Many people want to retire early. Unfortunately, that’s easier said than done. Not only do you need to make enough money to set aside early retirement, but you need to make sure you know exactly what you’ll need, taking into account various costs, including health care, housing, and possibly long term care as you age. Additionally, you need to be disciplined enough to stick to a budget during your working years so that you can save enough money for retirement. If you want to retire early, there are a few rules to follow and contingencies to plan for.
For more help with planning for early retirement, consider hire a financial advisor.
Determine what you need
The first and most crucial step in retiring early: knowing what you will need in retirement. The rule many experts stick 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 currently earn $100,000 in salary, you will need about $80,000 in retirement income each year.
After calculating your annual expenses, you can extrapolate to see how much you will need in total. Be liberal about your lifespan – you don’t want to plan your retirement around dying at 80 only to hit eighty and find yourself healthy enough to climb a mountain but with no money to buy running shoes. Trek.
Let’s say you want to retire at 45 and use 90 as your ideal lifespan. That’s 45 years of retirement, with $80,000 needed each year. Simple calculations show that you will need $3.6 million in your retirement coffers.
Make a budget and stick to it
That’s a lot of zeros, but it shouldn’t be impossible for you to save, provided you’re willing to make some sacrifices. The best way to make sure you’re saving enough for early retirement is to make a budget and stick to it.
Since planning for early retirement is the goal, a substantial portion of your budget will go to saving much more than if you were willing to work into your 60s like most people do. This may mean foregoing vacations, living in a cheaper home, or cutting your entertainment budget.
If you need help budgeting, consider using SmartAsset’s budget tool.
Determine your strategy
The next step is to figure out how you’re going to save all the money you need. There are several options available, 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 it, especially if your company has a employer matching program. This is a perk that some companies offer, where they will match some or all of the money you put into your 401(k), which is basically free money. Be sure to enroll in your 401(k) plan as soon as possible and put in the highest percentage possible. Most plans also allow you to use an automatic increase, increasing the percentage you contribute each year.
Not all workers have access to a 401(k), yet. If that’s 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 will have to pay taxes when you take retirement dispersions, while the dispersions of 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 consider health care
You may feel healthy as a horse right now, but that probably won’t last through your retirement. You need to consider how much you will have to pay in healthcare costs, now and in the future.
Once you turn 65, you will be eligible for Medicare. For some people, that’s all they need to know. If you’re trying to retire early, however, you could have decades to consider before you qualify. Knowing how you will get insurance and how much it will cost is key to planning for early retirement.
Also, don’t forget the possibility of needing long term care later in life. One way to plan for this is to purchase long term care insurance now.
Don’t Forget Social Security
The good news is that you won’t need to create all of your retirement income. Some will come in the form of Social Security once you reach a certain age. Retiring early will likely mean you won’t receive as much Social Security income, but when planning for retirement, every penny counts.
Smart Assets free social security calculator can help you estimate what you’re likely to get.
Conclusion
Retiring early is possible, but it takes a lot of planning and dedication. You need to figure out how much money you will need, then you need to save it. To achieve this, you will need to stick to a budget and make sure you don’t forget any expenses.
Retirement Planning Tips
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A Financial Advisor can help you prepare for early retirement. Finding a qualified financial advisor doesn’t have to be difficult. Smart Assets free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Want to see how much your 401(k) will be worth when you retire? Use SmartAsset’s Free Calculator.
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