Many people dream of retiring early, before the age of 65, in order to enjoy financial and personal freedom. However, unforeseen circumstances may sometimes force individuals to retire earlier than anticipated. This article provides insights into how to retire early, including how to plan for it.
Early retirement is often defined as retiring in your 40s, 50s, or even earlier, allowing individuals to travel, pursue personal interests, or simply enjoy not working. This has been popularized by the FIRE movement, which emphasizes achieving financial independence and the ability to choose when, how, and for whom you work.
Despite this desire for early retirement, it requires a significant amount of work to fund your own retirement, as Social Security benefits can only be accessed from age 62, and taking them earlier will result in reduced monthly benefits. The extent of this reduction will depend on how far away you are from the full retirement age, which is either 66 or 67, depending on your birth year. Keep on reading to understand how to retire early.
How to retire early?
Below are the 5 steps to retire early. Read on till the end to understand how to retire early and what to do to sustain and enjoy your retirement.
Make some adjustments to your current budget
To retire early, you need to make adjustments to your current budget to save more money. Many people who aim for early retirement live on 50% or less of their income and funnel the rest into savings.
This means cutting back on expenses, including finding ways to save on transportation, utilities, food and housing costs. Some people also take on side hustles or find ways to increase their earnings through investments to help them retire comfortably.
There are different groups of early retirees, such as lean FIRE, who focus on living frugally, fat FIRE, who focus on earning more, and barista FIRE, who save enough to retire but still work for convenience or pleasure. To achieve early retirement, you’ll need to make changes to your spending habits and possibly find ways to earn extra income.
Calculate your annual retirement spending
When planning for early retirement, it’s important to adjust your budget accordingly. Many people who pursue early retirement aim to live on 50% or less of their income and funnel the rest into savings. To achieve this, it’s important to get creative about cutting expenses and finding ways to bring in extra income.
To estimate your retirement spending needs, start by looking at your current monthly expenses and considering what might go up, down, or be eliminated altogether. Once you have a monthly estimate, multiply it by 12 to get your annual retirement needs. To be safe, increase this number by 10-20% to account for unexpected expenses.
Taxes and healthcare are often overlooked when planning for early retirement but can have a significant impact on your finances. To minimize taxes, strategize about how and when you pull income from your investment accounts, taking into account the rules for qualified distributions from tax-advantaged retirement accounts like 401(k)s and IRAs. Roth IRAs offer more flexibility, allowing you to distribute contributions at any time.
Healthcare is a real challenge for many early retirees, especially if you were getting health insurance through work before retiring. Consider purchasing private insurance or finding a plan through Healthcare.gov. If you’re married and your partner is still working, you might be able to get on their plan. Some part-time jobs also offer health coverage, as do industry associations.
While early retirement may seem like a dream, it requires a lot of planning and hard work. By adjusting your budget, considering taxes and healthcare, and finding creative ways to bring in extra income, you can achieve financial independence and retire early.
Estimate your total savings needs
Two widely-used rules of thumb for retirement planning are the Rule of 25 and the 4% Rule. The Rule of 25 suggests that you should save 25 times your planned annual spending before you retire. This means that if you plan to spend $30,000 in your first year of retirement, you should have $750,000 invested before you retire. The 4% Rule states that you can withdraw 4% of your invested savings during your first year of retirement, with that amount adjusted for inflation in subsequent years. These rules are based on historical market conditions and can be adjusted based on your risk tolerance and investment strategy. However, they are not foolproof, and there are no guarantees.
It’s important to keep in mind that withdrawing savings from tax-deferred retirement accounts before the age of 59½ could result in penalties and income taxes. However, money can be withdrawn from a brokerage account without penalties at any time. It’s crucial to understand the potential consequences of withdrawing funds early and to plan accordingly. A financial advisor can help you determine the best approach for your individual circumstances.
Invest for growth
If you’re planning to retire early, keep in mind that you’ll have less time to save money and more time to spend it. This means you need to have a balanced investment portfolio that is geared towards long-term growth potential.
Although your retirement time horizon may be shorter, you shouldn’t reduce your risk-taking. Instead, consider your time in retirement as part of your overall financial plan and maintain your investments to continue growing.
While preparing for retirement, it’s a good idea to keep a portion of your savings in a more liquid form to cover expenses for the first year or two. However, the majority of your savings should still remain invested to support the 4% distribution rate.
Keep a check on your expenses
Many people may have a rough estimate of their retirement expenses, but the challenge lies in adhering to the planned budget.
Often, after throwing a retirement celebration, and settling into post-work life, people tend to engage in various activities that can cause a strain on finances such as traveling, shopping, and acquiring new financial obligations like adopting a pet.
Although the 4% rule is meant to provide some assurance of having enough savings, it is not foolproof, especially in cases of significant spending increases or unexpected debts.
Unfortunately, a considerable number of individuals may find themselves running out of retirement savings, and in the worst-case scenario, may have to go back to work to support themselves.
Takeaway from how to retire early
Achieving the goal of early retirement may seem like a daunting task, but it is certainly possible with careful planning and consistent effort.
By focusing on increasing your savings rate, minimizing your expenses, and making wise investments, you can lay a solid financial foundation that can support your retirement dreams.
It’s crucial to start planning for your retirement as early as possible and take advantage of the power of compounding interest.
It’s important to stay disciplined and committed to your goals, making necessary adjustments along the way to ensure you stay on track. With dedication and perseverance, you can retire early and relish a fulfilling and stress-free retirement.
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How much money do I need to retire at 55?
According to experts, people should have at least seven years of savings saved at the age of 55. For instance, if you earn around $55,000 annually, you should have around $385,000 saved for your golden years.
Is 40 too early to retire?
If you retire at 40, you’ll not have access to either Medicare or Social Security for the rest of your life. This means that you’ll have one less financial source of retirement income. Your earnings will also be reduced once you reach full retirement age.
Is it better to take Social Security at 62 or 67?
Your Social Security benefits can start at age 62. However, these are only full once you reach full retirement age. Those who delay taking their benefits past this age will have their benefit increase.
How much Social Security will I get if I only work 10 years?
If you only worked for ten years, you’re unlikely to receive Social Security benefits. The program’s benefits are calculated based on your 35th working year, which is the average of your highest earning years.
Will I get Social Security if I haven’t worked 20 years?
In order to qualify for Social Security benefits, you are required to have worked for at least ten years. Nevertheless, the amount of your benefits is determined by considering your earnings from the previous 35 years.
Hi there, my name is Shivani and I’m the founder of Fuelcoin and co-founder of Thefinanceopedia. I created this blog to share my knowledge and experience in cryptocurrency, banking, personal finance, and the stock market, and to help others build wealth.