2. Start early
Start saving as soon as you start working. Each year you wait to start socking away cash is a lost opportunity. Don’t put off retirement savings until you get around to it or until you’re making more money. The time to start thinking about your future is now. Due to the power of compounding interest (this is when your earnings earn more earnings), saving earlier is more beneficial. Consider this example from American Funds:
You earn $30,000 a year, receive 4% annual raises, and plan to retire in 30 years. You save 4% of your salary a year and earn an 8% annual return. If you start investing today, you could have more than $220,000 by the time you retire. If you wait five years before starting, you’d have $164,878 (assuming the same retirement date, salary, raises, savings rate and return). Waiting five years could cost you $56,066.
3. Max out retirement contributions
Are you contributing the max to all your retirement accounts? If you want to exit the workforce early, you’ll want to do your best to max out retirement contributions. For 2018, you’re allowed to contribute a maximum of $18,500 to a 401(k). If you’re age 50 or older you can make an additional catch-up contribution of $6,000.
If you don’t have access to an employer-sponsored plan, Barnes recommends setting up an IRA. You can contribute a max of $5,500 for 2018 across all IRA accounts and a max of $6,500 if you’re age 50 or older.
4. Cut back on extras
It’s a simple, yet powerful, way to make sure you reach your early retirement goals. It’s often the smaller changes, not necessarily the big ones, that can help whip your finances into shape. Track spending for at least 30 days, so you can see where you should start trimming the fat. You might find that your lunchtime snack — and not your coffee habit — is what’s really holding you back from financial freedom.
Carve out some time to evaluate your spending. Remember, the key is to cut back, not completely cut out everything that makes you happy. That would just be a miserable existence. Denying yourself will eventually make you rebel and spend even more. Do everything in moderation.