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Retiring Early: What to Know

Retiring early is a dream for many Americans. We explain what it takes to achieve this.

Retiring early — it’s something most of us want to achieve. But the path can be hard to envision and seem like an uphill battle. However, with the right plan in place, it’s an attainable goal.

In this article, you’ll learn what the key steps are to an early retirement. This includes the types of financial vehicles you can use to your advantage. It’ll also outline what you can do right now to set yourself up in the future. Finally, you’ll learn how a financial advisor can help you plan for and reach your goals.

Key Takeaways

  • It’s important to understand what your vision is for retirement. In other words, how young do you plan to retire and what do you plan to do to fill your time?
  • By understanding how soon you want to retire, you can then determine the amount you need to save to realize your goal. This typically entails taking your average monthly expenses and multiplying them by 25-30.
  • To achieve your goal, it’s wise to save and invest in tax-advantaged accounts, allowing you to build your funds through compound interest.
  • Avoiding unnecessary expenses where you can allows you to save more money for your retirement.
  • Staying on track can be difficult. For this reason, it’s a good idea to hire a financial advisor to help you avoid mistakes and identify any opportunities you may be missing.
Woman Relaxing In a Hammock

1. Determine Your Vision for Retirement

The path to an early retirement begins with what you envision it looking like. That is, what sort of lifestyle do you want to live once you’re done working? How you answer this question will inform how much money you’ll need to live the way you want. To do this, you’ll need to ask yourself a few questions, including:

What Age Do I Want to Stop Working?

It’s important to figure out exactly when you want to retire. For some, this could be in their late 30s or 40s. For others, it could be in your 50s or 60s. Keep in mind that the earlier you stop working, the more money you’ll need to sustain yourself for the remainder of your life.

How Much Money Will I Need for Retirement?

Once you have an age in mind, you’ll need to calculate how much money you’ll need to live a comfortable lifestyle. Generally, most people need at least 70% of their pre-retirement income to do this. However, depending on what you want your life to look like, you may need 100% or more of your past income.

The amount one needs after they’re done working is typically unique from one person to the next. However, there are some general rules you can follow that can help you figure that number out. First, you’ll want to calculate your current monthly expenses, then multiply that by 12. That’s the minimum amount you’ll need each year for retirement.

As an example, let’s say your average monthly expenses are $6,988. Per year, this number equates to $83,856. This is how much you would need to live your current lifestyle in retirement. You may also want to add 10-30% just in case you want to spend more on things like travel.

You should also think about health insurance when you make this calculation. Once you’re done working, you won’t retain your coverage unless your spouse has a job. This means you’ll need to pay out of pocket for private insurance or apply for Medicare/Medicaid. For reference, the national average monthly cost for health coverage is $438.

What Activities and Hobbies Will I Want to Pursue?

Figuring out what you want to do during your newfound free time is important. Some people make it their mission to travel as much as possible during retirement. Others are comfortable living a quiet life below their means. Answering this question will dictate how much you intend to spend after your career ends.

2. Figure Out How Much to Save

Now, it’s time to figure out how much you need to save to set yourself up for the future. The way to do this is to calculate your FIRE (financial independence, retire early) number. To do this, you’ll need to take your average monthly expenses and multiply that amount by 25-30. If you consider the example from earlier, where one would need about $83,856 per year, you’d need to have at least $2,096,400 on hand to comfortably retire.

Another way to find your FIRE number is by following the 4% rule. Following this, you’d be able to live on 4% of your savings for up to 30 years. However, this also assumes you’ve saved 25-30 times your annual expenses upon retirement.

3. Use Retirement Savings Accounts

One of the smartest ways to set yourself up for the future is by using tax-advantaged retirement accounts. This could be a 401(k) through your employer or a type of IRA. With these, you can defer taxes or eliminate them (with a Roth IRA) when you withdraw funds. They also allow you to invest money within them so that you can earn more over time via compound interest.

Every year, you’ll want to get as close to maxing out these accounts as possible. However, each one will have contribution limits that you’ll need to adhere to. For instance, both traditional and Roth IRAs only allow you to put $6,500 (or $7,500 if you’re over 50) in annually.

You should also keep in mind that these types of retirement accounts set limits on when you can withdraw your money. For a Roth IRA, you’ll need to be at least 59.5 years old to take funds out without penalty. 401(k)s require you to be 55 years old as long as you no longer work at the same employer. And with a traditional IRA and 401(k), the government requires you to take minimum distributions after you reach 73 years of age.

4. Invest for the Long Term

Investing is crucial for retiring early. This is especially true since you won’t have as much time to save the earlier you stop working. If you allocate your funds wisely, you’ll be able to grow your wealth over time as you continue to save.

Rather than long shot stocks or quick money-makers, you may want to focus on long-term, lower-risk assets, like index funds or mutual funds. These will ebb and flow with the market, but they’ll generally appreciate over time.

Real estate can also be a viable long-term investment if you have the capital to make it happen. However, you’ll be at the mercy of the housing market, so proceed with caution here. Real estate investment trusts (REITs) are a low-risk option to do this as well. These allow you to buy shares of properties and receive regular payments from them, creating passive income.

5. Avoid Expenses

The quickest way to derail your retirement plans is by increasing your expenses drastically. Try to avoid racking up expenses as much as you can. This means avoiding debt that doesn’t help you reach your goals, such as credit cards, car payments, and cash advances.

It’s also a smart idea to live at or below your means. Often, it can be tempting to “keep up with the Joneses” by buying material items you don’t necessarily need, such as expensive cars, boats, and houses. By avoiding this type of spending, you’ll have more to save and invest, getting you closer to your goal of early retirement.

Once you finally retire, you’ll also want to keep spending at or below your means. Otherwise, you risk running out of money. Essentially, you’ll only want to spend what you can afford or what you’ve accounted for ahead of time.

6. Consider Hiring a Financial Advisor

Retirement planning alone isn’t an easy task. And trying to do so as early as possible can place even more pressure on you. For this reason, you may want to consider working with a financial advisor to help you reach your goals.

For retirement planning purposes, a financial planner may be the right choice. They can help you outline your goals, then build a comprehensive strategy to get you there. As you search for one, try to find one that’s a certified financial planner (CFP). These individuals have years of experience and must act as a fiduciary at all times.

You can find a qualified financial advisor by taking a free matching quiz, like this one. After filling it out, it’ll match you with up to three vetted experts in your area.

Frequently Asked Questions

Is 55 too early to stop working?

This depends entirely on your situation. There is no one-size-fits-all age for retirement. 55 may be too early for some people. At this age, you won’t be able to take social security for several years. This means you’ll be purely relying on your savings and investments to live. If you don’t have enough on hand, it’s probably not the right time to stop working.

What is the 4% rule?

The 4% rule is one way people calculate how much they’ll need to live once they retire. Assuming you’ve saved your estimated expenses by 25-30, you should be able to live off of 4% of your savings each year. Keep in mind that while this is widely believed to be true, it may not be so for you.

What is the 25 times annual expenses rule?

This refers to the common recommendation that you’ll need your current annual expenses times 25-30 to comfortably live in retirement. For example, if you spend $60,000 annually, you’ll need $1,500,000 after you stop working.

How do I get health insurance if I retire early?

Unfortunately, once you retire, your job will no longer provide health insurance for you. Instead, you’ll need to buy private coverage or apply for Medicare/Medicaid from the government. You’ll also want to plan for this in your long-term strategy to avoid unwanted surprises. On average, Americans pay $438 per month for health insurance.

Should I retire early?

Ultimately, the answer to this question is up to you. Of course, you should only retire early if you’re financially able to do so. Generally, this means you should have at least 25-30 times your annual expenses saved. Beyond that, you’ll have to decide if you’re comfortable leaving your job early, especially considering you’ll be living off your investments and savings for the next 30-50 years (depending on when you do it).