How to Retire Early – Things you need to do
| September 1, 2012 | Posted by Kevin under Retirement Planning |
There’s much on the web and in the financial media these days about retiring early. Some people imagine retiring as early as 35 or 40, though exiting the workforce at 50 or 55 seems more doable for most.
What ever age you’d like to retire at, it will require some serous changes in your financial lifestyle, and the earlier you adopt those changes the greater your chances of retirement success will be. Those changes will include most of all of the following.
Front load your retirement savings—and all savings
You’re entire early retirement effort will rise and fall on this one step. The job is not just to save early in life, but also as much as you can. If you’re in your 20s, and don’t plan to retire until you reach 65, you can get by saving 10-15% of your income each year. But if you plan to retire early, and especially before you turn 50, you’re going to have to think in terms of much more substantial savings.
It’s especially important that you get into a saving pattern early, like in your 20s. The best investment results are experienced by those who save large amounts of money early. The earlier you do, the easier your retirement goals will be reached.
Depending on how well you plan to live in early retirement, you may need to save anywhere from 20% to 50% of your income in order to do it. You can do this by maximizing your contributions to your retirement plans—401K, 403B, Roth and traditional IRAs and SEP or SIMPLE plans if you’re self-employed.
If you work for an employer, your 401K or 403B might not allow you to save any more than 10-15% of your pay, but you don’t have to stop there.
Add an IRA, traditional or Roth, to your retirement savings mix if your income will permit you to do so. Beyond that, you can also save money in non-retirement accounts, such as investment accounts, mutual funds, certificates of deposit or any other savings vehicles. Just because an account doesn’t specifically have the word “retirement” in it shouldn’t stop you. You’re going for early retirement so you’ll need to pull out all the stops and save where you can.
Cut your cost of living
Minimizing your living costs will accomplish two things that both work in your favor:
- They’ll allow you to divert money from spending and consumption into savings and investments while you’re saving for retirement, and
- The less money you need to live on, the less income you’ll need in retirement.
The first advantage is self-explanatory—it will enable you to save more money. But the second part is at least as important.
How much you need to save for retirement is mostly dependent on how much income you’ll need when you actually retire. The lower the income number is, the lower the ultimate savings number will be also.
You may need, for example, $2 million to provide an $80,000 income in retirement, but if you can live comfortably on $40,000 you’ll only need $1 million.
Keeping your retirement income needs low is important for another very important reason too. If you plan to retire at 65, you can expect Social Security and maybe even pension income to provide part of your retirement income; but if you want to retire at 50 you won’t have either source of income.
Get out—and stay out—of debt
Debt is bad for retirement planning. It cuts into retirement savings while you’re working and increases your cost of living when you retire.
Early retirement will require a tremendous amount of near-term sacrifice, and that will mean foregoing expensive cars, an over-sized house and even exotic vacations—and the debt that’s often attached to them.
Have a back-up plan
If you’re going to retire in your 40s or 50s, you should also have some sort of back-up plan. You’ll need to provide for yourself for anywhere for 30 to 50 years, so you’ll need to be prepared for what ever may happen.
What might happen?
- A bad run in the stock market may drop the value of your investments
- A sudden need for additional cash, such as an illness, or the need to help a family member in distress
- Bad investment choices (we all make them from time to time!)
Again, early retirement will mean that you’re preparing for a very long period of time—maybe half your life—so you need to be ready for what ever life may bring.
You can do this in a variety of ways—by having growth type investments that you don’t use for living expenses, by having a job or career you can return to on short notice and on a temporary basis, or by having a side business that you can quickly build up to full time, if necessary.
The point is, contingencies don’t stop when you retire, so be prepared to make sure that you can stay retired, at least for the long-term.
Are you planning to retire early? If so, what age do you want to retire at, and how are you preparing for it?
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.
