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Aggressive investments, a balanced portfolio, long-term planning, and smart tax strategies are the key to your early retirement dreams.
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Millions of people dream of clocking out for the last time and entering early retirement, but knowing how to retire at 30 is a hurdle. You need a significant amount of money saved and invested to last 40 or more years with just around a decade to prepare.
That said, retiring early is possible – if challenging – with strategic investments and large enough contributions. And we know just where to start.
Before you choose any new investments or savings accounts, you need to audit your current budget and lifestyle. You’ll have to pull months of bank statements, identify your spending habits, and determine your most and least valuable expenses.
This process can be time-consuming and, frankly, discouraging for some people – particularly if you’ve never taken an honest look at your finances before.
Qualified financial advisors can easily help you determine realistic retirement goals, improve your current financial standing, and make a plan that ties everything together.
If you’re unsure if early retirement is feasible or you don’t know where to begin with your budget, a Certified Financial Planner (CFP) should be your first call.
CFPs have a fiduciary duty to act in your best interest and they’re typically fee-only advisors that only get paid when they help a client. This means they have no incentive to sell you financial products you don’t need.
With a clear understanding of your current finances, you can start to consider what’s a reasonable goal for you and how you can get there. A personalized investment plan depends on:
Everyone’s financial situation and goals are different, and your plan needs to reflect that.
Consider that a high-income individual in a low-cost area can contribute significantly more and may have a higher risk tolerance than a young family with a mortgage in a city.
Determining how much you’ll need to retire by 30 can be tricky, but estimates will help you get started.
Financial experts historically recommended at least $1 million saved, but that goal was based on the traditional retirement age and has already shifted with inflation and other economic considerations.
People planning to retire early usually rely on compound interest income, which needs a significant principal balance to cover all of your expenses and outpace inflation. You’ll have to determine how much you need to live off of compound interest.
Here are some questions to consider as you establish your goals:
The more you make, the more you can invest, which increases your potential returns. That said, you can increase your income and support your early retirement dreams in several ways.
Passive income ideas are a great place to start. These typically require minimum time and financial maintenance from you (though startup costs vary), while providing a steady income.
Long-term passive income also provides security for when you retire since it will continue to pay out as long as it’s performing well. Passive income streams may include:
Of course, increasing your primary income also improves your financial standing and investment opportunities. Negotiating a raise or preparing for a promotion are good places to start in your current role.
New career opportunities are typically the best way to increase your salary. Zippia found that external career moves offer a 14.8% average salary increase compared to a 5.8% increase for workers who remain in their positions.
Consider retirement benefits like employer-match 401(k) contributions. This may not boost your early retirement salary, but you can enjoy the benefits of compound growth once you reach retirement age. This is particularly valuable since medical costs and lifestyle changes may increase as you age, and you’ll need more money to cover those expenses.
Reducing your liabilities is another key way to increase your contributions and reduce how much you need to comfortably retire in the first place.
Paying off large debts is priority No. 1. Not only does this decrease your monthly expenses, but repaying debt early means spending less of your income on interest charges.
It’s also important to stick to a budget to manage your daily spending. A treat or dinner out every now and then is great, but don’t spend more than you planned. That extra cash has to come from somewhere, and the less you contribute today, the less you’ll earn in compound interest over time.
If you’re new to budgeting, consider beginning with the 50-30-20 rule. This simple budgeting guideline groups your expenses into three categories and allocates your money accordingly:
That said, you’ll likely need to increase your savings and investment contributions if your goal is to retire as early as 30. The financial independence, retire early (FIRE) movement recommends contributing as much as 50% of your income to savings and investments.
No matter how much you cut down on lattes and nights out with friends, you’re unlikely to save enough to retire by working a 9-5 alone. You have to learn how to invest for true financial independence.
The more you invest, the more you can earn or lose, which makes investing equal parts exciting and intimidating. If you’re just starting your portfolio and aiming to retire in a decade, you’ll need more aggressive and risky investment strategies to maximize your returns.
That said, always balance your portfolio with appropriate safeguards. Don’t overlook long-term retirement assets like 401(k)s and individual retirement accounts (IRA) that grow with compound interest and offer tax advantages that protect your gains.
These assets can significantly increase your wealth long term and protect you if you run out of retirement money within a few decades.
Lower-return certificates of deposits (CDS), high-yield savings accounts, and bonds can also protect you from losing a bulk of your wealth.
Consult a financial advisor for guidance if you’re unsure what balance suits your situation.
Navigating the available investment options can get confusing. If you’re unclear what the difference between an IRA and a Roth IRA is or why you should consider either, these investment explainers should help.
Taxes are inevitable. You’ll pay them on your income and sometimes on returns from investments, but you do have opportunities to adjust how much you owe and when.
For example, if you’re hustling for early retirement and cashing out huge paychecks and capital gains, contributing to traditional tax-advantaged retirement accounts may be a good choice. You won’t pay taxes until you withdraw funds after retirement and if you’re in a significantly lower tax bracket at that point, it could mean lower taxes.
Of course, early retirees can’t afford to put all of their cash in tax-advantaged retirement accounts, since access is restricted before you reach a certain age. You can’t avoid your taxes entirely, but you can reduce your liabilities with tax strategies and great timing.
Take tax-loss harvesting for example. You can sell underperforming and winning assets in the same year and reduce your overall gains. So if you sell three stocks and one loses $1,500 in value while the other two earn $5,000 combined, you owe taxes on the reduced $3,500 profit.
Consider your income and investments as a whole when you buy and sell assets. If you know you’re getting a promotion and a huge raise next year, think about selling strong assets this year to avoid the increased tax rate you’ll have with a raise.
Other tax strategies for high earners include:
Your needs will evolve as you age, so plan for these changes and how they might impact your income or expenses. Consider how these common life goals might impact your retirement goals:
Beyond your lifestyle choices, there are some inevitable expenses you need a plan for:
You can’t anticipate everything that will happen in the next 30 years, but that doesn’t mean you should ignore expected expenses and market changes. Consult a financial advisor for help evaluating future costs and incorporating them into your early retirement strategy.
Life will inevitably throw a curveball or two your way, no matter how well you try to plan ahead. Stay flexible and make changes as needs arise.
Heavy inflation periods, temporary market downturns, and even huge inheritance windfalls will affect your strategy.
Losses are challenging, so never skip contributing to your emergency savings. By keeping it in a high-yield savings or money-market account, you can even earn risk-free returns.
At the same time, stay cautious of lifestyle creep. Don’t start planning your next luxury vacation when you come into a large sum of cash from an inheritance or a particularly great market year. Treat yourself, but invest the bulk of your unplanned income to protect your future.
Clocking out of the rat race isn’t easy. But with the right investment strategy, strict budgeting, and strong, consistent income, you can learn how to retire early at 30 and enjoy the best decades of your life on your own schedule.
Start with a personalized financial plan and learn to reduce your taxes for maximum savings.