not just about saving as much as you can. You need to save effectively by avoiding taxes, high investing fees, and low returns and taking steps to counteract inflation. To help you delay taxes, do as much investing as possible within tax-advantaged accounts like a 401(k) or an IRA. Avoid high fees by paying attention to individual fund expense ratios and load fees. Consider using Treasury Inflation-Protected Securities within your portfolio to stay ahead of inflation. As for low returns, well, those are pretty hard to avoid. Just ask anyone who was planning on retiring last year. But don't let that scare you away from shooting for the high returns that come from the stock market in the long run.
You're not willing to adjust your lifestyle. To retire early, you will probably have to adjust your lifestyle throughout your earning years or in retirement. If you can't learn to live well below your means, then you will have a difficult time saving enough money to retire on. Most people who retire early live well below their income level and typically save more than 25 percent of their pay. Are you willing to cut your spending to these levels? If you can't spend less in retirement, then you might run out of funds too early. Most financial planners suggest you plan on withdrawing 4 percent of your retirement portfolio annually when you retire at 65. Can you live off of less than that amount?
You don't want to create a second income. To get to retirement quicker, you may need to create a second source of income. This extra income will help you eliminate debt and save more for retirement. You could be using your nights and weekends more effectively to bring in extra cash or to build a business. This second source of income could also be passive in nature, allowing you to continue it into your early retirement as a supplement to your investment income.
You enjoy your job. Consider the fact that you may not want to retire early. You might want to enjoy more of your money during your working years or continue to work in a field that is your passion. If you're lucky enough to be doing what you love to do, then there's no reason to stop early. You might also simply prefer alternatives to traditional early retirement: mini-retirements, part time work, consulting, or starting your own business.
Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.