Many of the clients I work with are happy climbing the corporate ladder for now but would like to be able to “retire” early to work on their own projects and business ideas.
I think we’d all like to set up some passive income streams to be able live a more flexible and balanced life. However, when pressed for specific timeframes and plans, many young professionals tell me, “I have plenty of time to think about it” Or, “I should work on it, but I don’t even know where to begin.”
The truth is retirement planning can be overwhelming because there are so many choices to make. How much do I save? Where do I invest? Should I use other types of retirement accounts outside those offered by my employer? The answers to these questions will vary based on individual circumstances, but here are some of my recommendations for improving your prospects.
Take the Pulse of Your Finances
Have you made a list of your major life goals and reviewed your financial needs in that context? Have you ever thought about the value of your human capital over time? Do you know your own personal net worth? Do you review your income and expenses periodically? Have you ever looked at a retirement calculator?
If you said no to any of these, it’s time to start working on it.
Save More Than You Think
While amazing investment returns sound like the silver bullet to retiring earlier, ultimately you have very little control over your annual return. You can take steps to diversify and reduce risk, but no one can set a return and expect to get it year in and year out.
However, you can control where your income goes and how much you save. This is the way to build real wealth. Think about this possibility for a minute: if you can save 50% of your income you can retire in about 10 years. It’s an extreme example, but with some intense budgeting techniques, could you do it? Would you want to do it? What would you want to do with your time if you could retire in 10 years? If you did, how would you invest all the additional savings?
Hopefully, at the very least, you are maxing out your employer match. Depending on when you started saving, if you put away at least 10-15% of your income you’ll be able to retire at a normal retirement age (~65).
For those of us somewhere in the middle, any extra income you can sock away will bring you a step closer to finding the financial freedom to pursue side projects, business ideas, or whatever your long-term goals look like.
Understand Your Investment Options
If you want to make good on your plans to retire earlier, you have to know how to invest your money. Start with your retirement accounts. Do you understand the investment choices available in your employer’s retirement account and the costs involved? I know lots of smart people who don’t (and don’t want to) spent much time on this. You have a day job, after all, and not everyone wants to be an investment expert. It’s exhausting trying to keep up with financial news and information that often seems to bring more confusion.
The best gift you can give yourself though is to make sure you aren’t overpaying fees and expenses in your retirement accounts. Limiting these fees can save you hundreds of thousands by the time you retire. It’s also very important to understand the difference between stocks and bonds and other asset classes. Diversification across asset classes determines the bulk of your return overtime.
The Value of An Advisor
One of my jobs as a financial advisor is to help clients dream big about where they want to be and come up with a plan to get them there. Retiring at 65 and never working again doesn’t have to be the norm. There are all sorts of alternative arrangements that might make sense for you which could include retiring earlier, taking extended breaks from work, or transitioning to full-time entrepreneur.
If you’re overwhelmed by any of this (and lots of people are!), think about getting a fee-only financial advisor to provide some personalized advice regarding your situation.