4 Steps To Retire Early on an Average Salary
Written by
Kerra Bolton
Edited by
Zuri Anderson
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Retiring early seems like an impossible dream that only those who’ve earned $1 million by 30 can do.
However, with the right strategies, the impossible is doable, said Emily Luk, CEO and co-founder of Plenty.
“With careful saving and consistent investing, it’s absolutely possible,” Luk said. “The earlier you’d like to retire, the more you may need to be open about the lifestyle you maintain in retirement, including considering moving to places with a lower cost of living or even another country.”
Here are four steps you can take now to retire early on an average salary.
Create a Budget
Developing a budget and sticking to it helps you understand how much you can save prior to retiring.
“This way, you can determine if you can save more by spending less,” Luk said. “Estimate how much you may need for retirement by walking through your major expenses.”
Luk also recommended building a buffer in case of emergencies or federal economic policies.
“For example, don’t assume Social Security may be available to you,” Luk said. “Assume health costs will be more than you may think.”
Live Below Your Means
Now that you’ve created a budget, develop the discipline to live below your means.
For example, live on 90% of your salary and invest the remaining 10% to increase your retirement savings.
“Assume you are making a modest salary of $40,000 each year and receive a 3% annual pay increase,” said Paul Tyler, host of “That Annuity Show.” “If you invest 10% of each pay check and earn, on average an 8% return each year, in 20 years, your retirement savings account could be worth over $200,000.”
Make Smart Money Moves
Luk recommended tracking your savings and investments and setting targets to increase those amounts over time.
“Maximize contributions to retirement accounts, especially any tax advantaged accounts, and make sure to also invest in taxable brokerage accounts since you can’t withdraw from retirement accounts early,” Luk said.
Finally, pay off medium or high-interest debt as soon as possible.
“Instead of paying off low-interest debt like mortgages, use that money to invest and make compounding returns,” Luk said.
Take Care of Your Health
Tyler said three factors people must consider before they retire, regardless of their income status, are inflation rates, market rates and lifespan or health.
According to the latest data from the Consumer Financial Protection Bureau, the average retiree owed an average of $13,800 in unpaid medical bills.
“A long life means the assets must last longer,” Tyler said. “A long life with health concerns could cause some very large hospital bills near the end of life.
“Anyone in their late fifties or sixties should carefully consider hedging some of their risk with annuities and possibly a good Medicare Supplement plan.”
In addition, it’s important to have caregiving conversations with your parents to understand what kind of support they might need. These conversations are especially important for caregivers in the sandwich generation who retire early to take care of their parents while simultaneously caring for their children.
“Caregiving costs at the end of life often catch many families off-guard,” Luk said. “However, long-term care insurance may help reduce the financial impact of that when the time comes.”
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