Income

7 Steps To An Early Retirement

Katie Price

Published: April 17, 2024 9:10 am

The “official” retirement age varies based on your birth year. Those born in 1943-1954 can officially retire at 66, while those born from 1955-1960 have an official retirement age of 67, and full retirement benefits are available from the government at age 67 for anyone born after 1960. But what happens if you want to retire early? How can you prepare for that?

You’ve worked your entire life to build a retirement fund that ensures you can relax and enjoy life once you’re done working. Those who dream of retiring earlier than the official date can take a few steps to ensure they have enough money to get by.

Why Do People Want To Retire Early?

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Simply put, some people are just tired of working and ready for the next phase of life. These people are fortunate enough to have a stable, steady retirement fund that allows them to do so. Other reasons people retire early include:

• Pursue other business interests or ideas previously put on hold for a traditional job.
• Spend more time with family and friends.
• Travel to places inaccessible while working a traditional job that keeps you tied to the office.
• Relax and get rid of work stress at a younger age.

No matter why you retire early, there are smart ways to prepare for it. In fact, it’s beneficial for everyone to prepare for early retirement if they can.

1. Estimate Your Expected Expenses After Retirement

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Consider how you want to live after retirement. Do you want a quiet, simple life, or one full of excitement and travel? These things can greatly affect the money you need in your retirement account to quit working early.

Identify things you can’t live without, like food, housing, transportation, insurance and healthcare. The goal is to enter retirement without consumer debt, but include any mortgage, medical, credit card or student loan payments that will follow you into early retirement.

Now it’s time to think about what lifestyle you want in the form of discretionary expenses. Include hobbies, travel and entertainment and how much you plan to spend on each. 

2. Figure the Total You Need for Retirement

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Once you have these numbers, add them together to determine exactly how much money you need each month after retiring. One suggestion is to have between 25 and 30 times your expected yearly expenses in a retirement account along with enough cash for one year’s expenses.

For example, if you need $10,000 a month, you need $120,000 a year to get by. This means you need between $3 million and $3.6 million in your retirement account.

Remember the four percent rule, which is a suggested limit for how much you can take from a retirement account during your first year of retirement. This limit ensures you won’t run out of money during a 30-year retirement.

3. Adjust Your Current Budget in Exchange for Early Retirement

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If you aren’t saving enough to hit your early retirement goal, it’s time to make some adjustments. You may need to reign in spending and save to make up the difference. You have three ways to do this: earn more, spend less or both.

This essentially comes down to the oldest trick in the book: budgeting. Adjust your current budget and cut out any discretionary spending. This takes hard work and commitment but pays off in the long run. If you find you would rather spend more now than cut back, early retirement may not be an option unless you find a way to make more.

4. Consider Big Expenses Between Now and Your Preferred Retirement Date

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Between now and retirement, you may have some big expenses that limit how much you can contribute to early retirement. These can include continuing education for yourself, sending kids to college or buying a home. 

When deciding what you need for retirement, consider any curveballs that life can throw your way and how they affect your financial future. It’s a good idea to think about any medical emergencies that could arise or inheritances you want to leave for your family. You could also end up providing care for a loved one if they are unable to care for themselves.

5. Understand Your Retirement Accounts

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Two of the most common retirement accounts are 401(k)s and IRAs. Your employer may contribute to them, but it’s a good idea to add your own contribution to ensure early retirement.

All have benefits and disadvantages.

A 401(k) is an easy, consistent way to contribute money to retirement, and many employers match your contribution. Any money you place in a 401(k) is deducted from your taxable income the year you contribute. The downside is that your taxes may be higher in retirement and there may be higher penalties and fees if you access the money early.

A traditional IRA offers tax-free earnings and tax deductions the year you contribute. However, any withdrawals are taxed at your income tax rate the year you withdraw it.

Roth IRAs allow for some tax-free withdrawals or distributions but offer no tax deduction the year you contribute.

Most retirement plans include a complex mix of investments and contributions. This may be a good time to hire a financial advisor or planner to navigate the process.

6. Add In Your Current Savings or Assets

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Do you have a collection of gold bars in your house that should be assessed during this process? It’s unlikely, but you probably do have other assets.

If you plan to sell your house and downsize after the kids leave, you may pocket a large chunk of money from the sale. Do you have other investments in real estate or other businesses? What is your savings account balance? All these numbers can contribute to your retirement account, although they may fluctuate more than others.

7. Consider Your Personality

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There may not be a tangible way to measure this, but some personality types struggle when they aren’t working. If you find yourself without a job at 55 because you worked your whole life for early retirement, can you relax and enjoy the time, or do you need to work? This is a valid concern as some who retire find other jobs because the transition is difficult. There’s nothing wrong with wanting to work and there’s nothing wrong with wanting to relax. You have to assess your personality and decide where you fit.

Save Now, Play Later

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Retiring early isn’t a decision you can make spontaneously. It requires discipline, savings and planning long before the actual retirement date arrives. For some people, the trade-off simply isn’t worth it, because it requires that you cut back on spending when you’re younger.

Early retirement is something people plan for from the beginning of their careers. If you begin your career at 22 and want to retire at 55, that’s 33 years of cutting back on non-essentials for an extra 10-12 years of relaxation. Not many people retire early because of the discipline required, as they have to be almost single-mindedly focused on the goal. 

If you’re considering early retirement, calculate the numbers and determine if it’s worth it. Involve your family in the discussion as it deeply affects them also. Get a financial planner involved and make an intentional decision.