Most of us have got an ideal retirement age in our minds. Until some years back, the common age of retirement was considered to be 60. However, lately, many people are finding the idea of early retirement more attractive.
People are not shying away from planning their retirement in their 40s and early 50s. The reason for this change of mindset is two-fold.
- FIRE concept: People today are embracing the concept of FIRE, which stands for Financial Independence, Retire Early. This financial concept is based on smart investments, greater savings, and frugality. According to the FIRE concept, people plan to save around 70% of their annual income so that they can take early retirement. After their early retirement, they plan to live on a percentage of their accumulated savings.
- The increased importance of hobbies and traveling: an increasing number of people are realizing the importance of developing and nurturing hobbies. This is why people are moving into private-sector jobs and choosing entrepreneurial freedom that gives them more time to pursue something outside of work.
However, early retirement is not as easy as it sounds. It needs a certain amount of discipline and planning. In this article, we will provide you with some tips on planning an early retirement so that you can make the best use of your resources.
1. Determining your required income for retirement
When people are planning their early retirement, they tend to have a number in mind for their retirement income. They feel if they have a set amount in their investment accounts, they will be able to retire timely. However, this approach is wrong.
Instead of the savings in your bank, you need to look at the ways in which you can create sustainable income from other sources. Besides this, if you want to maintain the same standard of living, you would need to save around 80% of your pre-retirement income. If you had an annual income of $100,000 before retirement, after retiring, you would need around $80,000 to maintain the same standard of living.
2. Figure out your income from Social Security and other sources
If you have a goal for your retirement income, you would need to consider the amount that would come from reliable and fixed sources. However, you cannot take the income from Social Security into account if you are planning to go for early retirement. The earliest you can start receiving SS retirement benefits is age 62 and if you opt to start receiving benefits before your Full Retirement Age then the government will reduce your benefits.
If you have annuities and pensions that would start soon after your retirement, you can add that to your pension amount. After deducting this amount from your income goal for retirement, you would get an idea about the income stream you would have to create from your savings.
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3. Determine your target for savings
This is an important step in which you calculate your “number” or savings target. For this, you need to take the income amount that will be produced from your savings over the years. Thereafter, you can consider the amount you want to safely take out from your retirement savings.
For this purpose, many people tend to use the 4% rule. According to this rule, retirees withdraw 4% from retirement savings each year (readjusting slightly every year to account for inflation). Many like this strategy because it provides a predictable, steady income.
4. Do an honest assessment of your current savings
An important step in planning an early retirement is performing an honest assessment of your current standing. You need to determine how feasible the idea of early retirement is for you.
If you are currently 40 years and you wish to retire in your mid to late 50s, having just $50,000 in your retirement savings will not suffice. $50,000 could grow to around $70,128 in 5 years, $98,358 in 10 years, and $137,952 in 15 years. Retirees are estimated to live 20 years more in retirement. $137,952 is not enough.
You need to take stock of how your current savings will grow in the coming years and when it would be sufficient enough to support your retirement.
5. Have a good savings and investment plan
It is very important to have a sound savings and investment strategy if you want to retire early. An expert financial advisor can help you make sure that you are in good financial shape to retire on time or even earlier.
6. Take healthcare and other concerns into account
When you are planning for early retirement, you need to take other concerns into account too. You need to plan your healthcare and other insurance policies so that you can live peacefully even after your retirement.
By not working, you won’t have access to inexpensive health insurance through an employer and you can’t apply for Medicare until age 65. Be sure to consider the costs of health insurance when you’re planning how much income you’ll need each month in retirement.
And what about life insurance? Does anyone rely on you? Is your spouse or partner also currently saving up to retire early? Without life insurance, your unexpected death would derail these goals.
When someone dies, surviving loved ones are in emotional pain. But will you also leave behind the burden of financial struggle? Life insurance can be an affordable financial tool to help protect your loved ones’ financial futures.
7. Stay on course
After you have developed strategies and planned everything for early retirement, it is important to stay on course. Your course of action for the next few years determines how well you stick to the plan.
Even though early retirement seems too ambitious at the start, with proper financial planning and investment, it is far easier to achieve. With the aforementioned tips, you will be able to set yourself on the right path to financial freedom.
However, life is full of uncertainties. This is where term life insurance comes in.
Buying a life insurance policy is a great way to eliminate certain challenges from your loved ones’ lives. It doesn’t cost a thing to get life insurance quotes through Quotacy. Not even your contact information. If you are not sure how much life insurance you need, you can check out our free life insurance needs calculator.
About the writer
Quotacy is the country’s leading broker for buying life insurance online. We are obsessed with making it easy for everyone who has loved ones who depend upon them to have life insurance.