The following is part 1 of a guest post from Precious of Frugal Makes Cents
My husband and I retired early because we made a plan when we were married at the ages of 19 and 20, and we stuck to it no matter what it took. We treated our retirement plan as a bill that needed to be paid month after month after month. Everything that we did in our financial lives was planned around early retirement and being ready at the ages we wanted to do it. We did not want to not be able to retire early or worst yet live in poverty in that retirement.
I have heard from so many people over the years that we will plan for retirement later. Most of them today are not retired because tomorrow never came, at least the planning part. The retirement age did creep up on them and now they are surprised because they do not have the funds to retire, or worse yet, they are too old or unhealthy to work. They always felt spending for today was more important than saving for tomorrow. So, they spent every cent they ever made, have nothing saved now that they have reached retirement age, and hope to be able to live on Social Security. That is not a plan in my estimation, it is suicide.
I am here to tell you that you can plan for retirement and still enjoy your life along the way. DH and I provided everything we felt our children needed along the way – private Junior High and High School, College Educations and they belonged to the sports teams. They went on just about every private school trip for weeks at a time to Florida, VA, and Washington DC. We also went on family vacations where we rented camps for a few weeks in the summer when they were little and we even put in an in ground pool for them to enjoy. They lacked for nothing and we all had a great family life. You can too with some planning.
The following are the most important things that you should do to plan for early retirement all of which we have done:
1. Always save or invest 10 -20% of your gross pay in a retirement plan, whether that be a 401K or any other retirement vehicle. As you approach 40 or 50 or whenever your children are off to college or out on their own, you should be able to ratchet that amount up to 40-60%, as you will find that children are expensive and you will have a lot more money when they have left the nest. Take advantage of that extra and invest it. If you start saving at a young age, you will be amazed at the power of compound interest and the amount you can make in the stock market year after year. I realize the economy is bad right now, but if you have more than 10 years before you retire, your money belongs in the stock market. It will eventually recover and there are some great bargains out there right now.
2. Save a certain percentage – 5% to 10% for each child for college costs. Advise your children from the time they are young to study hard and they will be able to pay some of those college costs with scholarship money. There is nothing better than FREE money for college. This is important because as you are getting closer to retirement age, you do not want to have to forfeit your savings plan to pay for their college costs. Our children paid for college with money from us, college scholarships, and they worked part time jobs while they were going to college. One went to a State College and one went to a very prestigious(think expensive) Private College. If you plan ahead it can be done.
3. Weigh the benefits of different job prospects carefully. Some jobs have much better retirement plans via 401K’s than others. Some match a certain percentage of money that you put into it. That would be the kind of 401K that you want to be in. So always look at the benefits that a company offers before you make a job choice or change. Over the years I have seen so many people become angry over the fact that their retirement plan is not as good as someone else’s. They forget that they made their own choices in life as to what job they work. So in retirement, if they are not happy with how much they received, they have to realize that they made their own choices. They could have made the same choices as the person with the better plan but they didn’t!
4. Never ever turn down a chance for advancement in your job! I feel like I need to repeat that! The farther you advance, the more money you will make, and that is another key to early retirement. I have seen people turn down promotions and then wonder why they were never offered one again. This is especially important when you have the opportunity to take a position with another company. If that company finds out that you would not take a promotion, it will kill your chances for that position. I don’t know about you but we wanted to make the most amount of money during our working years that we were capable of without sacrificing our family life. That should be your goal also!
5. I believe in home ownership rather than paying for rent. I would much rather invest my money in a home that will appreciate in the long run than pay rent to a landlord month after month. I realize home prices are down now but they will appreciate again. History has shown us that. However, I believe that you should buy a home with a large down payment, one that you can afford, and pay it off as soon as possible. We have paid 3 homes off in our lifetime. The first in 8 years, the second one in 16 years and our retirement home, which we live in now, was paid off 22 months after we purchased it. I have heard over the years by many so-called experts to never pay your mortgage off early because of the tax deduction. That is the most ridiculous thing that I have ever heard. Let’s say you pay out $10,000 in mortgage payments in a calendar year at 6% interest. You pay $600 in interest. If you are in a 25% tax bracket your actual deduction from taxes is only $ 150. I can’t figure out how you are ahead if you pay $600 and only get $150 back. I suppose it could be worth it if you could make more than 6% in interest on your money consistently over 30 years. But I would bet that the people who are not paying off their mortgages early are not investing that money every month. The best thing you can do for yourself is to pay that mortgage off as fast as you can. That way, if you have a job loss because of layoffs or illness you don’t have to worry about making that mortgage payment. But the biggest reason to pay it off is so that you will be totally debt free in retirement!
6. Speaking of home ownership, we have always paid our own property and school taxes directly to the county and school. I would much rather earn 4-6% interest on that money all year than the measly 2% the escrow accounts set up by the bank would have paid us.
7. We started building an emergency fund of 6-8 months of salary set aside in case of a job loss or loss of work because of illness from the first week of marriage.
To be continued…Such great information! If you have questions about any of the information Precious provided for us in this part of the series, please leave a comment here or visit her at her blog, Frugal Makes Cents. Come back tomorrow for Part 2!