With the right strategies, you can reach the retirement "finish line" years ahead of schedule.
Early retirement is an excellent goal, but many people have no idea how to make it happen. Fortunately, there are plenty of tools at your disposal that can speed up the process, and these range from the relatively obvious (saving more money) to more complicated tricks such as using a health spending account to save for retirement. With that in mind, here are five suggestions from our experts that can help you accelerate your retirement.
Selena MaranjianArguably the most effective way to accelerate your retirement is to save more aggressively. That may seem obvious, but check out the table below to get an idea of just how powerful this strategy can be. It compares how your money grows over time if you save $8,000 versus $12,000 every year. It also assumes that you park that money in an inexpensive broad-market index fund such as an S&P 500-based ETF and that you earn the stock market's long-term annual average growth rate of close to 10%.
Keep in mind that you only have so much control over your savings' growth. You get to decide how much you will invest and where you will invest it -- such as in stocks, which have historically outperformed bonds over long periods of time. But you can't know how for sure how your investments will perform, especially over short periods of time. A return of 10% is a reasonable expectation, but you may end up averaging closer to 7% or 8% -- which is still a respectable return.
Therefore it's smart to plan conservatively, save aggressively, and have contingency plans, such as delaying retirement a bit longer. If the market has some good years, though, you may end up retiring even earlier than you had hoped!
In my opinion, health savings accounts, or HSAs, are the most underappreciated vehicles for retirement savings.Ostensibly, HSAs are designed to help you pay for large medical expenditures. To have an HSA, you need to have a qualifying health-insurance plan with a large enough deductible. With an HSA, your benefits don't disappear on Jan. 1 every year, as they do with flex-spending plans.
But viewed in a different light, HSAs are the ultimate retirement vehicle. The money you put in one is tax-deductible, it grows tax-free, and you aren't taxed when you take the money out -- provided you use it to reimburse yourself for a qualified medical expense.
But imagine this scenario. You undergo a $500 procedure in year one and pay for it out of pocket, saving the receipt for later. In year 15, you decide you need that money. You can pull out the $500 tax-free, saying it's for the dental procedure -- but your money has gotten 15 years to grow as well.For many, this strategy can significantly mitigate worries about medical expenses in retirement.
Matt FrankelBeing able to retire is all about having enough money to cover your post-retirement living expenses. So one of the best ways to accelerate your retirement is to pay off your debts, which will eliminate some bills and make it easier for you to retire.
Many experts say you should plan to replace about 80% of your pre-retirement salary in order to maintain your lifestyle in retirement. This is a good guideline for most workers, as it assumes that, although your expenses will be reduced somewhat (for example, you'll no longer be saving for retirement or commuting every day), they will largely stay the same.
But if you accelerate your debt repayment and pay off your home and car, you can retire on much less money. For a simplified example, consider a couple that earns $5,000 per month combined. Using the "80% rule," we can assume this couple will need about $4,000 per month to live on in retirement. However, if we assume this couple has a $1,000 mortgage payment and car payments totaling $700, paying off these debts in full before retirement means they'll need $1,700 less in monthly post-retirement income.
As I pointed out in another recent article, this can make the difference between needing 80% of your pre-retirement income and needing less than half of it. Based on the popular "4% rule" of retirement, if you make $75,000 per year and expect $25,000 per year from Social Security or pensions once you retire, this could make the difference between a nest egg of $875,000 and just $312,500. A dramatically lower savings requirement could move your retirement date forward by several years.
Sean WilliamsThe simplest way I can think of to accelerate your retirement is to reinvest your dividends.
Most investors understand that dividend stocks form the backbone of many retirement portfolios. Dividend-paying companies typically have strong and consistent cash flow, as well as mature business models. In short, they're built to survive normal economic downturns with minimal problems and are thus some of the best stocks to hold over the long run.
But there's a big difference between simply pocketing a dividend payment and reinvesting that dividend payment back into shares of the same stock.
As an example, let's just pretend that the fictitious John Q. Investor and Jane Q. Reinvestor both bought roughly $10,000 worth of Johnson & Johnson stock at age 30. Johnson & Johnson shares are around $100 each and yield about 3%, and the company historically boosts its dividend by nearly 10% per year. For our example, let's assume its payout grows 5% annually (probably a fair long-term estimate), its stock price grows an average of 8% per year, and both John and Jane expect to retire in 37 years at age 67.
Upon retirement, John Q. Investor still has his original 100 shares of J&J stock, he's collected about $32,000 in dividends, and his overall investment is worth roughly $204,500. Not too shabby.
However, Jane Q. Reinvestor's initial 100-share position is now 196 shares thanks to her dividend reinvestment. She's collected $21,300 more in dividends than John, and the total value of her holding when she reaches retirement is $338,000! That's only an annualized return difference of 1.48%, but it shows how much dividend reinvestment can boost returns.
Jordan WathenAs retirement plans have grown more simple, they have inadvertently become more dangerous as well. Many retirement plans now offer easy, set-and-forget asset-allocation strategies that make investing as easy as picking from "conservative," "moderate," and "aggressive" funds.
Over the long run, one would expect the "aggressive" funds to outperform the "conservative" funds, if only because aggressive funds have a greater proportion of their capital invested in stocks, whereas conservative funds tend to favor lower-return bonds.
And while I don't suggest that you invest as aggressively as possible without any paying any attention to your retirement timeline (you can and should take more risks when you're further from retirement), I do suggest that investors who use these funds think twice about which style they choose. It isn't really as simple as picking an investment that fits your risk tolerance. It's also about picking something that matches a return profile that you need to reach your goals. The more conservative your allocation, the more likely it becomes that you'll need to save more or retire later than someone who has invested more aggressively.
Studies show that younger investors are turning away from stocks out of fear for their risk. But too often these same investors ignore the serious risk that they will not accumulate enough money to retire in comfort and security. Younger investors who favor conservative investments may be pushing their retirement date further back without even knowing it.
The article 5 Ways to Accelerate Your Retirement originally appeared on Fool.com.
Brian Stoffel has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. Matthew Frankel has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. Selena Maranjian owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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