How Much Money Do You Need to Retire Early?

keep calm early retirementEarly retirement. How great does that sound?

Just think about it – having the means and resources to quit your day job and bow out of the Rat Race much sooner than you expected. It’s a dream scenario that many of you likely play out in your heads over and over again, usually at your desk around 4pm on a Friday afternoon when your boss has given you a new high priority assignment that will require you to stay late.

Some of you have gone one step further than dreaming about the joys of early retirement and have actually started to plan for that early departure date.  Even after taking stock of your assets and expenses and asking yourself if you’re financially secure enough to make that leap, the answer to how much money you need to retire early may not be so straightforward.

Whether you’ve begun this inquiry already or it’s still just a daydream on your Monday morning drive to work in the rain, you’ll find that there is a complex network of variables and considerations to ponder before you can call it a day for good.

Finding an answer to how much money in savings you’ll need for an early retirement can be accomplished by conducting a full audit of your current situation, financial and otherwise. That includes the value of your current assets (home, savings account, 401k, stocks, etc.), how much you owe (mortgage, credit card payments, etc.), any revenue that’s currently coming in or is set to come to you in the future, the condition of your health, and of course, what it is you want to do now that you’re not going into the office anymore.

What are your plans for retirement? Do you see yourself as a jet-setter, traveling the world, or just relaxing and hanging out around the house? Do you have any new interests or hobbies you wish to pursue? Are they expensive?

Coming up with a game plan for your early retirement is going to involve more than just taking stock of your money. It’s just as important to figure out what your lifestyle plans are after you retire because they will factor heavily into how much money you’re going to need.

Defining Your Early Retirement

When you think of retiring early, how far are you planning to go with it? Do you still plan on holding down some form of small-scale or part time employment in any capacity, or are you making a clean sweep of your career entirely?

If you’re counting on the former, then you’re still going to have some income.  That means the plans for your nest egg can be adjusted slightly, at least for the initial period of your early retirement. However, once you have a clear cut definition of what early retirement means to you, then start planning accordingly.

Health Insurance Considerations

Calculating the amount you’re going to need will require you to factor in the costs of health insurance in order to meet the mandates of the Affordable Care Act. Once you reach the age of 65 you can qualify for Medicare Part A and Part C plans.  These healthcare options provide what the law dictates as “minimum essential coverage”. If you are planning on retiring early, then you’re going to need to get health insurance until you reach the age for eligibility.

Luckily, you have a choice of options in the Marketplace with various plans that provide different levels of care at a range of premium costs. Those costs are going to eat into the money you’re setting aside for your early retirement.

In order to reduce those costs, you may qualify for discounts or credits towards your premiums or any out of pocket expenses that come with these plans. Your eligibility will be determined based on income and the size of your household. You may not have to wait until the open enrollment period to enroll, either.  Losing your employer-based insurance coverage can trigger a special option that allows you to sign up for coverage outside of the open enrollment period.

Your Financial Outlook

Retiring early starts with taking a good long look at your financial situation. Tally up your assets in all of your various accounts, checking and otherwise, and get a grand total of all those balances. Be sure to add any income or revenue that will continue to come in after you retire.

Now that you’ve got a number to work from, start to list all of your potential expenses you might accrue during your retirement. That includes your current living expenses, estimated costs of the things you want to do when you retire, and don’t forget to factor in what you’ll need to pay for insurance premiums and other medical expenses. Remember, as we all get older things start to break down in our bodies. So if you’re healthy now or dealing with a medical issue, that should factor heavily into your estimated expenses.

Now take the total of your assets, measure that up against your estimated expenses, and this will give you a preliminary glance at your financial outlook. Does the first number greatly outweigh the second or is it the other way around?

If your assets are woefully insufficient to cover your costs, then you have some more work to do and early retirement may not be as early as you had hoped. However, if you can see the light at the end of the tunnel and you’re only off by a couple hundred thousand then you’ll have to make up that ground as quickly as you can. Time to put your nose to the grindstone and get ready to save and sacrifice.

How much you can save each year is up to you, but if it’s somewhere in the ballpark of $15,000 to $20,000 annually, you’re going to need to work another five or more years. During that time, you will have to dedicate yourself to saving, investing wisely, and do your best to prevent Uncle Sam from taking too much of your gains when tax season comes around.

The reality of your early retirement date is dictated by the size of your nest egg. In conducing that audit of your financial situation you’re either ready to burn that tie or you’re navigating morning traffic for another couple of years.

To put a clearer illustration on the type of numbers we’re talking about here, most financial advisers will suggest that your assets total anywhere from 10 to 15 times your annual salary at the time you’re ready to clean out your office. So let’s say you’re in your 40s and you’ve got your heart set on retiring at 55. If you’re making approximately $150,000 a year then you’ll need to have almost $800,000 in the bank already.

Of course your situation may vary and you might not need that much in your savings account based on your plans for retirement, the amount of resources you’ll need, and what sources of income you can still count on after you’ve retired. That can be in the form of a pension, investments, or you might opt to continue working in a highly limited capacity where some amount of revenue is coming in.

banking withdrawal cashThe Rate of Withdrawal

The amount of money you’ll have available for your retirement has to last for the duration of your life. So if you plan on retiring early, say mid-40s or early 50s, you’re going to have to make sure that nest egg is around for as long as you are.

Determining if you have saved enough can be based upon a rate of withdrawal that will ensure you don’t blow through everything you’ve saved too early. Your rate of withdrawal is how much you can spend annually and still rest assured that your money won’t run out.

Most financial experts point to 4% as a reliable rate of withdrawal, typically over a 30-year retirement. However, if you plan on retiring early, you’re going to need to calculate for longer than that 30 years.  In this case, 4% may not be sufficient for your retirement.

For example, let’s say you have $725,000 for your retirement.  A 4% rate of withdrawal breaks down to $29,000. That’s per year. Can you live on that much? Furthermore, if you increase that rate over time to keep pace with an increase in the standard of living, you may be relying on more than 4%.

Since we’re talking early retirement, your rate of withdrawal may need to be lowered to something like 2%-2.5%. That’s half of what we initially supposed.  Using the same numbers as the previous example, $725,000 for your retirement, leaves you with approximately $15,000 a year. To live on. That’s pretty much impossible in this day and age.  Plus, this is before we’ve even set aside any money to cover your insurance costs, much less living expenses.  Did you say you wanted to travel, maybe take up a hobby, eat once in a while? You’re starting to get the picture here.

Increasing Your Retirement Amount

We’ve established that your rate of withdrawal is potentially going to be lower than the standard 4% in order to ensure your money lasts with a possible retirement term of more than 30 years. If you’ve been used to living on a six-figure salary for a large portion of your career, then $725,000 is going to be woefully insufficient to keep you living comfortably. That means you’re going to need to keep saving and, depending on how much you have at your disposal at what age, you may need to push back that retirement anywhere from five to ten years.

While your current nest egg may force you to put off your early retirement so it’s not quite as early as you hoped, you may still be able to retire before 65, and ahead of your eligibility for Medicare or Social Security.  In that case, you’re going to want to make the most of those years where your savings are concerned.

To get where you need to be financially in the quickest amount of time, you’ll need to forgo some luxuries, make tough choices, and sacrifice enough to live the life you want during retirement. Check your bank statement, see where your spending can be curbed a little, find those expenses that are superfluous and keep that money in your pocket so it can be applied towards your retirement.

This can mean severely limiting how much you eat out to doing your own yard work instead of paying someone else to do it for you. Performing a strict audit of your finances is crucial to getting to a suitable nest egg as fast and direct as possible. If that means you have to reconsider every purchase you make, then do so. Ask yourself if this is something you really need to buy or if it’s best put aside in favor of your retirement.

You may also wish to supplement your main income with additional means of revenue. You know, some extra cash flow on a regular or semi-routine basis to help bring in more money that you can put away for your retirement. Pensions and personal savings are only the start and they can be of great help alongside your salary.

However, if you’re going to hit your number sooner than later you’ll want to get clever about coming up with more revenue. Some people have rented out additional space in their home or downsized their homes entirely to take advantage of the equity within. If your employer offers a 401(k) you’ll want to make the most out of any matching contributions they provide. It’s free money and you should do all you can to get as much of it as possible.

Social Security is another source of extra income that can start as early as 62 years old. Even that should be approached with a smart strategy for getting everything possible from it. Holding off on accepting those payments can pay off later because you can wait to get that money.

The longer you wait, the more money you can receive with each payment. The maximum age for delaying Social Security payments is 70 years old where your payouts can be 35% more than they would be if you start getting social security checks in the first year at 62 years of age. Your amount will depend on what you were making each year and how much you put into the program. So while you may wait longer to start getting that income, it’s a nice safety net to know is coming eight years later on, if you decide to wait through the maximum delay period.

You can trigger your payments at any time after you turn 62 and each year you delay yields you a little more.  Once you start getting those checks, the increase in payments does not raise. You’re locked into whatever percentage and amount you’re entitled to in the year you start getting your social security. 70 just happens to be the year you can start getting the maximum.

Savings Beyond Your 401(k)

Most employers have some kind of retirement program in place, usually a 401(k), which they will often contribute to match the money you’re putting in from every paycheck up to a certain maximum. That may not serve your purposes for growing your nest egg quickly enough and it might be time to find some other avenues in which to start accruing extra revenue.

There are numerous other savings accounts available such as Individual Retirement Accounts (IRA’s), Roth IRA’s and annuities. Each of these financial instruments is a smart choice for protecting your money from things like contribution limits and tax breaks, but they do come with a few drawbacks such as the inability to bring in matching funds from another party.  Plus, taxes are imposed on payouts that come from your annuities.

Investing requires risk, but these options work the best for minimizing that risk of losing your initial capital. It’s also important to know if the financial company or insurance provider issuing these IRA’s or annuities is solvent and reliable.  That way, if something should happen to you, your family and loved ones will be provided for in case you pass away.

Re-defining Your Early Retirement

So you’ve got your heart set on early retirement, but some of the numbers aren’t adding up in your favor. You don’t quite have enough money to do it just yet, but you’re not too far away from the nest egg you need to lead a comfortable life during your golden years.

If so, it might make sense to redefine your idea of early retirement by living a comfortable life that lets you focus on doing what you love, at least for the time being. Maybe it means leaving your commute and your office behind and working on alternative sources of income. Perhaps you can turn a hobby into a small business and drum up revenue from that.

Many early retirees continue to work by picking up a fun, low-impact part time job. Something local that doesn’t take up a lot of their time and still affords them the opportunity to bring in enough income to help close the gap between where they are financially and the number they need to reach for their retirement. This is often in addition to any pension they receive and, depending on how your money situation looks, it could take you right up to your first year of eligibility for Social Security if you wish to start collecting at age 62.

This highly diminished work schedule is also a good way to transition from going to a job every day for most of your life to not having that commitment anymore. While it sounds pretty enticing, many retirees, early or otherwise, find it a bit of a shock to not have that part of their life anymore. They lose connections to the colleagues whom they called friends and not seeing them each day can leave an unexpected void.

Concept Property Investment message on wood boards. A keyboard and a glass coffee table.Vintage tone.Buying Property

Spending money on real estate sounds like an odd choice when we’re discussing saving money and building a nest egg. However, one way that potential early retirees boost the size of their retirement accounts is by purchasing property with the intention of renting it out for regular, passive income.

This can be a large undertaking not just financially but could require you devote more of your time to it than you might think at first glance. However, it can be a highly lucrative form of income that works for you on a consistent basis, depending on the type of property you decide to buy.

Property ownership comes with many responsibilities of time and resources, but for early retirees who are ready to ditch their day job, this is a good way to transition into retired life.  By owning and managing rental properties, all they have to focus on is the upkeep and care of the property that they are renting out.

This option still lets you relax and enjoy life while bringing in a steady stream of revenue from renters. You can even turn this into a side business by owning more than one piece of property and establishing additional revenue streams. The size of your investment of time and capital is up to you and your current financial situation, but property ownership can help you retire early even if your nest egg isn’t exactly where you want it to be just yet.

Our Final Thoughts

So how much money do you need to retire early? That’s entirely up to you and the type of life you want to live after you’ve left the workforce. While we’ve covered some of the essentials in terms of what you should aim for in growing your retirement accounts and the steps you may want to take to reach your goals, the reality is that only you know what you’re really going to need for an early retirement. Once you establish how you want to spend your post-employment years and what your plans are going to cost, then you can begin to work towards meeting those goals head-on.

Leave a Reply

Your email address will not be published. Required fields are marked *


Time limit is exhausted. Please reload the CAPTCHA.