HOW TO RETIRE EARLY, part 2

Small saving moves now can significantly impact early retirement outcomes.

A large influx of funds—an annual bonus, inheritance or capital gains from a property sale—can move the early retirement savings needle, but it’s everyday savings habits that can have the biggest impact. That’s because consistent small savings and debt repayment actions often create forward-moving momentum while building net worth over time.

We developed this three-part series to help guide you through the decisions that can lead to successful early retirement planning. Part 1 included tips such as:

• Run numbers through a retirement planning calculator for specific planning targets.
• Plan to eliminate or decrease your monthly expenses as much as possible.
• Count on the advice of a well-trusted financial professional who can help you meet your financial planning goals—while also developing a finely tuned savings strategy to get there.

This second installment includes the smart savings and debt reduction moves you can make to kick-start your early retirement savings habits, so you’ll find yourself financially prepared to build a hobby, launch a new career, travel the country—or check off whatever must-do items you have compiled on your bucket list.

First, build an emergency cash cushion to buffer against unexpected goal busters

An emergency savings account can help decrease the chance you’ll raid your long-term savings to pay for an unexpected car repair, leaky roof or visit to the emergency room—all of which can set back your retirement savings progress.

How much should you stash away for a potential emergency? Experts suggest anywhere between three months and one year’s worth of living expenses, depending on your current outflows, job stability and how well you tolerate risk. You may want to keep these funds tucked away in a low-risk, easy-to-access account like a savings, checking or money market account.

Then, identify expense-busting opportunities wherever possible

The more you save, the faster you’ll reach your early retirement finish line. Making a few, small changes to your current spending can really add up over time. Not sure where you can trim a little financial fat? Track your spending for a few months. At least six months is ideal, but even two months can help you identify where you can cut spending.

Look for the easy wins first: unused subscriptions, unwatched streaming services, unnecessary in-app purchases. Once you have a few wins under your belt, dive deeper if needed, and make any additional changes as you’re able.

Sorting your must-haves (or really-want-to-haves!) from your not-so-necessaries is part of the process. Wherever possible, reserve spending for what you find meaningful—and cut in areas that are not.

Next, start paying down (and then off!) as many bills as possible

Spending is a large part of the early retirement equation. You can cut retirement costs by paying off as many recurring bills as possible—before you leave your nine-to-five. Here’s a possible strategy for debt reduction:

• Tackle high-interest debt like credit cards first. For example, by paying just the minimum monthly required at $108, it can take a staggering 56 months to pay down a $4,200 debt at a 16.24% interest rate—and you’ll end up paying an additional $1,803 in interest. In short, credit cards are one of the most destructive debts for an early retirement.
• Once you’ve paid off your plastic, attack any other interest-bearing debt such as car payments, medical bills and—usually last—your mortgage.
• Keep moving through debts—from the highest interest rate to the lowest—until you’ve paid off as many as you can before you retire.

Another debt-reduction tip that can seriously propel your progress: Once you pay off a bill, roll that payment forward to your next obligation. Keep up this strategy with each successive debt and soon you’ll be making progress toward paying off your last remaining bills.

Finally, save as aggressively as you can

A smart way to level up your savings strategy is to find what retirement plan options you can access. Take advantage of retirement plans offered through work such as a 403(b) and if they offer a match on contributions. If you’re self-employed, you can set up a plan of your own. Talk to your financial professional to find out which one is right for you. Retirement accounts have tax-advantaged benefits you won’t want to miss out on.

Once you’ve met your retirement plan contribution limits, you can set up automatic savings through a brokerage account. Your financial professional can help you decide which mutual funds, exchange-traded funds (ETFs) or other investments may be best for you. You may want to discuss an annuity as well, as part of your retirement savings strategy.

Later, build upon your strategy

At the start of your journey, it’s okay to start small—and build up from there. (Early retirement isn’t built in a day!) At the outset, just work on building your pay-down-debt and savings-boosting habits. Over time, you can work to build upon that foundation and make incremental progress toward increasing your debt payments and savings contributions. You may be surprised by how far those small money moves can take you toward meeting your early retirement goal.