Even if you enjoy your job, there are times when alphabetizing the spice cabinet might be preferable to traveling a crowded train with hundreds of sniffling fellow commuters. And you might be considering early retirement as you sway in the car next to a man who has biked four hours to the station.
Regrettably, early retirement is not for everyone. In truth, it isn’t for the majority of people. According to an Employee Benefit Research Institute (EBRI) poll, only 13% of today’s workers intend to retire before the age of 60. Many of those who do take the leap find that the reality of early retirement differs greatly from the illusion. Before you decide to retire early, consider the following factors.
What is the Minimum Age For Early Retirement?
Many people who want early retirement describe it as retiring in their forties, fifties, or even sooner. They wish to retire to travel, devote time to hobbies, or simply not work. This is known as the FIRE movement, which stands for financial independence and early retirement.
FIRE has effectively redefined early retirement, making it more about having the financial independence to choose when, how, and for whom you work.
However, retiring early necessitates a significant amount of labor – you must self-fund your retirement because the earliest you may begin receiving Social Security benefits is at the age of 62.
However, if you begin receiving Social Security benefits before the full retirement age of 66 or 67, depending on the year you were born, your monthly income is lowered. Depending on how far you are from the full retirement age, the monthly drop in benefits might result in a cut of up to 30% of your Social Security benefits.
Why Is It Important to Plan for Early Retirement?
The sooner you begin planning for retirement, the more likely you will be successful. If you decide at the age of 54 that you want to retire at the age of 55, but you’ve spent your entire career living off a six-figure salary, saving nothing, and falling into debt, retiring at the customary age may not be viable.
It is vital to figure out how to live a life that seems abundant while remaining within your means as early as possible. This allows you to spend your money meaningfully and purposefully on your beliefs from a young age, while ruthlessly cutting out spending on things that don’t matter to you.
In 2012, Mr. Money Mustache, a prominent player in the FIRE movement, wrote The Shockingly Simple Math Behind Early Retirement. This breakdown illustrates how many years you need to work to retire based on your savings rate assuming you invest in low-cost index funds and plan on withdrawing 4% in early retirement. As seen in the table, the earlier you begin, the less you need to save.
| Savings Rate (percent of your income) | Working Years Until Retirement |
| 5 | 66 |
| 10 | 51 |
| 15 | 43 |
| 20 | 37 |
| 25 | 32 |
| 30 | 28 |
| 35 | 25 |
| 40 | 22 |
| 45 | 19 |
| 50 | 17 |
| 55 | 14.5 |
| 60 | 12.5 |
| 70 | 8.5 |
| 75 | 7 |
| 80 | 5.5 |
| 85 | 4 |
| 90 | Under 3 |
If you start working directly out of college at the age of 22 and save 30% of your income, you’ll be able to retire at the age of 50. If you wait until you’re 43 to start saving, you’ll need to save 75% of your income to retire by the same age of 50.
It is preferable to begin saving when you are younger, and you will never be younger than you are today. Don’t give up hope because you think it’s too late for you. The later you start, the more you’ll have to invest and think outside the box to find ways to raise your income while decreasing your expenses.
Phase One of Early Retirement: Pre-Retirement Planning
When people discuss retiring early, they frequently refer to the financial approach known as FIRE: Financial Independence, Retire Early. Early retirement. Aside from deciding which retirement and brokerage accounts to utilize and how much money you need to save, you should also consider:
#1. Your Early Retirement Vision
According to Jake Northrup, CFP, founder of Experience Your Wealth, LLC, it’s vital to begin your retirement planning process with a clear vision of your life in retirement.
“I’ve found that a lot of people say they want to retire early, but don’t actually paint a picture of what early retirement looks like for them,” he says. “You don’t want to get to the top of the retirement ladder and realize it’s slanted the wrong way.”
Over his 30 years as a financial counselor, Phil Lubinski, CFP, co-founder of IncomeConductor, has discovered that pre-retirees do not assess their emotional preparation to retire.
“Fishing and golfing are great part-time activities, but what are investors going to do with the rest of their time?” Lubinski asks. “They need to fill the 40 to 50 hours per week that they were working with other activities.”
He also believes that investors may be unwilling to replace the psychological and social benefits supplied by their employment and work surroundings. That includes considering what kind of part-time or volunteer work you might want to perform, as well as what kinds of hobbies or travel you might want to pursue, among a plethora of other objectives.
Knowing your early retirement objectives will help you determine how much you need to save.
#2. Your Medical Insurance Policy
“The most common thing people fail to plan for when pursuing early retirement is health insurance,” Northrup adds. “You can’t get Medicare until you’re 65, and early retirement means you’re probably no longer covered by an employer plan.” Early retirees require a plan to bridge the gap between their retirement date and the start of Medicare.
COBRA coverage is one option that permits you to keep your previous employer’s health insurance. What’s the catch? High prices. You’re probably covering roughly 18% of your plan’s premium expense right now. However, after you quit your work, you are accountable for the entire premium—and then more. Administrative costs may result in a payment that is up to 102% the cost of the employer’s plan.
Keep in mind that COBRA coverage only lasts 18 to 36 months, depending on your situation, so it may not be enough to bridge you to Medicare.
To save money or to protect yourself once COBRA expires, consider purchasing a health insurance plan through your state’s insurance marketplace. While a policy purchased through the marketplace may be less expensive than COBRA coverage, the entire cost will almost certainly be more than what you paid while still employed because most employers cover the large majority of plan premiums. Deductibles and out-of-pocket maximums may be significantly more than your employer’s coverage.
When selecting a pre-Medicare health plan, examine the costs of any COBRA and marketplace policies. You can also get estimates from a health insurance broker.
#3. Plan Out Your Early Retirement Housing
“Most pre-retirees focus on getting their investments ready for retirement, but attention should also be paid to getting their home ready while they are still working and making a good income,” adds Lubinski.
To various investors, preparing your home for retirement may mean different things. You could do the following to prepare your home for your early retirement:
- Make an early payment on your mortgage.
- Reduce the size of your home
- Make extensive repairs (for example, rebuild your roof or sewer line, or engage in tuckpointing).
- Kitchen, bath, and landscaping renovations
- Look into residences in your desired location (if you’ll be relocating).
- To protect your home equity, plan to pay off any HELOCs before retirement.
Your first priority should be any big repairs you’ve been putting off because you don’t want to use your retirement resources to pay for them. “Major home repairs during the early years of retirement can be very damaging to a long-term investment portfolio,” Lubinski explains.
#4. Make a plan to continue earning money.
“Early retirement is about gaining complete control of your time, not stopping to work,” explains Northrup. He proposes that after leaving the 9-to-5 grind, investors look for part-time or gig economy work that fits with their new lifestyle while providing a little income to cover living expenses. These positions may even include benefits such as health insurance, which can help you bridge the gap between now and retirement.
“By planning to continue earning income, you are able to achieve early retirement far earlier because you don’t need as much money saved up in investments to support your lifestyle,” he explains.
Consider what kind of work you’d enjoy doing in retirement during the retirement planning process. Spend some time researching your alternatives. Knowing that you have options for retirement income might help reduce anxieties that you will outlive your assets or any pain associated with the prospect of using the savings you’ve amassed over a lifetime.
#5. Create a Social Security Plan
Not only does your early retirement strategy require a healthcare plan prior to Medicaid. You’ll also need a clear plan for when you’ll start drawing Social Security. Starting Social Security payments as soon as you are eligible will reduce your benefits by up to 30%.
Consult a financial counselor or use the Social Security website’s planning tools to determine when you’ll begin receiving benefits and any potential delays you can make to guarantee you obtain the greatest benefit.
#6. Establish a 10-Year Financial Reserve
“At least five years before their early retirement date, investors should set aside the amount of money required to provide income for their first five years of retirement,” Lubinski advises. “This effectively creates a 10-year buffer between the money they need for early income and any market volatility that may occur during their five-year retirement countdown.”
This buffer helps investors protect their capital by separating it from their primary retirement assets. You might accomplish this by establishing a new individual retirement account (IRA) and transferring the recommended five years of income. You can then put this money into a capital-preserving portfolio, such as one that focuses on cash-based investments like Treasury Bills or bonds.
By isolating the funds you’ll need early in your retirement, you provide yourself some cushion in the event of market turbulence. According to this concept, your remaining investments will have years to recover from any losses before you have to access them.
Phase 2 of Early Retirement: Managing Finances in Early Retirement
Early retirement isn’t so much a destination as it is the beginning of a new journey. You can’t just put your finances on autopilot because you’re no longer working full-time.
#1. Establish Spending Guidelines
To retire early, you must first determine how much money you will require to sustain the lifestyle you choose. “The most important variable in financial planning, and the one you can control,” adds Northrup. That is why he assists his clients in establishing “guardrails” for their expenditures.
He advises investors to create three budgets: a low budget (left guardrail), a moderate budget (middle of the road), and a fat budget (right guardrail). “You’ll probably drive in the middle of the road most of the time,” he says, “but it’s useful to know how far left and right you can go while still being safe.”
This type of ahead preparation will help you lessen spending anxiety while also giving you permission to boost spending on experiences you genuinely value, as long as you keep inside the guardrails.
#2. Modify your rate of return assumptions
“The last five or ten years are not a good predictor of what the next 30 to 40 years may hold,” Lubinski says. Wise remarks, given that the United States has lately seen the longest bull market in history.
If you’re counting on high rates of return in retirement, it could be a good idea to lower your expectations. Given that the S&P 500’s average rate of return over the last 90 years has been 9.8%, you should definitely err on the side of caution and model your portfolio with a lower rate of return.
Instead of assuming 10% annual returns, you could estimate 5% or 6%. You should also keep in mind that you won’t have a totally equities-based portfolio in retirement, so even in a perfect market, you won’t hit 10%.
As a result, Lubinski believes that during retirement, investors should prioritize “reliability of income” over “return on investment.” This entails shifting your assets toward a capital-preservation and income-centric strategy. It does not imply foregoing all of your market upside potentials, though your returns will most likely be lower than a portfolio invested just in stocks. Rather, your consistent income becomes the most important component in your investment decisions.
#3. Consider Savings Segmentation
You can consider bucketing your savings to try to capitalize on market gains while keeping the funds you’ll need for income in the near future. Some early retirees may find it beneficial to divide their retirement assets into five-year portfolios and invest accordingly, allowing money that will not be needed for 25 years to be invested more aggressively than those that will be needed in the next five to ten years.
Remember to Take Advantage of Your Early Retirement
People in early retirement should avoid the temptation to not enjoy their money. “My clients who were very good savers sometimes have trouble becoming spenders,” Lubinski explains. Creating a retirement spending plan can help with this.
“Retirees usually spend on a U-shaped curve, with higher spending in the early years when their health and energy levels are high, then a natural slow down, and in some cases an increased spending pattern in the later years when health care becomes an issue,” Lubinski explains.
“Having a written retirement income plan that is customized to the retiree’s actual spending goals gives them the confidence to spend and enjoy their retirement.”
You’ve saved it, and your objective for early retirement is to have more years to enjoy what you’ve saved.
What Should You Do If You Retire Early?
Retire to a good life, not from a miserable one. Many retirees who leave the working at a traditional or early age find it difficult to adjust to a new paradigm. While you are financially preparing for early retirement, you need also to prepare emotionally and socially.
Develop hobbies, invest in friendships, and learn what makes your heart sing now, rather than after you’ve finished working. There are no retirement officers. If you want to work part-time on a passion project or for a favorite nonprofit, go ahead and do it.
The actual beauty of early retirement is the flexibility it provides while you are physically capable of pursuing your objectives. The independence of not needing a high-paying job to support your lifestyle offers up a world of opportunities.
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