A Step-by-Step Guide to Retiring Early
Planning for retirement at a traditional age, like 67, is a challenge. However, retiring early needs even more careful thought. With fewer years to save and invest, and a longer retirement to pay for, the journey needs discipline and smart choices.
However, early retirement is within reach if you prioritize it and make strategic adjustments to your savings and lifestyle. Here’s a structured approach to help you achieve your early retirement goals.
Step 1: Estimate Your Retirement Expenses
Understanding how much you’ll need to cover your retirement years is crucial. If you track your current spending, you can begin forecasting how your costs might change once you retire. If you're just starting your early retirement journey, an estimate can still be helpful.
A general guideline is to plan for spending around 80% of your pre-retirement income annually. If you make $100,000 a year before retirement, your expenses could be around $80,000 each year after you retire.
If you want to retire early, think about how to cut expenses now. This can help you save more. Also, look for ways to lower costs during retirement. This might reduce how much you need to save or let you retire sooner.
Step 2: Determine Your Retirement Timeline
Longevity plays a key role in financial planning. If you’re retiring at 54, for instance, your retirement could span 40 years or more. To ensure financial security throughout, it’s wise to plan conservatively—many financial models use life expectancy projections in the mid-90s.
Step 3: Calculate Your Target Savings Amount
The amount you need to save depends on several factors, including the number of years you'll spend in retirement, expected investment returns, inflation, and your annual spending needs.
One common idea is to save 33 times your yearly expenses if you retire before age 62. This is based on a 3% withdrawal rate. For instance, if you plan to spend $75,000 per year, you may need $2.475 million in savings.
For people retiring at 67, a 4-5% withdrawal rate is usually safe. However, early retirees should be more careful to make their money last. A financial professional can help you determine the right withdrawal rate based on your situation.
Step 4: Set Your Annual Savings Goal
Your savings rate is the part of your income you save for retirement. This rate affects how soon you can retire. This includes contributions to 401(k)s, IRAs, HSAs, and brokerage accounts, as well as any employer contributions.
For a traditional retirement, saving at least 15% of your income annually is recommended. However, if early retirement is the goal, you’ll likely need to save significantly more. The earlier you start, the more time your investments have to compound, reducing the percentage of income you need to save each year.
Step 5: Maximize Tax-Advantaged Accounts
Using tax-efficient strategies can accelerate your savings. Contributions to 401(k)s, traditional IRAs, and HSAs can lower your taxable income now. Roth IRAs let you take tax-free withdrawals later.
If you have used all your tax-advantaged accounts, brokerage accounts can give you more investment options. They also allow for early withdrawals. Being tax-savvy with your investments can help keep more money working for you over time.
Step 6: Invest for Growth
Building a portfolio with strong growth potential is essential when planning for a long retirement. Stocks and stock-based funds offer the best historical returns over time, helping your investments outpace inflation.
The key is finding the right balance between risk and reward. A well-diversified portfolio tailored to your risk tolerance and time horizon can maximize your potential for long-term growth.
Step 7: Plan for Taxes and Healthcare Before Medicare
Retiring before 59½ requires careful planning for how you’ll access funds without penalties. While some strategies—like the Rule of 55 for 401(k)s or IRS Rule 72(t) for IRA withdrawals—allow for penalty-free access, they come with strict rules.
Healthcare is another major consideration. Since Medicare eligibility starts at 65, you’ll need an interim solution, such as:
● COBRA coverage (up to 18 months after leaving your job)
● Joining a spouse’s employer-provided plan
● Purchasing insurance through the public marketplace
● Using an HSA to cover medical expenses tax-free
Step 8: Decide When to Claim Social Security
Social Security provides an inflation-adjusted income stream for retirees, and timing your claim wisely can make a big difference. Although you can claim benefits as early as 62, doing so permanently reduces your monthly payout.
Delaying benefits up to full retirement age (FRA) or 70 can significantly increase your monthly payments. If you plan to retire before 62, you may need to rely on personal savings or alternative income sources to bridge the gap.
Final Tips for Retiring Early
● Start as early as possible – The sooner you begin saving and investing, the easier it is to reach your goal.
● Take advantage of catch-up contributions – Once you’re 50, you can contribute more to IRAs and 401(k)s.
● Watch out for lifestyle creep – As your income grows, resist the temptation to overspend and instead funnel more toward your savings.
By following these steps and maintaining a disciplined financial approach, early retirement can potentially move from a dream to a reality.
Sources:
https://www.fidelity.com/learning-center/personal-finance/how-to-retire-early
Disclosure:
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
