How to Retire Early
Retiring early can bring on dramatic lifestyle changes; but with smart planning and choices it can be made a reality.
To retire early, you’ll need to save a substantial portion of your income. Experts advise aiming to replace 80% of pre-retirement earnings. Additionally, to meet this goal you must also have fully funded emergency savings and retirement accounts (IRAs can only be accessed without incurring penalties until age 59 1/2).
No matter if you want to join the Financial Independence, Retire Early (FIRE) movement or simply retire in your late 50s, saving aggressively is key for early retirement. Also consider planning long term by calculating how much work will become unnecessary as well as creating an income stream to sustain you through retirement.
Morrison advises his clients to divide expenses into three categories: minimum survival, sanity and style. The goal is to save enough for both categories while paying off debt at minimum levels – putting compounding power of retirement accounts to work in your favor!
One way to save extra money outside of traditional retirement accounts is with a health savings account (HSA). An HSA offers triple tax advantages: contributions are pretax, investments are tax-free and withdrawals for medical use are tax-free. An SEP IRA provides similar advantages.
Set a Budget
Step one in reaching early retirement is setting clear goals. These might include travelling, starting a business, volunteering or engaging in another hobby – whatever they may be, you must know how much your lifestyle costs; that will determine your budget.
Financial planners can be invaluable. They can assist with developing an aggressive savings plan to achieve Financial Independence Retire Early (FIRE). Furthermore, they can estimate your expenses upon retirement by adding up housing, food, utilities, transportation and insurance as well as entertainment, hobbies travel and giving.
Once your goal has been established, calculate how much savings are necessary for reaching it. A general guideline suggests saving 25 times your annual expenses as a starting point; some FIRE enthusiasts aim for higher savings rates. Furthermore, consider opportunities that offer passive income generation during retirement such as rental properties or dividend-paying stocks; these could supplement your savings and make early retirement a reality faster.
One of the initial steps of early retirement planning involves determining your expected monthly expenditures so you can determine how much money needs to be saved for retirement.
According to experts, an ideal rule-of-thumb is for you to have 25 times your estimated annual spending saved before retiring, with inflation taking into account.
At least according to J.P. Livingston of her blog The Money Habit, saving for retirement meant cutting back on some luxuries. Her nest egg of over $2 Million allowed her to leave her cubicle job by age 28.
And it could also involve finding creative ways to increase your income, such as Capitalize’s service for consolidating and consolidating all old 401(k) accounts into an IRA you own – typically, these accounts have high fees that make tracking them difficult, so using such services helps ensure your money is working hard for you.
Save for Unexpected Expenses
As part of your estimated expenses for retirement, be sure to factor in any costs related to unexpected expenses. A separate emergency savings account can help prepare for these instances without needing to dip into longer-term accounts like retirement plans for immediate funds.
If you plan to retire early and enjoy costly activities like golf or skiing, such as early membership to clubs you don’t use or expensive hobbies like golf or skiing, cutting back may be wise. Or look to reduce expenses related to eating out or memberships in gyms or clubs you don’t use regularly – these expenses could add up quickly over time and could threaten early retirement plans.
Be mindful that retiring early requires more planning. Without social security or health care as part of your income stream, this could drastically alter your retirement estimates; for instance, retiring before age 62 often necessitates purchasing private health insurance – an expense which must be factored into your budget when planning retirement early.
Keep an Eye on Social Security and Health Care
Early retirement is often sought out so as to enjoy life more fully and focus on activities such as hobbies, travel and charity work – for this to work effectively, a good plan and budget are needed to track expenses effectively.
Your expenses during retirement can change significantly, particularly as essentials like food and housing tend to become more costly over time. To get a clear idea of your expenses in retirement, estimate them now and list out everything that remains the same, such as housing utilities and food costs, before adding anything that might increase in costs, such as travel or healthcare services.
Take note that withdrawals from tax-advantaged retirement accounts such as IRAs and 401(k)s cannot occur before age 59 1/2 without incurring significant taxes upon withdrawal. Consult a financial advisor about pre-Medicare retirement health insurance options that fit within your budget and learn of pre-Medicare health plans that offer affordable protection.