Who doesn’t love the idea of retiring wealthy? In a perfect world, you’d have so much money that you never have to worry about working again – and you can do just about anything you want.
While most of us can’t count on becoming billionaires, achieving multimillion-dollar wealth is well within the realm of possibility – and you don’t have to have a six-figure income to do it.
How to Retire Wealthy
So how can you work to retire wealthy?
- Define “wealthy.” What do you mean by wealthy? The first step of your plan should be figuring out what you want and defining your long-term goals. Investors often follow the four percent rule, banking on withdrawing four percent of their capital each year as a source of reliable income. In other words, if you have a million dollars invested in a retirement account, you can count on around $40,000 in annual withdrawals for the rest of your life. How much do you want to make in retirement to consider yourself wealthy? You can work backward from there.
- Live below your means. The most important principle for building wealth over time is living below your means. In other words, your expenses should be well below your income level. To accomplish this, you’ll have to make sacrifices, living in a smaller home or in a cheaper neighborhood than you could hypothetically afford. But living below your means allows you to have extra money each month, which you can use as you see fit.
- Pocket your extra money. That extra money shouldn’t be for recreation or entertainment. Instead, you have to save it. Put it toward something important, like one of your long-term financial goals.
- Invest in strong insurance policies. Disruptive events can interfere with even the best-laid financial plans, so use insurance policies to protect yourself. For example, disability insurance can replace some or all of your income if you’re ever disabled and unable to work due to an injury or illness. After getting a disability insurance quote, you’ll be able to see just how much coverage you can get for just a fraction of your income.
- Create an emergency fund. Emergencies can also interfere with your financial plans, so prepare for them. Establish an emergency fund of at least several thousand dollars. That way, if you face an unplanned expense (such as a medical emergency or a necessary repair), you won’t have to take on new debt.
- Pay off your debts. Speaking of debts, pay yours off as quickly as possible, especially high-interest debt like credit card debt. Otherwise, compound interest can work against you, forcing you to pay far more than you originally borrowed.
- Increase your income. Next, work to increase your income. Hopefully, you’re able to save at least a little bit of cash every month. Wouldn’t it be nice if you could save even more? Invest in your education and skills so you can earn raises and promotions and consider picking up side gigs to increase your revenue even more.
- Start investing as early as possible. The best way to grow your wealth is with investments like stocks, ETFs, and real estate. The sooner you start investing, the more time you’ll have to capitalize on the power of compound interest.
- Take advantage of retirement plans. Investing is always a good idea, but it’s an even better idea if you’re investing with tax-advantaged retirement plans. With a 401(k), you can invest pre-tax money, and with a Roth IRA, you can take advantage of tax-free gains. Don’t miss out on these opportunities.
- Diversify your portfolio. Every investment asset type is going to have strengths and weaknesses. You have to balance these by diversifying your portfolio; invest in a wide range of different assets if you want to minimize your risk exposure and secure a more stable course of growth.
- Be patient. The path to generating wealth begins with small, almost imperceptible steps. At first, you may be able to save only a few hundred dollars a month, and your investment earnings may be marginal at best. But if you remain persistent, these will quickly snowball to be much more powerful financial forces.
Can Anyone Retire Wealthy?
There’s no question that some people become wealthy due to sheer luck or because they inherited it from their families. There’s also no question that some people work hard their whole lives and never see financial success. But the reality is, wealth generation is much more attainable than most people realize. As long as you have a steady income, a plan to grow, and enough discipline to follow these important financial steps, you too can create a luxurious financial future for yourself.