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Early Retirement - The Ultimate Status Symbol

| MoneyRates.com Senior Financial Analyst, CFA
min read

happy-manKeeping up with the Joneses is about this one thing - status.

But what could be more frustrating than chasing a moving target?

Your neighbor just drove up in his flashy, new car. Your best friend loves to entertain in her 4,000-square-foot house. Your brother just got back from a week-long luxury cruise. How can you keep up?

You don't.

What it's like to work toward early retirement

Not that you don't make a good income. In fact, between you and your spouse, you pull down more money than most of the people in your life.

And yet, you chose a modest house; your car is more sensible than sexy (and is now about eight years old); and when you take vacations, long car trips and camping are more your style than five-star hotels and cruise ships.

Most of the time, you and your family are comfortable with that lifestyle. But every now and then you feel a twinge of envy for those people who always seem to live larger than you.

Again, don't -- and not just because envy is a destructive emotion.

If you feel the need to compare yourself against other people, keep in mind that you are on track to have the last laugh. Your friends will envy you when you're the first to retire. And all because you took every opportunity to save and make larger 401(k) contributions.

How to build retirement savings faster and retire early

In the long run, being able to afford a comfortable retirement is a great source of freedom and peace of mind. Early retirement means being able to enjoy that feeling even longer.

Unfortunately, people derail their retirement finances by spending money on short-term status symbols rather than long-term security.

Remember these concepts to help get you in position to retire at age 60 rather than having to work until the traditional retirement age of 65….

1. Fancy cars undermine retirement savings

According to Kelley Blue Book, the average price of a mid-sized car is $25,000, but several models list for over $50,000.

If you put that extra money toward retirement savings at age 25 instead of spending it, you could add over a quarter of a million dollars to your nest egg by the time you are 60, assuming a 7 percent annual investment return.

2. Keep your car longer - it's a double-win for your wealth

According to Edmunds.com, the average new car depreciates in value by 19 percent in the first year of ownership. The rate of depreciation then slows down after that.

Keeping your car for a longer period of time can help you avoid that first-year depreciation for a longer period too.

Also, if you're borrowing money to buy a car, holding on to your car longer means more years without a car loan, which can help you make larger 401(k) contributions so you can ultimately reach your 401(k) contribution limit.

3. Smaller houses are more cost-effective investments

Buying a home can be a good investment, but paying mortgage interest negates some of the value of that investment.

A smaller mortgage means paying less interest, especially if it allows you to afford a shorter mortgage at a lower interest rate.

If you put that money toward 401(k) contributions rather than to some loan company, you could move up your retirement date substantially.

4. Retirement lasts longer than a vacation

According to Cruise Market Watch, the average cruise costs $1,791 for about a week -- about $3,582 for a couple.

Put that money instead toward a larger 401(k) contribution at age 30 and it would grow to an extra $27,267 of retirement money by the time you are 55, at a 7 percent annual return.

5. Eating out means eating up retirement savings

Let's say you and your spouse like to eat out once a week for an average cost of $75.

If you refrain from doing that just once a month from when you are 25 until you are 60 and put that money into your 401(k) contributions instead, it would add a little over $129,000 to your retirement nest egg assuming a 7 percent annual return.

6. Enjoy your old favorites a little longer

According to the Bureau of Economic Analysis, the average American spends $1,166 per year on clothing and footwear.

If you get just enough extra wear out of some of your older clothes and can cut that figure by 25 percent every year beginning at age 25, it could add nearly $43,000 to your retirement savings by age 60.

These common-sense choices are not always easy. There is a natural desire to keep up with your social group.

But you shouldn't let others dictate your lifestyle - especially when many Americans have massive debt and inadequate retirement savings.

Keep your eye on the long-term prize of being able to afford retirement sooner, and resist the temptation to keep up with the Joneses. After all, peer pressure may not have ended when you left school, but it certainly got more expensive.

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