3 Ways to Retire Early

By Markets Fool.com

Retiring early may seem like an impossible goal, but it isn't. Each and every year, thousands of people leave the workforce earlier than they had anticipated thanks to smart planning during their working years.

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The truth is that there are three variables that govern how soon you can retire. Tweaking one or all of them can easily put you on the path to retiring years, if not decades, before your peers.

Below, three Foolish contributors have shared a tip for reaching retirement before you ever thought possible.

: If you're young (under 30), you're in luck. Getting an early start is the number one factor in building a large enough nest egg to retire early. Take a look at the math:

Let's say that you decide to save $5,500 per year in a Roth IRA -- the maximum amount allowed. This maximum will likely increase in the future, but let's assume you just put $5,500 into your account each year. We'll also assume that you want to keep things simple, and invest your money in a S&P 500 index fund, which has historically averaged a total return of about 9.5%. Take a look at how much you could have by age 55 depending on when you start.

If you start saving at this age...

You could end up with this much by 55...

35

$297,672

30

$501,853

27

$677,016

25

$823,281

22

$1,099,030

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Note: Calculations by author.

As you can see, if you want to retire early, the solution is simple: start early. Sure, there are other ways you can get ahead, such as increasing your rate of savings and maximizing your returns, as Jordan and Dan will discuss, but as an investor, time is the most powerful ally you have.

Dan Caplinger: One often overlooked way to retire earlier is to be smarter about your investments. It's great to save more money and do it earlier in your career, but the power of compound interest is much stronger when you boost your average annual returns.

For instance, if you earn 5% returns annually for 30 years, every $1 you save will turn into a bit more than $4. But if you double your returns to 10%, your savings won't just double -- it goes up to $17, showing the exponential power of improved investment performance.

Producing those higher returns takes some effort, but using a smart asset allocation strategy will prevent you from keeping too much of your money tied up in conservative investments with low returns. For instance, with most savings accounts paying less than 1%, keeping money there won't even keep up with the low rates of inflation we've seen in recent years, let alone give you solid growth for retirement.

That's not to say that you should put everything into high-risk, high-return stocks. However, making at least a small boost to your allocation to stocks and other higher-return investment vehicles gives you a better chance of making your portfolio grow large enough to consider early retirement.

Jordan Wathen: There aren't very many variables in the equation of early retirement. But it's my view that the single greatest variable is how much you save as a percentage of your income.

Extreme saving has been popularized by the likes of early retirement bloggers likeMr. Money Mustache. He's popularized the view that extreme savings is the single easiest way to decrease your time to retirement. The figures below are adapted from his analysis of retirement timelines.

Savings rate

Years to retirement

5%

66 years

25%

32 years

50%

17 years

Source: Mr. Money Mustache

Importantly, these figures exclude Social Security and other transfer payments, and use conservative returns of 5% above inflation. You can take issue with the assumptions, but the premise remains the same: Each increase in your savings rate dramatically decreases the time to retirement. If you include things like Social Security, the number of years to retirement by savings rate will be substantially lower (though it will vary based on your current age).

The reason for this mathematical reality is simple: Saving more results in a faster-growing nest egg, while at the same time it reduces your expenses so that you need a smaller amount of savings to sustain your annual spending.

The article 3 Ways to Retire Early originally appeared on Fool.com.