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How to Retire Early: A Comprehensive Guide


Many people want to retire early. Unfortunately, that’s easier said than done. Not only do you have to earn enough money to put aside for an early retirement, but you have to make sure you know exactly what you’ll need, accounting for various costs including healthcare, housing and potentially long-term care as you get older. Plus, you have to be disciplined enough to keep to a budget during your working years so that you can actually save enough money for retirement. If you want to retire early, there are a few rules you should follow and contingencies to plan for.

For more help with planning for an early retirement, consider enlisting the help of a financial advisor.

Figure Out What You Need

The first and most crucial step to retiring early: know what you’ll need in retirement. The rule many experts stand by is that to have the same standard of living you have now, you’ll need about 80% of your current income in retirement. If you are currently pulling in $100,000 in salary, you’ll need to have around $80,000 in retirement income each year.

After you’ve calculated your annual expenses, you can extrapolate to see how much you’ll need in total. Be liberal in how long you’ll live — you don’t want to plan your retirement based on you dying at age 80 only to reach octogenarianhood and find yourself healthy enough to climb a mountain but with no money left over to buy hiking boots.

Let’s say you want to retire at 45 and use 90 as an aspirational life length. That’s 45 years of retirement, with $80,000 needed each year. Simple math shows that you’ll need $3.6 million in your retirement coffers.

Make a Budget and Stick to It

That’s a lot of scratch, but it shouldn’t be impossible for you to save, provided you’re willing to make sacrifices. The best way to make sure you’re saving enough for an early retirement is to make a budget and then stick to it.

Since early retirement planning is the goal, a substantial part of your budget will go towards saving much more than if you were willing to work into your 60s like most people do. That may mean forgoing vacations, living in a less expensive home or cutting down on your entertainment budget.

If you need help starting a budget, consider using SmartAsset’s budget tool.

Figure Out Your Strategy

SmartAsset: A Comprehensive Guide to Retire Early

The next step is to figure out how you’re going to go about saving all the money you need to. There are several available options, but some make more sense than others.
If you have access to a workplace retirement account like a 401(k), it’s probably in your best interest to use that, especially if your company has an employer match program. This is a perk some companies offer where they will match some or all of the money you put into your 401(k), which is essentially free money. Make sure you sign up for your 401(k) plan as soon as possible and put in the highest percentage you can. Most plans also allow you to use an automatic increase, raising the percentage you contribute each year.

Not all workers have access to a 401(k), though. If this is you, you can use a traditional IRA or a Roth IRA. A traditional IRA uses pre-tax dollars, while a Roth IRA is funded after taxes. With a traditional IRA, you’ll have to pay taxes when you take dispersals in retirement, while dispersals from a Roth IRA are not taxed. If you think your tax bracket is higher now, use a traditional IRA; if you don’t, consider a Roth.

Don’t Forget to Account for Healthcare

You may feel healthy as a horse right now, but that probably won’t last throughout your retirement. You need to account for how much you’ll need to pay in healthcare costs, both now and in the future.

Once you turn 65, you’ll be eligible for Medicare. For some people, that’s all they need to know. If you’re trying to retire early, though, you could have decades to account for before you are eligible. Knowing how you’ll get insurance and how much it will cost is key to making a plan to retire early.

Also, don’t forget about the possibility of needing long-term care later in life. One way to plan for this is to purchase long-term care insurance now.

Remember Social Security

SmartAsset: A Comprehensive Guide to Retire Early

The good news is that you won’t need to create all of your retirement income. Some of it will come in the form of Social Security, once you reach a certain age. Retiring early will probably mean you don’t get that much Social Security income, but when you’re planning for retirement every penny counts.

SmartAsset’s free Social Security calculator can help you estimate what you will likely get.

Bottom Line

Retiring early is possible, but it takes a good amount of planning and dedication. You need to figure out how much money you’ll need and then you need to save it. To get there, you’ll need to stick to a budget and make sure you aren’t forgetting any possible expenses.

Retirement Planning Tips

  • A financial advisor can help you prepare for an early retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Want to see how much your 401(k) will be worth when you retire? Use SmartAsset’s free calculator.

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