Early retirement means more than a change of scenery.
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Do you dream of early retirement? If so, youâre not alone. Itâs tantalizing to think of ditching the rat race early to enjoy more of your life.
Key Points
- Retiring early means your savings may need to last longer.
- Where and how you live can significantly affect your retirement costs.
- Part-time work can reduce how much you need to withdraw from savings.
There are several potential strategies for those whoâd like to opt out of working before their 60s. But is retiring early always the way to go? And if you do retire early, what are the pitfalls?
How much do you need to retire early?
First, take a step back to figure out whether you can actually afford to retire early. The earlier you retire, the larger your initial financial base needs to be. If you retire at age 50 versus age 65, your nest egg will need to last that much longer.
Retirement planning can start with a baseline, such as the 4% rule, a rule of thumb for estimating how much you might withdraw from your savings each year without running out of money. If you retire early, though, your savings may need to last longer, which could mean starting with more money or spending less.
- How much do you have now? When deciding on an early retirement age, start with how much youâve amassed in your retirement portfolio. Will it provide a good base to start from? Or do you need to accumulate more?
- Can you access your 401(k) early? If youâve been setting money aside in your 401(k), you might need alternatives. In general, you need to wait until age 59Âœ to access your nest egg (or face heavy tax penalties). If you leave a job at age 55 or older, the rule of 55 may allow you to take distributions from that employerâs 401(k) without the usual 10% early-withdrawal penalty.
- What about other accounts? If you have a Health Savings Account (HSA), that can help pay for healthcare costs in early retirement. If you planned ahead and opened a Roth IRA, you can withdraw those contributions at any time without penalty (just leave your earnings alone until youâre at least 59Âœ). You might also have taxable investment accounts to draw from.
- Do you have other income streams? Additional revenue streams such as a side business or rental income can help supplement your needs. If you have alternative income, youâre more likely to successfully retire early, even if you need to wait to access your tax-advantaged accounts.
- When will you take Social Security? Look ahead to when you qualify for Social Security. Early retirement and Social Security donât often mix, because you must be at least 62 to begin drawing on your regular benefits. However, your monthly payments at age 62 will be lower than if you were to wait until full retirement age, typically 67. And by waiting until age 70, you can get an even higher monthly benefit. Weigh Social Security with your early retirement age and how long you can go before you need that help.
Itâs essential to understand where your money will come from during early retirement. Want to eyeball it? Punch some numbers into the retirement calculator to the right.
Retirement lifestyle planning
Early retirement isnât just about the size of your nest egg. Donât forget to consider your desired lifestyle. How much money you needâand whether you can remain retiredâdepends on a number of factors:
- Location. Where will you live? If you retire to an expensive area, youâll deplete your nest egg faster. Do you have a plan that considers cost of living, taxes, and other factors? Retirement location is a big factor in remaining retired after you leave your job.
- Desired activities. Some retirement hobbies are more expensive than others. World travel costs more than puttering around in the garden. Figure out what you hope to do during retirement and factor that into your planning.
- Working while retired. Getting a retirement job can help you stretch your nest egg. Consider a part-time job or start an interesting side gig. Youâll stay active with your mind and body while earning a little extra money. Itâs even possible to start a completely new career. Your retirement second act might be more fulfilling than your first act.
- Volunteering. Staying active can help improve your mental health and overall well-being. Even if you donât receive payment, volunteering can be a good part of early retirement. You give back to your community and reap the intangible rewards. Plus, depending on your situation, you might be able to benefit financially. For example, there are travel programs that allow volunteers to reduce their travel costs in exchange for helping out.
As you decide whether to retire early, consider whether it fits your lifestyle goals and values. You donât want to engage in early retirement only to find yourself bored and running out of money.
The financial independence, retire early (FIRE) movement has been gaining momentum in recent years. However, if you want to FIRE, youâll need to plan far in advance. In many cases, the keys to a successful FIRE strategy include:
- Frugal living for between 10 and 20 years
- Aggressive saving and investing
- Developing multiple streams of income, including passive income
- Frugal living during retirement
Although there are different paths to FIRE, planning is essential if you want to succeed. And monitor your finances to make sure youâre on track every step of the way.
In the past, there was speculation that early retirement resulted in a decline in life expectancy and mental health outcomes. The assumption was that without work to give life meaning, death would follow swiftly. But after compiling the research from 25 studies, the National Institutes of Health found that early retirementâwhen not related to prior health issuesâisnât connected to early mortality.
An active, purposeful life is what most of us would want from early retirement. One key is freedom from financial stress. So, if you do plan to retire early, make sure youâre doing it for the right reasons, and with the right plan in place.
If you feel youâve covered those uncertaintiesâas much as you canâitâs possible to retire early and enjoy a long and healthy life, full of the meaning you give it.
Building a comfortable retirement typically involves combining Social Security with other sources of income.
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