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Middle-class people who plan to retire earlier than the average age of 67 need to strategically plan their retirement savings because they will be spending their money over a longer period of time than the average retiree. be.
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Whether you fall on the upper middle class end of $149,131, or even on the lower middle class end of around $55,001, it is possible to achieve financial independence that allows you to retire early on a middle class salary. We can’t leave that to chance. The earlier you start saving for retirement, the more likely you are to reach that goal.
A financial expert explains how you can retire early without sacrificing your financial goals.
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actively save
To retire early on a middle-class salary, preferably in a tax-advantaged retirement account such as a 401(k) plan, Roth IRA, or even an HSA (if applicable), says CFP and founder Ashley Ritterhouse. It is necessary to actively save money. Curious Crow Financial Planning.
To do this, she said, you need to “identify the values that are most important to you, spend money on things that align with those values, and eliminate spending in areas that don’t.”
fill the gap
For early retirement, Ritterhouse says, there are many ways to close the gap between traditional retirement age, such as paying for health insurance and making plans to access funds to support your lifestyle before traditional retirement age. A plan will also be required.
“This could include building assets in savings or taxable accounts, planning to withdraw Roth IRA contributions, completing a Roth conversion ladder, or planning to pay early withdrawal penalties to a retirement account. ”
A financial advisor can help you decide on the best approach.
invest in your own time frame
Additionally, the way a portfolio is invested will look different for someone who retires later in life, Rittershuis said.
“Portfolios should be invested based on your time horizon, risk tolerance, and goals. Make sure your money is invested properly so that it lasts you well into retirement and supports your current lifestyle.” you need to,” she said.
It’s also a good idea to keep an emergency fund in a high-yield savings account, since you want to have the cash you need on hand before you retire to avoid losing value in the stock market.
Retirement of test out
Another strategy recommended by Rittershaus is to, if possible, “test your retirement savings before you take the plunge and see if your retirement budget is sufficient for your desired lifestyle.” is.
She suggested taking a long break from work and living like you envisioned your retirement.
“Move your retirement budget into your checking account each month and see if that amount is comfortable for you. You may discover important insights that change your retirement plans.”
Invest more money towards retirement
To achieve this early retirement goal, the middle class must:[a]i agree [putting] 15% to 20% of your income toward retirement. “Think of it as paying your future self first,” says True Tamplin, CFP and founder of Finance His Strategist.
Brandon Galici, CFP at Galici Financial, suggests that in order to put more of your income (25% recommended) toward retirement, you need to make sure you reduce debt and unnecessary items from your income. did. Spending.
“I use burn rate (annual expenses not including debt payments). [divided by] Annual gross income — Determine if your spending is healthy. If it’s too high, it becomes difficult to get the savings rate you need to retire early,” Garisi said.
For context, he explained that a burn rate of about 50% is normal for a middle-class income.
invest wisely
Tamplin also said it’s a good idea to invest in a mix of stocks, bonds and real estate, if you’re comfortable, for potential long-term growth.
“Higher returns often come with higher risks, so find a balance that fits your comfort zone.”
free up more cash
To save even more cash, Tamplin suggested tracking your spending and identifying areas to cut back on.
“Perhaps it’s your daily latte or an unused gym membership. Every little bit of savings adds up.”
You might also consider downsizing your lifestyle, he said.
“Think about a smaller house, cheaper rent, or cohabitation. Lower housing costs can free up more cash for your future self.”
Also, try to DIY as many things as possible.
“Learn basic home repairs, cook at home and find free entertainment,” he said. “Every penny saved is a penny towards early retirement.”
How do I know if I can retire early?
You can save as much as you want, but how do you know if you can retire early?
Rather than focusing on a specific number, Garisi said, consider the “total period ratio,” which is your net worth divided by your annual expenses.
“Every situation is different, but generally a total term of about 30 years is sufficient for retirement,” he said.
For example, if you want to retire at age 62, spend $70,000 a year, and have a net worth of $2 million, your total term would be 28.5 years, he said.
“This shows you have about 28 years worth of expenses with your current net worth. This is something you will need to monitor throughout your retirement to give you the peace of mind you desire.”
Everyone’s early retirement strategy is different, but if you’re on a middle-class salary, purposeful retirement increases your chances.
GOBankingRates Details
This article originally appeared on GOBankingRates.com: Retire Early with a Middle-Class Salary: Strategies for Secure Financial Independence
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