Retiring early is the ultimate dream for many. Yet most believe it’s impossible. In fact, some people resign themselves to working into their 70s.
But is this really the way things must go down? No way! But if you do want to retire before the typical retirement age of 62, you have to be disciplined along with following a few important steps. I have written before about who can retire early, but in this article I want to dive deeper into what can get you there.
Save Early, Consistently, And Often
We all know we need to save money for retirement. But not everybody saves money from each paycheck. Also, those who have 401(k) plans should be maxing out their contributions. Some 401(k) participants don’t even take full advantage of their company match, which is like throwing away free money!
How Much Should We Be Saving?
The answer to this one is, “It depends.” There is no one answer of course. So let’s instead look at a couple that is 45 years old. Here are my assumptions:
1) They will spend $65,000 per year in retirement (not including taxes).
2) Today their accounts total $250,000 in savings (75% stocks, 25% bonds).
3) They currently are saving $22,000 per year combined.
What We Found
You can run a quick analysis like this in our free retirement withdrawal calculator. I ran the analysis and I found the following:
1) By saving $22,000 per year they will accumulate nearly $1.2 million by the time they retire.
2) Saving just a few thousand less per year has a huge impact. In their case, if they cut their savings by only $4,000 per year, the amount they will have at retirement declines by $225,000. Also, the amount they have accumulated by the time they’re 85 drops by $520,000.
It goes without saying that saving is so important. Reducing how much you save has a dramatic effect. But on the flipside, save just a bit more and you can completely change your retirement situation.
Choosing Which Accounts To Save To
Not many people should only be saving to their taxable accounts. A 401(k) plan is the best place to save money for most of us. I found that if you save $16,000 per year to your 401(k) for 20 years and you get a company match 50%, you will have nearly $1 million by retirement. This assumes an 8% rate of return on your 401(k) investments.
If you don’t have a 401(k) plan at least start saving to a traditional or Roth IRA.
Generate Income In Retirement
Generating enough income in retirement is probably the most difficult it has ever been. With interest rates below the level of inflation, some people are actually losing income every year.
My view is that more investors should be looking to dividend-growth stocks for income. Specifically, dividend-growth stocks with a long history of increasing their dividends. Some of my favorite picks are Exxon (XOM), Altria (MO), Johnson & Johnson (JNJ), and Procter & Gamble (P).
These types of dividend payers can set you up with stable income forever. The goal is to not have to dip into investment principal, which means there is no chance of outliving your money.