Everyone wants to believe they will be financially independent when they reach retirement age. But it doesn’t just happen without planning ahead. And in addition to good planning, you need to establish the right habits to stay retired.
The financial choices you make now can have a big impact on how and when you can retire. Depending on your current financial situation, this truth may feel a bit scary. But even if you feel like you are off course and have a lot of work to do, you can take steps today to ensure you are on track when you are ready to retire.
Here is how to achieve a level of financial independence by the time you are ready to retire.
Get on the same page with your spouse.
If you are married (or plan to be someday), this is a must. Money is one of the most common reasons couples get divorced. If you and your spouse are not aligned about what needs to happen for you both to retire when you want, it does not matter how much research you do—you are both going to be frustrated.
Getting on the same page might involve making changes to the way you both think about and treat your financial resources. It is fine for one person to do the bulk of the research and management of your finances, but it is imprudent for one spouse to just take care of all things financial. Both partners need to be involved and active in the decision-making process. This allows you to jointly set goals and expectations that you can follow through with. If you don’t, you’re more likely to end up fighting each other all the way to the finish line.
Reduce your major expenses.
One of the biggest steps you can take toward financial independence and retirement is lowering your cost of living. According to the Bureau of Labor Statistics, the average American spends more than half of their annual income on housing, food, and transportation. That leaves less than half for everything else—including saving and preparing for retirement.
Keep in mind, this does not have to mean making permanent changes. Investments accrue interest over time, so every little bit you can save now can make a big difference later. But if you do choose to make permanent changes, you will be ready for retirement sooner. The less you are willing to live on, the less you will need per year once you are retired.
Create extra sources of income.
Not everyone has the opportunity to climb the corporate ladder and work toward the next big promotion. But that does not mean you cannot find other ways to get some additional money coming in.
When you are out of town, you could rent out your home through a service like Airbnb. This extra money (minus taxes) could go straight into your investments—or you could use it to pay for your own vacation. Either way, it gives you more to work with when you look at what you can save and invest over the course of the year.
Nobody likes the idea of having to work more than one job, but most of us would do it if our financial situation forced us to. What if you got a part time job for the sole purpose of working toward your retirement? You could apply that additional income to chip away at debt, build up an emergency fund, or diversify your investments.
Manage your debt.
Just like investments, debt can accrue a lot of interest over the years. The sooner you get rid of it, the less that initial debt costs you. The trick is to make sure you do not put so much money into paying off debt that you have nothing left to invest—or worse, nothing to use in an emergency.
If you want to be on track to retire, you should plan to have minimal debt by the time you are fifty (or better yet, none). That certainly does not mean you cannot have any mortgage payments left (odds are you probably will), but student loans and significant credit card debt should be a distant memory. Of course, you will need to be extra cautious about taking on any new debt. Think through how long it will take to pay off new debt before you take it on.
Invest as much as you can afford.
Many of us take retirement for granted. If we do not prepare for it, we do not magically get to the amount we need to sustain our current lifestyle. That is why investing is so important—it ensures we have enough to live on when we can no longer work to provide for ourselves.
It is easy to tell ourselves, “I will invest when I have X amount of money left over each month.” Or we may think we need to focus on building up savings first before we can afford to start investing. Yet the longer you wait to invest, the less time you have to start accruing interest. Everything you put into your investment portfolio today will grow until you decide to take it out. Even if you only invest a small amount right now, it is worth it.
Get on a track to financial independence.
The path to financial security starts by looking at where you are and where you want to end up. It involves taking a deep dive into your financial situation, your desires, and your lifestyle to identify barriers between you and your goals.
It will probably mean making some changes. It may take some sacrifice. However, the return on investment is worth working for.
