Save Early into Your 401k and You Can Retire Early

Save Early into Your 401k and You Can Retire Early

A wealthy friend gave me some great advice the day he retired, and this is what he had to say. “Save early into your 401k, and you can retire early.” I was 22 years old at the time, and I am here to tell you the power of compounding interest is a wonderful thing.

I will admit, I do not invest directly in the stock market so I can’t tell you what stocks to buy. But I do believe in mutual funds, and I did listen to my friend’s advice, so I saved early into my 401k. And because I listened to him, soon I will be retiring at an early age of 53 or 54. I cannot stress this enough…instead of buying a fancy car and living beyond your means – put as much money as you can into your 401k at an early age, and keep at it for 20 to 30 years, and you can also retire early.

The Power of Compounding Interest
I’m excited about compounding interest, and here’s why. Let’s say you contribute $3000 a year into your 401k at the early age of 25, and then you suddenly stop saving 10 years later – and I mean completely stop. By the time you reach 65, your $30,000 contribution will have grown to more than $470,000, (assuming an 8% annual return), even though you didn’t add a cent of your own money beyond the age of 35.

In a different scenario, let’s say you don’t start saving at the age of 25, and instead put off investing until you reach 35. You still save $3,000 a year. To make up for investing later in life, you decide to save for 30 years instead of 10. As a result you saved more money out of your own pocket, but you started late. By the time you reach 65, your money will have only grown to about $360,000, assuming the same 8% annual return. That’s a big difference of $110,000 that your nest egg missed out on if you would have started saving 10 years earlier.

The Secret to Retiring Early is Learning to Control Your Spending
Learning to live on less money is a sure fire way to the path of an early retirement. When I find I need a new car, I buy a slightly used vehicle and drive it into the ground.  When I paid off my house in Portland at the age of 35, I figured I only needed about $2000 per month to live a good social life. 

In the future, to help keep my expenses low, my plan is to take my nest egg from the sale of my house and move to Thailand. Sure, I’d have to work longer if I decided to stay in the USA, but in countries such as Thailand, Costa Rica, Panama, or Ecuador, I wont need as much money. When I reach the age of 59 1/2, I will start taking out a small amount of money out of my 401k (without a penalty). At 65, I will draw from social security. I think it’s a good plan, and I can’t wait to start that next adventure.

To see what your money can do for you, click on one of our financial calculators.

Gary

Gary is one of the founders of RetireBook, and is the site engineer and also one of its writers. He has been working in IT for over 25 years, is a world traveler, and enjoys everything about living in the Pacific Northwest. He is full of energy, loves the outdoors, climbed several mountains, volunteers in his community, and has been saving his whole life for an early retirement that will be coming up in just a few short years.
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