Slash household costs
Renegotiating auto insurance rates, cellphone service, electricity and other necessities can save you a significant amount of money each month. “By just reducing 15 percent of household expenses, the average household could save about $3,700 a year,” according to Repak. Here are some other ways to cut down on major expenses:
— Look for car insurance with adequate coverage but no personal injury coverage that overlaps your health insurance, or collision coverage on a lower-value car.
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— Deregulation of the electricity market has resulted in some states allowing residents to choose their energy suppliers, where savings of 10–15 percent have become normal.
— Reduce your TV bill by switching from high-priced cable service to antenna TV paired with a low-cost streaming service such as Netflix, Hulu or Sling.
Know what you’ve got
If you don’t know where your money is going, you’ll have a tough time making the key changes needed to retire debt-free. So take an objective and thorough look at your finances, said Aaron Hatch, a certified financial planner and co-founder of Woven Capital in Redding, Calif., a fee-only financial planning and investment management firm.
“Get real honest with yourself about your finances,” he said. “Pretend you are a business and look at your finances as objectively as possible.”
Hatch said you should create a personal balance sheet and document your cash flow. Your balance sheet is simply your assets compared to your debt, or liabilities. Cash flow is a better term for a budget. At this stage, you want to know where your money is coming from, which is probably easy to determine. You also want to know where your cash is going, which is more difficult. Plenty of free apps are available to help with this phase, including Mint and LearnVest.
Set goals that support your lifestyle
Retirement planning is about more than finances, and for many, lifestyle is just as important. “As with any financial and life decision, there are trade-offs that need to be considered,” Hatch said. “So, it’s good to start with what you value most.”
Your preferences will determine exactly how much money you need before you retire. For example, you could start by being honest with yourself and answering these questions:
— Do you love working, but just want more flexibility?
— Do you want a quiet life of gardening, or do you plan to travel full-time?
— How important is it to leave a legacy for your kids or community?
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According to Hatch, only after you honestly answer these questions in writing will it be possible to move forward with a plan to make retirement both fulfilling and fiscally sound.
Take care of credit card debt
Credit card debt is often the most expensive type of debt, so it makes sense to pay it down before tackling “good debts” such as your home mortgage or student loans. This is true even if you earn credit card rewards, because the high interest rates can eat up your rewards savings. Start paying more than the minimum balance on one card while continuing to pay the minimum on your others. You can put the extra money towards the highest-interest card first, and once that’s paid off, focus on paying off the others in descending order of interest rate. Alternatively, the “snowball” method — popularized by financial expert Dave Ramsey — recommends starting with the card with the lowest balance.
Do a trial run
Early retirement planning gives you plenty of time to test your income goals. These tests can be done by doing your math with a retirement calculator, or by living on your anticipated retirement income and tracking the results. Setting aside a chunk of your pay rather than spending the money gives you a real taste of what your retirement will be like. You’ll uncover any flaws in your plan and have time to adjust if needed.
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Delay retirement
Waiting until full retirement age gives you extra time to pay down debt and build savings so you can avoid debt in the future. You also benefit by qualifying for your full Social Security benefits or increasing your benefit. For example, individuals born in 1943 or later earn an extra 2/3 of a percent for each month they delay collecting beyond full retirement age. In total, that’s an 8 percent increase for each year they delay.
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