Achieving the goal of not working for money before 50 takes dedication, disciplined financial habits, and smart decision-making. Unfortunately, too many folks who think they’re on the path to early retirement actually slow their plans by engaging in certain behaviors. They don’t realize it, of course, because these habits are very common and seem harmless. But they aren’t harmless, and they definitely aren’t harmless to your retirement plans.
1. Stop Spending More When You Earn More
The tendency to increase spending as income rises is a major barrier to early retirement and has a fancy name: lifestyle inflation. Research shows that individuals who spend moderately regardless of income build wealth significantly faster (Friedline & West, 2016).
Why Income Matters: More money coming in should mainly feed the accounts that slowly accumulate wealth—savings and investments, which, after a certain amount of time, turn in enough returns to let you retire. If you use this boosted income to step up your spending—rather than take it as an opportunity to put more into your wealth-accumulating accounts—that’s a dangerous way to live.
What to Do: Set up automatic transfers into retirement accounts at a fixed percentage of your income, and behave as if any pay increase is a chance to increase the amount you’re saving—not a chance to increase your spending.
2. Stop Ignoring Compound Interest
The “eighth wonder of the world” is compound interest, growing your investments exponentially over time (Einstein, attributed). Yet many delay investing and make minimal contributions, missing out on powerful growth.
Why It Matters: You compound your wealth if you invest as early and as consistently as you can, and the only way to beat compounding is to not do it.
How to Fix: Contribute to all available tax-advantaged accounts up to the maximum limit, including 401(k)s and IRAs. Invest in low-cost, broadly-diversified index funds. Do this as a regular practice, starting now. Even if the amounts you can contribute seem small in relation to your goals, do not defer investing until some hypothetical time in the future when you can put in a larger sum.
3. Stop Accumulating High-Interest Debt
High-interest debt like credit cards stifles financial progress by gobbling up cash that could be used for investments. The rates of interest charged on debts usually exceed the rates of return on investments, making paying off debts the most unfunded, high-return “investment” you can make (Hastings, Neilson, & Zimmerman, 2013).
What Matters: Saving for retirement while carrying debt creates a double financial whammy.
What you can do: Pay off your high-interest debt before you focus on growing your investments. This is what you can do, and it’s a classic investment mistake that we see all the time.
4. Stop Neglecting a Budget
It is very easy to lose control of your financial situation when you don’t keep track of how much money is coming in and going out. When you live without an awareness of your income and expenses, it’s like being in a fog and hoping that you somehow emerge unscathed. You don’t see any of the signs that might help you figure out where and how you’ve gone off course, and you’re unable to make any of the types of course corrections that might get you back on a path toward financial wellness. Budgeting, then, is a critical first step.
This Is Why It Matters: When you save more, you can invest more, and that very simple equation is the reason that saving rates tend to be inversely related to how far away someone is from retirement. The closer you get to retirement, the more you need to save, and the more you usually want to save. And then, after you save, you want to invest. Here, too, simplicity is the soul of efficiency:
Ways to Fix: Employ straightforward budgeting techniques such as the 50/30/20 rule or zero-based budgeting and assess your progress each month.
5. Stop Underestimating Healthcare and Emergencies
Healthcare costs and emergencies can quickly erode savings, and many early retirees fail to account for these expenses in their retirement planning. Ensuring one has enough savings to cover these uncertainties is essential to avoid significant retirement setbacks (Friedline & West, 2016).
What You Need to Know: Expenses that arise unexpectedly can push early retirees to return to paid work or to dip more deeply into their retirement savings—neither of which might work out well or as planned.
Corrective Measures: Create a substantial emergency fund, investigate health insurance choices for those retiring before age 65, and look into insurance solutions designed for people without Medicare.
Conclusion
To retire before age 50 takes more than just earning and saving. It requires not doing several counterproductive things. If you can manage to do these five things, you will be on a much stronger path toward achieving an early retirement:
1. LIVING SMALL
2. USING COMPOUND INTEREST TO YOUR ADVANTAGE
3. PAYING OFF HIGH-INTEREST DEBT
4. STICKING TO A BUDGET
5. BEING INSURED AND COVERING YOUR ASSET
References
- Einstein (attributed). Compound Interest Quotes.
- Friedline, T., & West, S. (2016). Budgeting practices and financial well-being: A behavioral finance perspective. Journal of Family and Economic Issues.
- Hastings, J.S., Neilson, C.A., & Zimmerman, S.D. (2013). Financial Literacy, Financial Education, and Economic Outcomes. Annual Review of Economics.
- Lusardi, A. (2019). Financial literacy and financial resilience: Evidence and implications for financial education. Journal of Pension Economics and Finance.