The key to retiring early is putting the right plans and strategies in place. Making the wrong moves or decisions can jeopardize your goal and force you to stay in the workforce longer than you prefer. To secure your future and ensure that you can enter retirement right on schedule, there are certain financial mistakes you’ll want to avoid making along the way.
1. Not accounting for inflation
If you don’t factor inflation into your retirement plans, you might wake up in 10, 15, or 30 years and realize you don’t have enough to retire early because the cost of living has gone up, Investopedia notes. That means the money you have won’t last you through your later years. Make sure you’re investing in assets with long-term growth potential that’ll outperform inflation.
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2. Overestimating your financial standing
You need to be realistic about the state of your current and future finances. Inflating the value of your assets or overestimating the potential returns on investments can result in you retiring much later than you wish. Being honest about how much you have and managing your expectations will allow you to develop an achievable savings and investment plan that correlates with your desired retirement lifestyle.
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3. Banking on factors beyond your control
When planning for early retirement, base your projections based on the money and assets you currently have, not some imaginary wealth that you’re hoping to cash in on. Don’t hinge your dreams on some future inheritance you were promised or returns on an investment that’s yet to materialize. This will help you avoid disappointment if things don’t pan out as you expected.
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4. Starting the process late
Ideally, you should start saving for retirement in your 20s, especially if you want to kick off that phase of your life earlier than usual. This allows your savings and investments to yield more returns for you over time. Waiting until your 30s, 40s, or 50s can crimp your plans and force you to keep working for longer. However, it’s better late than ever. With the right strategies, you can still catch up and stash enough money away before it’s time to retire.
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5. Making bad investment decisions
Sometimes, it can feel like you’re rushing to make as much money as you can because time is running out. This panic can lead to you making poor investment decisions that result in significant losses and frustrate your dreams of early retirement. Be smart about what you invest in. Get advice from a financial advisor and always do your research. Remember, if something seems off or too good to be true, it probably is.
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6. Living beyond your means
Spending more than necessary in your younger years can negatively impact your retirement plans because it might prevent you from saving enough to opt out of the workforce early. A common strategy for managing your living expenses and limiting excessive spending is the 50/30/20 rule, Forbes explains. This means that 50% of your income should go to serving necessary bills like rent and groceries, 30% for discretionary spending like shopping or entertainment, and 20% goes straight to savings and investments.
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7. Withdrawing retirement funds when switching companies
Cashing out your retirement plan when you change jobs can deal a massive blow to your early retirement plans. It’s considered a premature withdrawal if you haven’t hit the minimum age requirement of 59 1⁄2, so you’ll have to pay high taxes and lose out on the benefits of long-term tax-free or deferred growth on your funds. The wise thing to do is roll over your funds into an individual retirement account (IRA) or your new company’s employee retirement plan.
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8. Borrowing from your 401(k)
When you’re struggling financially, it’s easy to treat your retirement savings as a bailout fund that you can withdraw from and pay back when you’re in a better position. Don’t give in to that temptation. Money taken out of your retirement account is money that’s not compounding interest. Even if you pay it back quickly, you’d still have lost a hefty amount to taxes, penalties, and missed gains.
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9. Failing to plan for emergencies
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As you’re saving towards retirement, you should also be putting money aside in a special fund for emergencies. This way, if unplanned expenses like extensive home repairs or medical bills come along, you can take care of them without tapping into your retirement account. So you can still leave the workforce when you plan to.
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10. Not diversifying your portfolio
One costly financial mistake you can make in retirement planning is putting all your eggs in one basket. It puts you at risk of losing all your investments in one swoop. The best strategy is to distribute the risk by investing in different asset categories like bonds, stocks, and cash. So, even if one asset fluctuates, your portfolio can keep growing and cushion the effects until the asset bounces back.
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11. Overreacting to volatility
The financial markets are constantly shifting. You have to make peace with that and learn when to stay after a downturn, waiting for it to rebound, or when to cut your losses and sell before your entire investment evaporates. Overreacting by pulling all of your money too soon can cost you a lot in potential earnings. It’s usually wise to rely on a financial advisor to manage your finances and investments if you’re not equipped to deal with market volatility on your own.
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12. Failing to review your plan regularly
Your retirement fund is not something you set up once and forget about until it’s time to make contributions or cash out. It’s important to revisit your plan regularly and adjust your strategy based on market shifts, changes in income, current life stage, or other significant events. By regularly optimizing your plan, you can stay on track to reach retirement goals.
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13. Falling for scams
Fraud is a booming business. People are constantly cooking up schemes to get others to part with their money for nothing in return. Falling for a scam can easily derail your entire financial and retirement trajectory. Before you hand over a significant sum of money to a person or for a business venture, get second and third opinions. Stay up to date on the tactics that scammers use to steal funds so you don’t become another unsuspecting victim.
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14. Carrying a lot of debt
Letting your debt accumulate can hinder your early retirement plans, especially if the interest rates on those debts are high. Experian advises focusing on paying off high-interest debts, be it credit cards, school loans, mortgages, or personal loans as soon as you can before shifting your attention to the smaller ones. The earlier you get rid of outstanding debt, the freer your cash flow will be, and the more contributions you’ll be able to make to your retirement fund.
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15. Forgetting about taxes
Many people fail to consider tax implications when planning for retirement. The amount of taxes you’ll end up paying can eat into your nest egg and reduce how long it lasts. You’ll want to work with a financial advisor to leverage tax-efficient strategies to help you slash what you owe Uncle Sam and maximize your retirement savings.
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