Retiring early holds an undeniable appeal. Picture swapping office buildings for sandy beaches in Florida, waking up to the aroma of freshly brewed coffee instead of alarm clocks, and having the freedom to pursue your interests without the constraints of a traditional job.
However, the actuality of early retirement necessitates a substantial amount of savings and meticulous financial planning.
Key takeaways
- 51 percent of retirees cited a desire to do other things or spend time with family as important factors in their decision to retire, according to a May 2024 report by the Federal Reserve.
- Meanwhile, 29 percent of retirees stated that health problems influenced their decision to retire, and 16 percent retired partly to care for family, according to the Federal Reserve report.
- A significant percentage of retirees (46 percent) exit the workforce earlier than expected, as per a 2023 survey by the Employee Benefits Research Institute.
- 57 percent of Americans in the labor force feel behind in their retirement savings, according to Bankrate’s Retirement Savings Survey, with 35 percent feeling “significantly behind.”
- Only 15 percent of working Americans believe they are ahead in their retirement savings, with 6 percent feeling “significantly ahead,” according to the Bankrate survey.
Why is Early Retirement So Desirable?
A better question to ask would be: Why wouldn’t someone aspire to retire early?
Some of the advantages of retirement include:
- Pursuit of creative projects: Early retirement provides the perfect opportunity to pursue your passions, whether it’s writing a book or exploring artistic endeavors.
- Spend more time with family and friends: A timeless reason for considering early retirement.
- Travel: With more time on your hands, early retirement allows for extensive travel experiences.
- Relaxation: The value of simply taking a break cannot be overstated in retirement. For many, retirement is more about what they choose not to do rather than what they plan to do.
Each individual has their own motivation for stepping away from the traditional work routine. Some seek a more laid-back lifestyle, while others desire quality time with loved ones or wish to delve into their hobbies. Health concerns or a stressful work environment might also drive some towards early retirement.
Irrespective of your reasons, achieving financial independence at an earlier age demands proactive planning and a disciplined savings regimen. Simply daydreaming at your desk won’t transform your vision into reality.
Moreover, there are numerous obstacles on the journey to early retirement. Inflation, unforeseen expenses, and market fluctuations can complicate or even derail the most well-thought-out retirement strategies.
Whether you eventually opt for early retirement or not, there’s immense value in preparing for an early exit: You’ll be ready in case you have to retire unexpectedly due to illness or familial circumstances. If early retirement doesn’t materialize, you’ll at least have additional savings accumulated by the time you do exit the workforce.
As the saying goes, aim for the moon. Even if you fall short, you’ll still land among the stars.
How to Plan for Early Retirement: 7 Steps You Can Take
If early retirement is a priority for you, here are seven steps you can implement to turn your retirement dream into a reality.
1. Map out your retirement goals
Determining the amount of money you need to save for retirement hinges on the lifestyle you envision. There are no right or wrong answers when it comes to defining your ideal retirement, but each scenario comes with different financial implications. Before charting your path to early retirement, you must have a clear understanding of the resources required to sustain your desired lifestyle.
Specify the age at which you aim to retire and the lifestyle you aspire to. Take into account factors like housing expenses, healthcare costs, and travel aspirations. This will aid in calculating the savings necessary to achieve your retirement objectives.
You can also utilize Bankrate’s retirement calculator to estimate the amount needed for retirement by your target age.
2. Know your numbers
Gaining a comprehensive understanding of your current financial status is crucial for crafting a feasible plan. This involves assessing your income, expenses, assets, and debts.
Are you planning to purchase a house, fund your children’s education, or pursue further education? Identify any significant milestones or expenses that could impact your savings and investment strategies leading up to retirement, and ensure these financial curveballs are accounted for.
Once you have gathered this information, develop a detailed budget. This will help you monitor your income and expenses, identify areas where you can reduce costs, and save more for retirement. Financial planning tools or budgeting apps can provide a clear overview of your finances.
3. Create a retirement budget (or a few of them)
Setting a savings target for retirement can sometimes result in a figure that feels too abstract and overwhelming to be practical.
Take the time to outline a monthly retirement budget. Similar to your current budget, you can create sample budgets to determine your potential expenditure in retirement.
Income and expenses typically shift during retirement. You’ll need to estimate the Social Security income you’ll receive and establish a sustainable withdrawal rate from your retirement accounts, such as a workplace 401(k) or an IRA. Remember, investments can be a significant income source in retirement but may fluctuate based on market conditions.
While you may spend less on items like transportation in retirement (goodbye daily commute!), healthcare expenses tend to rise with age. If extensive travel is on your agenda, budgeting for it is essential.
Don’t confine yourself to a single budget – develop multiple budgets that depict different scenarios of your potential spending.
4. Maximize your retirement savings
Contribute as much as possible to your retirement plan, such as an employer-sponsored 401(k) or 403(b), and capitalize on any employer matching contributions. If you’re self-employed, consider a solo 401(k) or a Simplified Employee Pension (SEP).
Most retirement experts recommend saving between 10-20% of your income for retirement. However, if you aim to retire early, bear in mind that you’ll likely need to set aside a more substantial amount. Since you cannot claim Social Security benefits until age 62, early retirees must amass sufficient funds to cover expenses for several years before regular retirement benefits kick in.
While traditional 401(k)s and IRAs are popular choices, these tax-advantaged accounts impose penalties for early withdrawals if funds are accessed before age 59 ½. Therefore, if you plan to retire early, consider investing some funds in a taxable brokerage account and delay withdrawals until your income decreases post-retirement. In 2024, the long-term capital gains tax rate is 0% if your income falls below $44,625 for single filers or $89,250 for married couples filing jointly.
5. Figure out health insurance
An often overlooked aspect of early retirement is determining how to cover healthcare expenses. Upon retiring, you will lose employer-based health insurance, which could pose a significant challenge if other family members rely on that coverage. Furthermore, you become eligible for Medicare, the federal health insurance program, only once you reach 65 years of age.
You might have the option to enroll in a plan through the federal Health Care Marketplace, join your spouse’s employer-sponsored coverage, or utilize funds from a health savings account (HSA) to self-pay for medical expenses.
6. Talk to a financial advisor
Seeking advice from a financial advisor for retirement planning is prudent regardless of when you intend to retire. However, if you’re contemplating early retirement, consulting an expert becomes even more crucial.
An advisor can offer tailored guidance and help you stay on course to achieve your goals. Look for an advisor who is a Certified Financial Planner (CFP). Bankrate’s financial advisor matching tool can assist you in finding an advisor in your vicinity.
7. Be prepared to make changes
Regardless of the path you select, be prepared to adjust your spending habits now to realize early retirement. Few people retire early for a reason. For most individuals, pursuing early retirement entails a focused approach towards this goal, sacrificing non-essential expenses in the short term, and channeling every available dollar into investments.
Remain adaptable and regularly review and modify your plan as necessary.
Bottom Line
Early retirement is a long-term endeavor that demands meticulous planning and disciplined financial practices. Stay dedicated to your objectives, make informed choices, and seek professional guidance when necessary. By following the seven steps outlined above, you can enhance your chances of attaining financial independence and relishing a rewarding retirement.
— Jessica Blankenship contributed to a previous version of this article.