Do you want to retire early? Many people wish to leave the rat race sooner rather than later, whether to travel, pursue a passion project, start a business, volunteer, or simply stop working.
When you plan to work until you reach full retirement age, however, retirement planning is hard enough. It’s even more important if you want to retire years—or even decades— earlier.
Is it possible? Absolutely. It will take work and dedication unless you are independently wealthy, which few individuals are. Here are five important steps to follow.
Estimate Your Retirement Expenses?
If you wish to retire early, the first step is to figure out how much money you’ll need each month once you’ve retired. Begin by totaling up all of your out-of-pocket expenses, such as housing, food, clothing, utilities, transportation, insurance, and healthcare.
You should be debt-free when you retire. That means there’s no mortgage, no credit card debt, no unpaid medical expenses, and no student loans or other debt. If you still have debts to pay off, make sure those payments are reflected in your budget.
After that, put in any extra expenses you’ll have, such as entertainment, travel, and hobbies. Add everything together to figure out how much money you’ll need each month to live the retired lifestyle you want.
Naturally, your budget may vary as you progress through retirement—you might decide to cancel your life insurance policy, for example. This rough budget will serve as a strong beginning point, so take the time to make it accurate and practical.
Calculate How Much You Need to Retire
The next step is to figure out how much money you need to save now that you have an estimate of your monthly spending. There are various methods for calculating this. One strategy is to have 25 to 30 times your projected annual expenses, plus enough cash to cover one year’s spending. To calculate an annual estimate, multiply your monthly spending by 12. Find your “target” range next. Here’s an illustration. Assume your monthly expenses are $5,000 per month, or $60,000 annually. To retire with this strategy, you’ll need between $1.5 million and $1.8 million besides $60,000 in cash.
Another method is to split your projected annual expenses by 4 percent to determine the size of your nest egg. You’ll need $1.5 million ($60,000 ÷ 0.04) if you plan to spend $60,000 every year.
Divide by 3 percent if you want more flexibility in retirement (or somewhere between 3% and 4%). You’ll need $2 million ($60,000 ÷ 0.03) with the same $60,000 per year budget.
A cushion is always a good idea.
Subtract your existing nest fund from your desired figure to find how close you are to your retirement aim. If you require $1.5 million but only have $500,000, you’ll need another $1 million before you can retire.
Adjust Your Current Budget
This is where discipline is needed. To make up that $1 million difference, you’ll have to work extra hard—especially if you want to do it quickly. Many people who aspire to retire early live on half of their salary (or less). The rest is used to pay down debt and build that emergency fund.
Here you have three choices:
- Spend less.
- Earn more.
- Do both.
You must construct a budget in order to understand where your money goes and where you may save money. There are many budgeting tools available to make this time-consuming task a little easier.
Max Out Your Retirement Accounts
It’s a good idea to save early and often, regardless of when you want to retire. Individual retirement accounts (IRAs) and 401(k)s are excellent options for achieving this.
Do everything you can to max out your retirement accounts while you’re still working. A typical IRA allows you to save for retirement while generating tax-free earnings and receiving a tax deduction in the year you contribute. When money is withdrawn in retirement, however, it is taxed at your current income tax rate in the year of withdrawal. A Roth IRA permits you to take certain distributions or withdrawals tax-free, and your gains grow tax-free. Roth IRAs do not provide a tax deduction in the year they are established.
Individuals can contribute up to $6,000 per year to a regular or Roth IRA in 2021 and you can make a $1,000 catch-up contribution each year if you are 50 or older.
You can contribute up to $19,500 per year in 2021 (rising to $20,500 in 2022) if you have a 401(k) at work. In both 2021 and 2022, you can contribute an extra $6,500 if you are 50 or older. Make sure you save enough to take advantage of any matching funds your company may provide; it’s free money.
Work With a Financial Advisor
You face two major difficulties if you desire to retire early:
You have a shorter amount of time to save for retirement.
In retirement, you will have more free time.
Working with a financial advisor regularly is a good idea unless you’re a rock star investor. An advisor can assist you in developing an investment strategy to help you achieve your retirement objectives. They can also show you how much money you need to put aside each month to achieve your goal in a particular number of years.
Your advisor can assist you manage your income streams once you retire so that the money lasts. Dividends, mandatory minimum distributions, Social Security, defined benefit plans, and real estate investments are all examples of income streams.
Take the time to locate an advisor with whom you get along—after all, you could work with them for decades. If you’re concerned about the cost of a financial advisor, keep in mind that you’re paying for their skills and their time. Those skills will more than compensate for the cost if you discover the correct counsel.
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