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Early retirement is something to aspire to, whether you’re in your 20s or already in your 50s. The freedom from worrying about earning your next paycheck opens the door for you to live life on your own terms. But getting there requires dedicated saving and investing, good financial planning, and maybe a little bit of luck.
If you’re dreaming of an early retirement, here are four ways you can get ahead in the new year.
1. Track your expenses
It’s impossible to plan for retirement if you don’t know how much your life costs. The start of a new year is a great time to start tracking your expenses. (Although there’s never really a bad time.)
You don’t necessarily need to budget or cut back on your spending. Just track your expenses for a few months. You can use a spreadsheet or software that links to your bank and credit card accounts to help.
After a while, you’ll get an idea of what you spend in a typical month. You might also notice you’re spending a lot in some categories, and that the spending doesn’t line up with your values. For example, you might be spending a lot on dining out, but you’d rather spend the time to make a good meal at home with your significant other. If you can spot some inconsistencies, try to consciously align your spending with your values.
Once you have an idea of how much you spend per month and you’re optimizing your spending to provide the most happiness in your life, you can have a rough idea of how much you need for retirement. Multiply your annual spending by about 30 to get an idea of how much you need to retire with a reasonable safe withdrawal rate.
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2. Boost your savings rate
If you want to retire early, you have to save more than average. Not only will you be relying on your investments to fund your retirement, your retirement is going to be longer than average. That increases how much you need to save.
For those that have more trouble saving, one useful method is to “pay yourself first.” One example is using a 401(k) plan, which deducts contributions directly from payroll, so the money never even hits your checking account. You can mimic that mechanism by setting up automatic transfers from your checking account to your brokerage account every month (or however frequently you choose).
Your savings rate is one of the biggest determinants in how early you retire. The person saving half their income will be able to retire sooner than the person saving one-quarter of it, regardless of how much either person makes. That’s because retirement is a two-sided coin – your savings have to cover your spending. If you save more, you spend less, and if you spend less, you need less savings to fund your retirement.
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3. Increase your income
There are a few ways to increase your income. You can negotiate a raise at your current job. This may be as simple as asking for one, or you may need to get a competing job offer and bring your best negotiation skills to the table. Another option is to make a lateral move to a new company offering an increase in pay over your current employer.
One of the lower-risk options is to start a side hustle. There are countless opportunities to start generating additional income these days. You can freelance, start a passion project, or do some ridesharing or delivery gigs.
Starting a side hustle also opens the opportunity to use self-employment retirement plans like a solo 401(k) or SEP IRA. These are excellent options for additional tax-advantaged savings and can help you reach retirement even faster.
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4. Take control of your taxes
One of your biggest expenses every year is going to be taxes. If you don’t make a plan for saving on taxes, you’ll pay more than you need to. But you can exercise more control over your tax rate if you also save lots of money. Keeping your tax bill low can save you tens of thousands of dollars over your life span.
Most people interested in retiring early will benefit most from tax-deferred retirement accounts. When you contribute to a tax-deferred account, you’re saving on your taxes at your marginal tax bracket. When you withdraw, you’ll pay income taxes on the withdrawal, but those will likely be at a lower rate than your current marginal tax rate. What’s more, you have more control over your income in retirement, so you can exercise more control over your taxes, too.
Contributing to tax-deferred accounts can also lower your adjusted gross income, allowing you to qualify for tax credits such as the Child Tax Credit, Saver’s Credit, or ACA credits.
If you have investments that are showing a loss on paper, you can also tax loss harvest and offset any capital gains you generated that year and up to $3,000 in other income after that. That can also help lower your AGI.
At its core, retiring early is a matter of increasing the gap between your income and your expenses. Focus on the big picture and the rest will fall into place.
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