Planning To Retire By 40? Things You Need To Do

Although analysis by a financial technology company puts the average retirement age for Americans at 63, many people retire after attaining 65 years while others do not retire at all. This may be by necessity or by choice. On the other hand, there are those that are able to retire by the time they get to 40.

While it is said that life begins at 40 financially, for many people this is the time they look forward to being financially independent. This is particularly true because retirement might be closer. As such, you will do well to plan how to retire early way before your peers. If you are wondering what those individuals who retire by age 40 did to gain financial independence, here are some tips to help you gain financial independence and set you on an early retirement path before you get to the age of 40.

• Create a Written Plan

Having a well-written plan is one of the keys to a successful retirement. You can do this using an app, an old-fashioned pen or an Excel spreadsheet. Creating a written plan ensures that you go beyond your spending goals and retirement savings. A written budget is also a sure way of ensuring that you stay on track with your plan throughout your career.

• Open a Self-Directed 401(K) or Self Directed IRA Plan

Saving in an account that offers tax incentives is an excellent way of maximizing your retirement savings. It is common for employed workers to have 401(k) accounts as this is part of their compensation package. If you are self-employed, then you will be excited to know that IRAs are a great option as well. If you have maxed out your 401(K) contributions, IRAs are also good for you.

• Shop for Low-Cost Retirement Plans

IRA and 401(k) accounts offer multiple fund options that you can consider. Even then, you must be sure to pay attention to the fees that is associated with each fund in addition to the rate of return. The ability to minimize these fees means you are more likely to end up with a reasonable retirement package.

• Look for Roth Accounts

Both IRAs and 401(k) come in Roth and traditional options. That is, while the traditional account subjects workers to deductions at the time of contribution but taxes the withdrawals. Contributions made to the Roth account are “after-tax” meaning you are paying the tax today. However, once the Roth account is 5 years old and the Roth owner reaches the age of 59 ½ the tax-deferred gains change to TAX-FREE. Consequently, Roth makes more sense if you are young as it guarantees you greater tax savings.

• Contribute at least enough to get your 401 (k) Plans

A majority of the employers match the contributions of their employees to 401(k) plans. That may either be a per cent on the dollar or dollar for a specified amount. Regardless of the match, you will do well to contribute enough money to your 401 (k) retirement plan in order to qualify for the entire match offered.

• Buy Life Insurance

Financial planners advise that everyone should consider having a life insurance policy by the time they are 40. This is because individual policies offer great benefits at a reduced cost for people who buy them while they are healthy and young.

• Spend less so that you can save more on your retirement plans

It is best advisable that you live below your means at an early age. This is a good way of freeing up cash that you can put into your retirement savings and avoid having to go into costly debt in the event of an emergency without any emergency fund. Simply put, when you check your spending, you can be sure to amass enough savings that will enable you to retire by age 35. You will do well to live by the 50/20/30 rule that translates to 50% of your salary catering for essentials, 30% going to lifestyle choices while 20% goes to financial priorities that include your retirement contributions, savings and even debt payment.

• Be content with your current lifestyle

Being content with your current lifestyle is a great way to avoid lifestyle creep. That is instead of constantly striving to get a bigger or better car or house, you are content with the kind of lifestyle you will live by the time you are 40. This is a sure way of ensuring that you save more towards your self-directed retirement plans.

• Opt for a 15-year mortgage

You barely make any principal payment for the first 10 years of your 30-year mortgage. For those people that are keen on moving in five to six years, a 15-year mortgage is an ideal and smart financial choice. Furthermore, the interests are usually so low thus, you are still able to buy a house using a short-term loan.

• Stop assuming that the government or a former employer will pay for your retirement

Although baby boomers may have the guarantee of Social Security benefits to cushion their personal savings, your Gen Xers and Millenials may have a smaller safety net. To begin with, they must wait for older age in order to make claim to their full Social Security benefit. In addition, a majority of the companies are no longer offering traditional pension plans to their former employees.

Retiring early is a deliberate decision that you must make and work towards realizing. It is important to begin early and stay committed to making your contributions as this will cushion your financial future and usher you into financial independence by the time you are 40.