Normally people retire at the age of 60. But what if you could retire early and enjoy the rest of your life doing things you had always wanted to do? You can retire early only if you are financially well off. You must accumulate enough money to live comfortably till the end. Early retirement age can be 40s, 50s, or even earlier. Retiring early is often called the FIRE movement which stands for ‘financial independence, retire early’. However, this movement doesn’t put an end to earning; it means that you can decide when and how to work. So, even after retirement you can do business or join a part-time work. That is, you get the full financial control of your life.
Why Do People Want To Retire Early?
Doing a job keeps you active, engaged, and challenged. At the same time, it ensures financial security. However, some people have other ambitions in life, for example, traveling, spending more time with family, or investing their time in a creative project like writing a book. These people want to retire early as they see the other good side of life. Work stress is another reason many people want to retire early.
Planning To Retire Early
Whether you decide to retire early or not, it is good to learn how to plan for early retirement. You never know your early retirement can come unexpectedly when you lose your job or get seriously ill. During the pandemic, many people were forced to retire early. So, if you know how to be prepared for early retirement, you can overcome the challenges that come with it. Here is a discussion on planning for early retirement.
Decide Things To Do After Retirement
You should make full use of your early retirement. Don’t just spend time at home relaxing; try to do something worthwhile. You can develop different hobbies to keep yourself busy and entertained, like gardening, joining a health club, doing community activities, volunteering, and others. You must nurture relationships with your close ones and spend more valuable time with them. You should enjoy the freedom of early retirement and travel around the world or do things that you couldn’t do if you had a full-time job. If you retire at the normal age, you may not be in the right physical condition to travel often or take part in adventurous activities. But if you retire early, you can go mountaineering or hiking in a beautiful place. So, make sure that after retirement your life is stress-free and full of fun.
Estimate The Timing Of Retirement
First, you need to decide the age at which you want to retire. If you retire early, your savings and investment must be high. Retiring early also means you will have more expenses that should be covered by your savings. Moreover, your plan depends on your current age. For example, if you want to retire at the age of 40 and you are already 30 then your strategy should be different than if you want to retire at 50 and you are now 20.
Estimate How Much You Need To Save Up
The amount of money you need to save up for your retirement depends on several factors. If you are leading a high-class lifestyle then you will need more money to maintain it. If you have any underlying health issue then your savings should be more to cover your medical expenses. The savings amount also depends on your goal and wish list. For example, if you plan to go on a world tour then your savings must be high. So, you must first calculate how much you will need per year to lead a comfortable life after retirement. You should take into consideration the inflation rate as well. Then you can use tools like Bankrate, NerdWallet, Vanguard, and others to calculate your retirement amount based on your age, current savings, annual household income, lifestyle, and other factors. You can contribute to your 401(k) and try to provide 30-35% of your salary to this fund. You should remember that once your money is in the 401(k) account you won’t be able to withdraw it until your age is 60; otherwise, you will be penalized. This way you will save money. Alternatively, you can create a separate savings account to put money for early retirement.
You can also use the concept of the FIRE movement. You should calculate your FIRE number which is the amount you have to save to get financial freedom. You can use the 4% Rule which says that you can live on 4% annual withdrawals from the retirement fund for 30 years. For this, you need to save 25 times the yearly expenses. So, you will get your FIRE number by multiplying the annual expenses by 25. This could mean that you have to save 70% of your income and lead a frugal lifestyle.
To retire early you need to make sacrifices. From your college years make the habit of spending less money. Try maintaining a decent lifestyle instead of a high-class one. You can save on housing costs by staying with family or friends. You can cook dinner instead of going to a restaurant. Don’t spend much on vacations. Choose not to buy a car; instead use public transport. If you can make these small habits then you can reduce your expenses and increase savings.
You need to grow your money and it’s possible through investments. You can have diversified stock funds, for example, and aim for a steady 8-10% returns every year. Don’t go for the high returns as it’s risky and you may lose your money instead of gaining. You can also invest in the crypto market now which is showing tremendous growth. You should develop a passive income stream by investing your money wisely. Early retirement doesn’t mean stopping to work completely. It only means leaving your 9-to-5 job and getting control of your life. You can do a part-time job or work from home. You can think of doing something that makes you happy. That way you will feel motivated to work. For example, if you like gardening you can start a gardening blog and earn money from there. You can even start a small business.
Spend Money Wisely
You should review your bank statements and credit card statements carefully to find out where you are spending more money. Categorize your spending into sections like necessity, comfort, and luxury. food, transportation, insurance, clothing, etc. are necessities. Lifestyle choices like going to a restaurant every weekend are comfortable and going abroad for a holiday is luxury. Once you separate the expenses into these categories, you will know how to save more money.
Have A Health Insurance Plan And Health Savings Account (HSA)
The medical cost is high and you should plan for your health insurance the moment you think of retiring early. After you retire, your employer won’t cover you so you should find out other options. Some health insurance allows you to continue the plan even after you stop working for the employer. There are many private health insurance options too with low premiums. You should find out about those and start one or more of these plans to help you cover your medical costs after you retire. You can open a Health Savings Account (HAS) as well. This account is funded with pretax income. It is a great alternative to your long-term medical insurance.
Think Of A Roth Conversion And Brokerage Account
The 401(k) account won’t let you withdraw money unless you are almost 60. So, if you retire early, you can’t utilize that money. That’s why you should consider Roth IRAs which give you the option to withdraw your contributions before the age of 60 without any tax or penalty. A taxable brokerage account is another good option. In this account, you can buy and trade stock, mutual funds, and bonds. You can access this account anytime.
Consider The Trade-Offs
Going to early retirement means you need to trade off some things in your life. For example, buying a smaller house, or spending less on luxury things. Make sure you are mentally ready for these trade-offs. If you cannot accept the challenges, you won’t enjoy your life after retirement. You should be prepared for the changes that will come to your lifestyle.
Plan For Housing
It will be difficult to pay the mortgage for your home after you retire. So, you should try to pay off your mortgage while you are still employed. You can consider downsizing your home; that way you will save money on rent, in case you don’t get the chance to buy a house. You should do major repairs and renovations before you retire.
Pay Off Debts
You should complete all your financial obligations before you retire. For example, you must pay off your mortgage, car loan, credit card balance, college loan, and other debts. Being loan-free will make your life a lot more comfortable and you can use your savings money on other important things.
Consult A Financial Advisor
It is recommended that you consult a financial advisor who can help you plan for your early retirement. There are things that only the experts will understand. A financial advisor can suggest all the good places to invest in, the best way to save money, and give other important tips.
You will receive your Social Security benefits at the age of 62. But the ideal age is 66 or 67; if you withdraw the money before that your monthly benefit will be reduced. You should create a 10-year financial buffer plan so that you are financially safe for that period after you retire. You can invest the money on investments like bonds or treasury bills. Your mindset must be positive all the time. If you can plan early for your retirement then you can save a sufficient amount of money to lead a comfortable life after retirement.