For many people, early retirement seems like a far-fetched idea. While it is certainly an ambitious goal, it’s possible to achieve when you have a solid plan in place. Here’s what you need to know about retiring early and how to build the best strategy.
Top Factors to Consider
Your Spending
The first step to knowing how much you need for early retirement is knowing how much you’ll spend. Experts often recommend replacing at least 80% of your pre-retirement income to sustain the same lifestyle, so if your pre-retirement income is $60,000, expect to spend about $48,000 annually in retirement.
This number, however, is only meant to give you a general idea. Your lifestyle in retirement may look different than it does now, so it’s always best to discuss with a qualified wealth advisor about your retirement vision and expected spending.
Social Security Income
When determining your retirement income needs, be sure to account for funds that will come from fixed sources (like your Social Security benefits). If you plan to retire well before Social Security kicks in, leaving it out of your calculations completely will give you a better idea of how much income you’ll need to generate from other sources, like your portfolio.
Health Insurance
No matter when you retire, you won’t be eligible for Medicare until your 65. This can cause a problem for early retirees who received their health insurance through their job pre-retirement. Some jobs may allow you to keep your plan after retirement, but if not, you’ll need to consider where your health insurance will come from and how you’ll pay for it.
Your Age
How old are you currently? What age are you hoping to retire? Depending on the length of time in between, you’ll need to adjust your saving and investing approach to meet your goals. For example, if you’re young with a longer time horizon, now’s the time to invest more aggressively and build up your wealth.
Building Your Plan: What to Include
Your Goals & Vision
All retirement plans start with defining your goals. What does early retirement look like for you? How are you going to fill up the 40 hours you spent working each week? Many people are not prepared for the psychological impact of retirement, but planning out your goals and vision for retirement can help alleviate any negative feelings. This is especially important for individuals who will be spending upwards of 20 or 30 years in retirement.
Taking the time to think about your vision of retirement will also help you determine your monthly expenses and how much you’ll need to save.
A Health Insurance Plan
Healthcare will be one of your biggest retirement expenses, so it pays to have a plan. For a tax-efficient saving strategy, consider opening a health savings account (HSA). Withdrawals are tax-free, the funds grow tax-free within the account, and contributions can reduce your taxable income.
In addition to an HSA, there are a number of different health insurance plan options for early retirees, such as short-term insurance plans, spousal insurance, membership-based group health plans, and more.
A Housing Plan
Housing expenses, such as major home repairs, can put a big dent in your retirement savings. Before you retire, focus on getting your home ready while you’re still receiving a steady income stream. Preparations might include downsizing your home, finishing renovations, or paying off your mortgage. If you don’t currently own a home, you’ll need to consider whether you plan to purchase one or continue renting, and how that impacts your saving goals.
A Saving and Investment Plan
Someone in their 20s hoping to retire by age 40 will need to invest differently than someone in their 40s hoping to retire by age 50. No matter your age, a qualified financial advisor is a valuable resource when it comes to developing an investment plan that’s aligned to your objectives and risk tolerance.
Be Prepared With These Tips
Save and Invest Early
Every investor’s strategy will vary, but one thing remains the same: the earlier you invest, the better. To build your nest egg and ensure a comfortable early retirement, you want to give your money as much time as possible to compound and grow.
Plan to Continue Earning Income
Most people choose to create additional income in addition to their savings and fixed pensions. Many early retirees may start a side business, rent out real estate, or pick up part-time work that better aligns with their lifestyle. In addition to alleviating some the mental and social obstacles of retirement, it helps ensure you don’t experience a retiree’s worst nightmare—outliving their retirement savings.
Don’t Withdraw Early
Even if your retirement account has a sizeable balance, it’s best to avoid withdrawing early. In addition to the income tax you’ll need to pay, the IRS usually charges a 10% penalty on any withdrawals taken before you turn 59 ½. Plus, the longer you leave your money invested, the more it’ll grow.
To learn more about how feasible early retirement is for you, contact Ironwood Wealth Management today. With our comprehensive financial planning services, we’re here to ensure your financial strategy is aligned with your goals and vision of retirement.
