How to Retire Early and Know When You Should Consider It

retirement balloonsEarly retirement. Sure, we all dream of it happening some day sooner or later. But the realities of such a thing taking place are far more distant than most of us might like. Or is it? Take a look at your current situation and you may discover that retirement could be closer on the horizon than you first thought. It begs the question, are you ready to retire early?

Money is only one piece of the puzzle, albeit the most important and potentially restrictive. Some folks fall in love with the idea of retiring early until they really know what that actually means. Others find themselves facing an early exit without any say in the matter as they fall victim to downsizing or some other cost-cutting measure that has left them without a job at an age where finding another may prove incredibly difficult.

If either of these situations sound like yours, then it might be time to take stock of your current financial outlook. Where are you with respect to debt, pension, savings, your health, and any plans for your Golden Years? These are all of the things you need to start thinking about before you retire early. Do you have a strategy in place for when you trade in the suit and tie for a pair of board shorts and flip-flops? What about those life plans in retirement – do you want to travel, take up a hobby, or see the grandkids more often?

You’re going to want to factor all of those things in when you start planning your financial exit strategy from the Rat Race. But before you start writing up that resignation letter, let’s have a look at some of the important steps, monetary and otherwise, you need to take first towards planning for an early retirement.

Look at Your Finances

It all begins with checking out your checking account and any other investment and retirement accounts you currently have at the moment. Add up all of your balances and see what number you get. Then start on an analysis of what you think your expenses will be in retirement. Lump in everything; current costs, the expenses you’ll need to cover for the activities you want to enjoy in retirement, and start thinking about the types of medical costs you could be facing as you get older. Compare the two numbers you get from both audits and you’ll start to see a picture of your financial outlook for retirement.

Does this paint a rosy picture or are you far off from having the necessary numbers to live the kind of life you want? If it’s the latter, then you’re going to need to start saving now. The time has come to start making a serious plan and it’ll help dictate when you can realistically call it a day at the office.

Depending on how well your money in the bank is going to cover your retirement expenses, you can start to set a date for retirement, based on the shortfall that still currently exists between your savings and your estimated expenses. If you don’t have that shortfall, then congratulations, you’re that much closer to retirement. But if you’re still a good $100,000 to $200,000 off, you’ll need to start doubling down on your 401k and savings accounts now.

That means saving and that might also mean some sacrifice, the first of which being you’re still going to need to keep heading into work every morning for the foreseeable future. If you want to retire in the next five years and you still need a hundred grand to get into that sweet spot, you’re looking at having to save $20,000 a year. If your further off that this from your financial goals, then your retirement age may be even later.

Living on Your Current Retirement Income

Consider how much you have in the bank and then decide if it’s really enough. The best way to do this is by following the rule of 4%, which states that you may withdraw that much from your accounts for the first year of your retirement and then increase the percentage each year concurrent with the trends of inflation. So let’s say you have $725,000 in your nest egg and 4% equals $29,000. Is that enough for you to live on? There is one way to find out, and that’s by taking a test run on that figure for a year or so, while you’re still working and bringing in an income. If you find that you’re having some difficulty living on only $29,000 a year, factoring in the difference in your lifestyle and routines between now and the future, of course, then you’re going to need to save some more to hit that target number for living life in retirement.

If you plan on doing a lot of traveling, picking up some expensive hobbies, or just spending on the things you’ve always wanted but never had the time for, then you’re going to need even more cash in the bank. Conversely, if you find that $29,000 a year is rather comfortable for things you need in your later years, then you’re getting much closer to retirement.

golden nest eggGrowing that Nest Egg

Okay, so maybe $29,000 isn’t cutting it. Now what? Time to start focusing on increasing your savings and decreasing your spending. I know, sounds like a lot of fun, but we’ve already established the cold hard facts that saving is going to mean sacrifice. Well then, the sooner you start, the quicker you’ll be enjoying your retirement…your way.

You’ve already taken the first step towards increasing your savings by sticking it out at work a few more years. But if you want to get there a bit quicker, start to find places where you can tighten your belt. Trimming some routine expenses will certainly add up quick. Maybe you cut back on the number of times you go out to eat instead of cooking at home. Brew your own coffee instead of dropping $4.75 every morning at Starbucks. Mow the lawn or clean the pool yourself over having neighbor’s kid come by and do it each week for $20.

How much you ultimately want to sacrifice for your retirement is up to you, but when you’re about to reach for your credit card on a non-essential expenditure, stop and think first. Is this something you really need right now or would that money be better served in retirement when you’re taking that trip to Italy you’ve been dreaming of all your life. This is about retiring early, so the more sacrifices you make will get you closer to that goal a lot faster.

Identify More Revenue Streams

Your current monthly income is a great start but finding more ways to bring in some extra cash can also prove beneficial to your retirement outlook. You may have a pension in the equation and personal savings, but seeking out other pursuits for additional cash in retirement takes a little clever thinking.

For example, Social Security will be a revenue stream that you can look forward to receiving once you turn 62. But if you wait to start getting payments you can maximize the amount you have coming in. Delaying until age 70 can yield around 35% more per payment. So it makes sense to hold off on collecting those checks if you can.

There are other ways to bring in more revenue, maybe do some part-time work that you enjoy, rent out a spare room you’re not using, take out a reverse mortgage, or downsize your home altogether so you can take advantage of the equity you’ve built up.

Getting creative will help find some new revenue streams. That also includes maximizing the money you’re entitled to receive on investments. If your employer is willing to match the contributions to your 401(k), then take as much of that money as you can. Getting the full benefit of that generosity can also prove to be a useful tool for making your way to an early retirement.

Consider Your Savings Options

That 401(k) may just be one part of the solution. If you’re contributing the most to your account, with your employer matching it, and this fund isn’t getting you there as fast you hoped, then you may want to consider taking a closer look at some other types of accounts such as Individual Retirement Accounts (IRA’s), Roth IRA’s and annuities.

With IRAs you have lower contribution limits and there are no matching funds, but you still get the same benefits as other qualified retirement plans. Annuities offer a tax break as they don’t impose taxes on your earnings until you start receiving the payouts from that fund. This option is a really good choice for early retirement as you’ll continue to receive distributions for as long as you stay alive. Once you pass on, the annuity ends so be sure you plan on sticking around for awhile.

That goes for you and the insurance company you select for purchasing that annuity. Choose one that you know is highly rated, solvent, and has a solid financial future ahead of it. The last thing you want is for your annuity to end because the company went under.

Don’t Forget about Your Health

As we get older, our bodies have a tendency to start breaking down. It’s just a cruel fact of life and it can be even tougher when you realize so much of that money you put aside to enjoy your retirement years is being monopolized by medical expenses. So take some crucial measures to ensure that the money you’re saving isn’t devoted entirely to saving your life.

With Medicare kicking in at age 65, you may need to seek out some affordable health insurance options to tackle the ever-rising costs associated with good medical care. Some investment experts estimate that the average cost of medical expenses for a retired couple is roughly around $247,000 for the remainder of their lifespan. Getting a jump on having a good health insurance policy that won’t cut into your savings through steep monthly premiums, high deductibles, or paying out of pocket for treatment and medications will be of great benefit to anyone intent on retiring early.

For some prospective retirees opening a Health Savings Account is a good way to save for the inevitable bills that will come with old age. The money that is deposited, accrued through interest, and withdrawn for qualified medical expenses is entirely tax-free.  This type of investment can better prepare you to avoid using the money you’ve ear-marked for enjoying life down the road.

Get Rid of Debt

All of these points so far are very important to getting your financial house in order before you retire. But none of this is going to do you much good if you’re still carrying around some serious debt. Chances are you’ve cleared up your student loans long ago but you may have a mortgage, car loan, or just too many credit cards with high balances hanging over your head.

Before you even think about trying to retire, you need to pay off your debt. The last thing you want is to be paying off these old bills of your nest egg. That’s just defeating the purpose entirely. All of your skimping, saving, and sacrifice will be for naught unless you’re completely rid of your debt.

The Great Unknown

So let’s say you’ve taken all of the necessary precautions with respect to budgeting, saving, bringing in additional revenue streams, and now you’ve put all of your plans into effect. In the money department, you may just be ready for an early retirement. The numbers are adding up and your nest egg is healthy enough to support you in the life you’ve planned after retirement. Your money is ready, but are you?

That’s right, are you in the proper mindset to retire? Millions of Americans who retire, whether it’s early or well into their mid to late 60’s, may have their hearts set on calling it a career as quickly as possible. But they finally reach that point and then what? The daily routines and practices they have been accustomed to for a large majority of their life are no longer there. It can sometimes prove more emotionally challenging than they had anticipated.

For some, retirement is far from the exciting adventure that many of us dream it might be some day. Becoming mentally and emotionally prepared for retirement can be just as important as being financially prepared.

take control of your retirementPlan Your Retirement

In this case, we’re not talking about planning in the financial sense. This is about planning what you’re going to do with your days. Have you thought about how you’re going to fill your time now that you have so much more of it to yourself? You’ve been devoted to a career and a job for such a long period of time, when that thing is no longer a part of your life it can present a significant void.

Deciding on what you want to do after retirement before-hand can make all the difference between actually enjoying your retirement and sitting around the house bored out of your gourd and wondering why you were so fast to retire in the first place.

Work represents more than just a routine job, there are often social connections that are no longer in place once you leave the workforce. The people you would see and interact with every day aren’t there anymore and you can easily lose touch with them after you’ve cleaned out your office. So to prevent from sitting on your couch and watching daytime television to fill your days, make a real plan for your retirement.

These decisions might have been made when you started putting together a financial plan for the road ahead, but you may be surprised how many retirees say they’re going to do certain things and then forget about them or simply just wing it and live a life free of structured plans. But with even the most basic list of ideas and arrangements under your arm, you can make the most out of the time you’ve earned for yourself.

Take up a hobby, learn how to golf, travel to places you’ve never been before, maybe get a boat. These may all sound like fun and active pursuits but they can also get expensive, so make your plans with an eye on the size of your nest egg and the budget you’ve created for it. Having a list of things you want to see and do after you retire will benefit you greatly, but not if it’s going to upset the delicate balance of your account balances.

Some experts on the matter suggest establishing three pursuits for yourself in retirement. Maintain a set of activities or interests that will help you take up your time and keep you mentally and emotionally grounded through this potentially challenging transition in your life.

Stick to the Plan

This goes for both of your retirement plans – the financial and the mental. These two will intersect repeatedly as you keep an eye on your income while you make the arrangements for living the life you’ve been wishing for after your career has come to an end. If you want to travel abroad, put in the time and effort to find the best deals on your airfare and accommodations. Bargain hunting is a large part of sticking to your plan.  By keeping more money in your pocket and living within your budget, you’re making a commitment to yourself to accomplish all of your retirement goals.

Frugality is a large part of the solution, but so is making sure that you’ve saved enough to keep your savings self-perpetuating as inflation is constantly looming over your nest egg.  The more inflation rises each year, the more money that is likely to come out of your savings. So while you may have sacrificed a lot to get to this comfortable financial position, you don’t want to keep having to do so just to maintain the same level of comfort.

Just make sure you’re sticking to the plan you’ve set forth before you retire and you’ll be able to get the most out of that 4% or more of your money each year of your retirement. The last thing you want is to find yourself running out of cash and looking for work in your 60’s or 70’s.

Final Thoughts

Retirement is no laughing matter. That’s why you want to begin thinking about it as soon as you can. One of the biggest mistakes many of us make is the time we let pass us by before getting our retirement plans thought out. It’s not something any of us is considering in our 20’s or 30’s but it should be! You don’t want to be working your entire life, do you?

Sure, there are those of you who love what you do and you plan on doing that thing up until the day you die. But for those of you who want to retire early, it can be within your reach if you just make some preliminary accounting of the strength of your finances and start to adjust your spending and saving habits accordingly.

Just as important as your money is your time. Retirement can be an amazing part of your life because it will afford you the ability to get to do the things you may have been putting off because of work, family, even your own apprehension at trying something new. But your working days are behind you, the kids are grown up with kids of their own, and you’ve matured into someone with an open mind and an adventurous spirit.

You still have plenty of life left to get to do all of the things you wanted. Retirement doesn’t have to mean you’re old or washed up or tired. It should revitalize you to live life to the fullest, but you’ll need to have enough money to do it first.

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