Many people dream of leaving their job and making the decision to retire early.
Personal finance advisor Dave Ramsey says it's possible, and people considering this dramatic move should evaluate a few factors, including their mortgage payments, and develop a plan.
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Because Medicare benefits are available at age 65, early retirement generally means retiring before you reach that age.
But many people expect to retire at much younger ages. To do this, it is essential to have a plan that involves low expenses, getting rid of debt and focusing on savings and investment.
Ramsey believes the first thing to do when planning for early retirement is to have a good understanding of your specific goals.
The type of lifestyle you want to live will determine the size of the budget you will need to plan.
To understand specifically what this means, Ramsey suggests creating a mock retirement budget that sets spending guidelines on a monthly basis.
Dave Ramsey Says A Mock Retirement Budget Doesn't Include Mortgage Payment
Ramsey lists a number of items to include an expected financial total in a monthly budget, such as utilities, insurance, medical costs, food, phone, Internet, gas and entertainment.
But that list, notably, does not include mortgage payments.
“That's because you want to pay off the mortgage (and any other debt) before you retire,” Ramsey. wrote. “Debt will destroy your plans to retire early. It will eat into your monthly income and deplete your retirement savings.”
The next step is to evaluate your current financial situation, Ramsey explained.
He compares it to planning a long road trip in that knowing the destination isn't the only consideration. A person needs to know exactly where they are starting from and how far they should go.
In addition to paying off your home early so that mortgage payments are no longer a factor, Ramsey says there are a few other important things to consider.
One is to find ways to reduce your retirement budget, which means living on a smaller amount of money per month over time. This means progressively cutting back on expensive hobbies like traveling.
Another is to increase your income during your working years by finding additional employment.
“Let's say you get a part-time job that makes you an extra $1,000 a month,” Ramsey wrote. “If you invested that extra income in good growth stock mutual funds month after month, year after year, that could add hundreds of thousands of dollars to your retirement.”
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Dave Ramsey Suggests Another Key to Early Retirement
Ramsey explained another tool that can be used when planning for early retirement: a bridge account.
This refers to creating a taxable investment account in order to bridge the gap between your early retirement and when you can start withdrawing money from your retirement accounts without penalty.
Ramsey believes mutual funds are best when invested in a bridge account.
Another investment option is real estate, Ramsey wrote, but he mentions some rules to follow.
One is to make sure you've paid for your own home before investing in any other real estate. Getting rid of the mortgage payment on the house she lives in is a must before purchasing another property.
Ramsey also says you should pay for other real estate in cash and it's important to hire a real estate agent to help you.
“This is one of the biggest investments you will ever make, so having a professional on your side is the way to go,” he wrote.
Another big consideration is being prepared to make serious lifestyle changes that involve sacrifices.
These may involve taking less expensive vacations, cutting grocery budgets, and looking for ways to save on clothing, entertainment, dining out, and subscription services like video streaming.
Finally, Ramsey suggests thinking about where you want to live in retirement.
Moving is an expense in itself. Therefore, considerations such as cost of living and whether it is important to be close to family become important.
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