Early retirement has always been a dream of many people, but some are taking solid steps today to ensure an early retirement. Why work until you are 65 or 70 years old when you might be able to retire at 50 or even younger? Follow these steps to get on track for an early retirement.
To retire early, you will need money to support yourself and possibly your family, for the rest of your life. Social Security doesnt kick in until you reach the government mandated 62 years old. You need a nest egg to live on.
Experts agree that most people should save 10 percent to 15 percent of their gross income every payday to maintain the same standard of living in retirement. If you are retire early, you have fewer years to save. In this case, you should work to increase your savings to 50 percent or more. The more you can save now, the sooner you can stop going to work.
Ensure You Have Access to Funds
Most retirement savings go to tax advantaged retirement accounts such as a 401(k) or IRA, but those accounts lock up your funds until you turn 59 ½ years old in most cases. If you want access to retirement savings in your 40s or 50s, youll need to save outside of a 401(k) and IRA.
There is no best place to save for retirement outside of a retirement account rule. Most likely, your best bet is to invest in low-cost mutual funds in a traditional stock brokerage account. You may also want to look into robo-advisors, which offer investment management at a low cost that can be tailored to your target retirement date.
Plan for Retirement Expenses
One of the biggest hurdles to overcome in retirement is your expenses. If you have high expenses in retirement, youll need lots of savings. The more you can lower your monthly costs, the less youll need to save. This makes sense intuitively, but you will want to run the numbers to make sure you wont run out of money in retirement.
If you can pay off your mortgage and other debts, you wont have to worry about those monthly costs going forward. Consider living in a low-cost state, or even outside of the United States, to get the lowest cost of living in retirement.
Set Your Freedom Date
Once you have your retirement expenses figured out, compare it to your current savings and planned savings to set a target retirement date. You may be tempted to leave early if you have big savings, but always make sure to do the math and estimate your freedom date conservatively.
The key to success here is matching the date you reach your savings goal to your retired life expectancy. When in doubt, it is better to save a little extra rather than leave too early and run out of money.
Consider Saving to the 4 Percent Rule
If you struggle to calculate the right savings and retirement date, you can fall back on the 4 percent rule. The basic idea of the 4 percent rule is that you can withdraw 4 percent of your investment balance each year without ever running out. For example, if you have $100,000 saved, you could withdraw $4,000 per year without ever running out of money.
The basis of this rule is that you can generally expect to earn more than 4 percent every year on your investments. The average return of the S&P 500 over the last few decades is about 10 percent per year, so the 4 percent rule is conservative, which is a good thing when it prevents you from going broke in retirement.
You can work backward from your target expenses in retirement to find your needed savings for the 4 percent rule to work. Lets say you expect to need $3,500 per month in retirement. That equates to $42,000 per year. Divide $42,000 / .04, and you find you would need $1,050,000 in savings. At that point, you can hypothetically withdraw your needed $42,000 per year without ever running out, and leave the $1 million nest egg to your kids.
Early retirement isnt a pipe dream. People leave their jobs and retire early all the time. Others enter a partial early retirement with a part-time job. Whatever your dream retirement looks like, good planning and saving habits can make it happen. When you reach your financial goals, any lifestyle change is possible, even leaving your job decades before your colleagues.