This article takes a look at 20 strategies for financial freedom and retire early.
Employer Contributions and Pay Inequity in Retirement Plans
According to a recent study by Vanguard, employer contributions exacerbate pay inequity in nearly two-thirds of plans. In a study evaluating the match formulas of more than 1300 employer-sponsored retirement plans, it has been revealed that employer contributions are highly concentrated, with 44% of dollars directed towards the top 20% of earners. Since 40(k)s are the most popular type of retirement plan, there’s an increasing chance of inequity affecting the bottom 80% of workers. In fact, the Vanguard analysis reveals how the bottom 80% are receiving only 6% of their employer’s matching contributions.
Employer contributions were devised to encourage employees to save more, regardless of their income. However, 59% of contributions go to 41% of the employees saving more than the match cap, implying that they would have saved anyway. As of 2021, corporations provided a whopping $212 billion in matching contributions, or an estimated 60 cents for every dollar saved by workers. As the statistics imply, the bulk of these dollars are going to higher-income workers. Here is what the study notes:
“Employer contributions are a ripe target for innovation. They disproportionately accrue to those with higher incomes, White workers, those with more access to liquid wealth, and those with richer parents”.
Whether or not retirement plans are beneficial for employees, the need for retirement plans cannot be understated. As of 2023, close to 6 out of 10 workers, or 56.6% of workers, now have access to a 401(k) account. The recent US legislation can be partly attributable to the increase, specifically the 2019 SECURE Act and its 2022 successor, the SECURE Act 2.0. The said acts have been responsible for introducing incentives and measures to encourage employers to broaden their retirement plan offerings.
The 2024 Workplace Benefits Report from Bank of America Corporation (NYSE:BAC) reveals how saving for retirement is now at the top of the list of financial goals for today’s employees. The survey highlights how two-thirds of employees are now confident that their 401(k) will give them enough savings for retirement. However, with the recent Vanguard findings that reveal inequity on part of the average and low-income workers, it is advisable for policymakers to do more in order to promote equity and allow workers across all income groups to adequately save for retirement.
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In a world of rising costs and fewer savings, there are plenty of individuals who wish to leave the corporate rat-race as soon as possible. In essence, they wish to understand how to achieve financial freedom and retire early. While there are plenty of strategies to implement, one answer in a nutshell is called the FIRE (Financial Independence, Retire Early) Movement. This lifestyle movement emphasizes on saving and investing aggressively in order to achieve financial independence and retire early. While following the FIRE way is not for everyone, saving up for financial freedom in order to retire early isn’t entirely an impossible move.
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Methodology
To compile the list of 20 strategies for financial freedom and retire early, we began by compiling a list of strategies from top financial institutions and websites. Employing a consensus approach, we listed out the top 20 strategies that were suggested the most.
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Here are the strategies for financial freedom and retiring early:
20. Run the numbers
According to T. Rowe Price, your likelihood of an early retirement starts with evaluating your current savings rate and spending levels. Using online retirement income calculators is a good start, allowing individuals to assess their likelihood of early retirement based on their current planning levels. By accounting for factors such as current levels of saving, life expectancy, and expected retirement age, retirement calculators allow individuals to make informed goals about investing, saving, and spending habits.
19. Clearly Define Your Financial Goals
Once an individual has assessed where they currently stand, it’s time for them to clearly define their financial goals. Start by setting specific, measurable, achievable, relevant, and time-bound (SMART) goals. For instance, “I want to retire early” is a vague goal. However, “I want to retire by the age of 50” is specific. SMART goals can help individuals formulate a targeted plan that includes timelines, money goals, and tangible benchmarks. The FIRE movement states that an individual needs to build up a net worth of 25 times their estimated annual expenses and spending to achieve financial independence.
18. Create a Detailed Plan
Creating a detailed plan outlining how one will go about achieving one’s goals will take them to the next step towards financial freedom and early retirement. From setting timelines to allocating resources, there is plenty to cover in this detailed plan. Individuals should make sure to include a detailed budget that reduces unnecessary expenses and creates some savings after accounting for all necessary expenses. The FIRE movement prioritizes saving and investing 50 to 70% of income, if not more.
17. Financial Education
Financial education has a huge impact on the quality of retirement and the decisions that one makes towards it. Therefore, one strategy for financial freedom and early retirement is being financially literate. According to data from the 2022 TIAA Institute P-Fin Index, retirees with high financial literacy were “more likely to plan and save for retirement” than those who were not. Having longevity knowledge is another prerequisite as appropriate decision-making related to retirement is contingent upon understanding how long a retirement can last.
16. Minimize Debt
Building up savings is important, but so is clearing off debt. This is because debt interests may far outstrip the interest on savings that you may earn. Charles Schwab recommends prioritizing debts instead of trying to pay them all at once. Credit card debts should be a first priority, with a primary focus on high-interest debt. One may make minimum payments on the rest, if possible. Be careful of loan consolidation offers as many of them have upfront fees and hidden costs. Also, minimizing debt and saving for retirement can be done together. The way is to save enough in your retirement account to leverage the entire employer match, pay off high-interest debt, create emergency funds, and then save some more for retirement.
15. Pay Off Mortgage
Individuals who can afford to make overpayments on their mortgage should take the first chance they get to make them. This way, they can pay off their mortgage sooner, and also pay less. However, deciding whether to pay off the mortgage should be done after considering factors such as tax deductibility, interest rates, and personal peace of mind. Charles Schwab recommends that individuals may refinance their mortgage to a lower, fixed rate (if they have a high-interest mortgage or adjustable mortgage) or make additional annual payments to cut dollars off their debt and time off their mortgage.
14. Live Frugally
One of the main strategies for financial freedom and early retirement is to live frugally. Extremely frugally, to be exact. The FIRE movement emphasizes saving as much as 70% of your income, being incredibly disciplined, and making huge sacrifices while you are young. Avoid buying luxury items, skip the takeaway coffee and sandwich routine, and save money in any and every way possible. Eat at home and avoid dining out, embrace a DIY attitude with home repairs, purchase second-hand items, cancel unused memberships, and adopt a frugal mindset.
13. Generate Passive Income
There’s no such thing as having too much money, especially when it comes to retirement. Generating passive income usually entails identifying your unique skillset and putting it to use. The more skills or interests one has, the more opportunities they have to create something that will help generate passive income. Examples include creating a course, writing niche-specific content, graphic designing, and much more.
12. Have an Emergency Fund
Another strategy for financial freedom and retiring early is having a readily available emergency fund. Those who don’t have an emergency fund at their disposal are more prone to what are known as “financial shocks”. They also keep individuals from dipping into their retirement funds in case there is an emergency. According to Vanguard, a record-high 3.6% of workers took hardship withdrawals from their 401(k)s in 2023.
11. Retirement Accounts
Retirement accounts play a crucial role in helping achieve financial freedom and retiring early through the provision of tax-advantaged growth and compounding returns. Individuals should contribute to such accounts and take advantage of employer matching programs. However, these types of retirement accounts have taxes and penalties on early withdrawals, so careful planning is needed to optimize benefits from them. For those planning to access their money before 59 ½ years, regular taxable investment accounts are better than retirement accounts.
10. Automate Savings
By automating savings, such as setting up automatic transfers from a current account to a retirement or a savings account, individuals can ensure consistent contributions without having to remember to do it manually.
9. Take Care of your Health
Many individuals underestimate the role of their health in saving up for retirement. Maintaining a healthy lifestyle can help individuals avoid chronic diseases which account for a significant portion of healthcare costs. Those individuals who are healthier tend to have fewer sick days and higher levels of productivity, increasing their chances of financial freedom and retiring early.
8. Consider a Finance Professional
Financial advisors and wealth managers have a crucial role in helping individuals achieve financial freedom and retire early. They can help devise and fine-tune your strategy, help understand options and trade-offs, and also help in assessing which actions are going to have the maximum impact on savings and investments. All in all, they are the exact push of confidence one needs to help retire early.
7. Maximize Tax advantages
On the journey towards wealth accumulation and financial freedom, paying unnecessary taxes can prove to be a major obstacle. One way of ensuring tax efficiency is through maximizing tax advantages. Using tax-advantaged accounts such as IRAs, 401(k)s, or their equivalents will help minimize current tax liabilities as well as maximize investment growth.
6. Real Estate Investments
Another strategy for financial freedom and early retirement is through real estate investments. Investing in real estate can be a good way to reap several key advantages. For instance, rental income provides individuals with a consistent cash flow stream, and rental properties may appreciate in value over time and also offer tax benefits.
5. Build a Network
Just like networking is vital during your career, it is equally important to build a network when saving up for retirement. To achieve early retirement, a strong network can help individuals by expanding their professional connections and helping them gain valuable information, mentors, and even potential collaborators who can accelerate their journey toward financial freedom. Individuals can also leverage potential investment opportunities to enhance financial planning and wealth accumulation.