Content provided by Kostya Etus, CLS Associate Portfolio Manager
Retirement marks the beginning of a permanent vacation. Something very near and dear to most people’s hearts. Although I know there are some out there who want to work until they aren’t able, the majority of us want to retire early. What many don’t realize, however, is the earlier you retire the more money you will need. I know it sounds too simple, but it does go overlooked. For example, if you want to retire at 55 instead of the typical 65, you need to sustain an additional 10 years in post-retirement. Given the average life expectancy of a 55-year-old American is about 27 years*, you will need enough wealth accumulated to sustain another third of your life.
What is the best way to retire early? Simple: save more. As we have previously learned, the power of compounding in your retirement investment account can be significant, and it is amplified by the amount of time over which you invest. The earlier you decide your target retirement age, the better off you will be because you can start contributing extra funds sooner. But where do you find that extra money to contribute, especially when you are younger? This is where budgeting comes in.
Even when money is tight, there are always ways to save. But you need a plan. Creating a budget gives you control over your spending, and thus allows you to put more away for retirement. One of the simplest ways to start is by tracking every transaction, no matter how small. This is similar to calorie counting when you are trying to lose weight; every little bit adds up. There are apps and software available that allow you to download and track inflows and outflows. Next, separate all your transactions into “needs” and “wants.” Needs are things you can’t live without, such as utilities and insurance payments. Wants are things like going out to restaurants and buying designer clothes.
Now that you have everything organized, calculate the average monthly spending on your needs and allocate a reasonable target amount on the wants. This step can lead to some heated discussion with your significant other, but you just need to find a happy medium. At this point you should have a good understanding about how much money is coming in and how much is being spent on a monthly basis. If there is more coming in than going out, don’t just raise the wants bucket. This is your savings. The savings can be allocated to big-ticket items planned for the future such as a child, a new car, or a new house. But don’t forget one of the most important big-ticket items: your retirement. After this step, it gets very easy. Simply stick to your budget. But remember, every time you go under budget you can get closer to your long-term goals.
Tips and Tricks
Although your risk tolerance may be much lower in retirement, it may be beneficial to invest conservatively because you cannot forget about inflation. Even a low rate of inflation can erode your earnings over time and impact your post-retirement lifestyle.
Manage your debt wisely. There are minimal benefits to credit card debt. It is basically burning money on high-interest rates you could be saving for the future. Pay your balance off monthly.
Consistently revisit your budget and evaluate if targets for your wants are still valid. There are always spending cuts that can be made. Just remember to keep your longer-term, big-ticket items in mind and the happiness they can bring you.