Regardless of when you plan to retire, it is a major life step that takes significant planning and prep work. This is especially true if you plan on retiring early. Early retirement requires particularly aggressive saving because you have less time to set aside money for retirement, and more time you’ll need to survive on those savings.
1.) Assess your current – and future – financial situation
If you plan on spending fewer years in the work force, it is especially critical that you know where you stand financially and what you need long-term.
How much are you putting toward retirement right now? What are your debts and assets? And what will your annual expenses during retirement be? You need to get a clear view of those numbers so you can determine how soon you can retire.
From there, it’s simple math. How many years from now do you plan to retire? How much do you need to have saved by that date? That will give you your annual savings target.
2.) Create a game plan
Once you have a real goal in place, the hard part is getting there. If you need to work aggressively to hit your savings target, look closely at your budget. What expenses can you cut, and where can you add more income? Consider how you can make more money in your career, as well as where you can add income from other sources.
If you can pay off your mortgage before you retire, it may cut your expenses significantly. Don’t forget that you still have to pay for property taxes and home insurance even after you’ve paid off your house.
Retiring early takes sacrifice. Could you sell your house and downsize? Can you wait a few more years before upgrading your car? The sooner you want to retire, the more you might need to cut out of your current spending.
3.) Check your investment and health insurance strategies
If you have less time to save, the typical investment strategies might not apply. You’ll likely need to do more than maxing out your 401(k) since you will be penalized 10% for taking money out of a 401(k) or IRA before 59.5. You will want to subsidize your retirement plans with a brokerage account with tax-friendly mutual funds or ETFs in it.
You will also want to plan for health insurance. Medicare is a nationwide health insurance program, but it isn’t available until you are 65. If you are retiring before age 65, make sure to research the cost of an individual health insurance policy, getting on a spouse’s health insurance policy, or COBRA continuation coverage from your employer. COBRA coverage only lasts for 18 months in most situations, or 36 months in special situations so make sure that you know how this piece fits in while you are making your retirement plans.
4.) Plan for the retirement you want to have
There is a big difference between retiring at 50 and retiring at 70. If you retire in your fifties, you will have more time to travel, take up hobbies and be active. While someone retiring at 70 may still want to travel, they will have fewer years to spend money, or spend it as quickly. People tend to spend money less as they age, with the exception of medical costs. So don’t assume you’ll want the same lifestyle throughout your entire retirement.
This is yet another challenge of early retirement, but it can be done. Don’t plan for a retirement fund that will cover your expenses; save for more than you’ll need. While you’re considering your lifestyle, there is another hurdle to consider: inflation.
5.) Offsetting inflation
Inflation is a consideration in any retirement plan, but it is one of your largest obstacles when you’re planning for an early retirement. If you’ll be spending nearly half your life (or more) in retirement, it can be challenging to predict how much inflation will affect your future finances. Think about the purchasing power of a dollar fifty years ago versus today. The current average inflation rate is around 3.22%, but at that rate, prices double every 20 years. That’s a big increase, and it doesn’t even consider the unpredictability of the stock market over time. That’s a lot of risk and uncertainty to plan for.
To offset that, you need to have a percentage of your investments in something that combats inflation, like equities. Compared to fixed income, equities have the ability to provide a return above the rate of inflation over the long term.
Early retirement is an enormous challenge, but with the right tools and a serious commitment to your goal, you can set yourself up for an abundant, fulfilling retirement.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.