Benefits Of Early Retirement
Retiring early isnt easy. It can take years of consistent hard work, focus, and dedication. So, its vital that you keep your eye on the prize and stay motivated.
Here are 9 benefits to keep in mind when planning for early retirement.
Put Your Money To Work
Once you’ve upped your savings rate and maximized your income, you can turn your attention to growing your money.
After all, as some early retirees say, saving money alone doesn’t get you rich but investing can. As Livingston explains: “At some point, your money pile grows to a size where focusing on growing your nest egg will have a much more material impact to your net wealth than further reductions on your spending.”
The simplest starting point is to invest in your employer’s 401 plan, a tax-advantaged retirement savings account or other retirement savings account, such as a Roth IRA or traditional IRA. You can also research low-cost index funds, which Warren Buffett recommends, and online investment platforms known as robo-advisors.
Does Retiring Early Extend Life
Long-term employment reduces mortality by 11%, new research shows. On the same subject : How to write retirement card.
Does the age of retirement affect longevity? Primary Retirement Risk In general, people who retire at 55 have an 89% higher mortality rate in ten years than those who retire at 65. Public safety has noticed this trend, too. Men who retire at age 62 have a 20 percent higher mortality rate than the general population.
How long will it take if you retire early? The meta-analyzes reviewed 25 studies and, again, reached conclusions. Researchers have found that there is no link between early retirement and mortality compared to retirement over time.
Is early retirement harmful to your health? They found that retirees had a 40 percent greater risk of heart attack or stroke than those who continued to work. In this study, early retirement was detrimental to health and led to early death. A 2008 study of more than 16,000 retirees in Greece found similar results.
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Tapping Your Nest Egg Early Can Be Costly
If you retire before 59 1/2, you’ll usually pay a 10 percent early withdrawal penalty from most tax-deferred accounts, such as traditional IRAs and 401 plans. There are some options for getting IRA money before 59 1/2, but it’s tricky and can cause major penalties if done incorrectly, says Matt Stephens, founder of AdvicePoint in Wilmington, North Carolina.
And unless you have a Roth IRA, which is funded with after-tax contributions, you’ll owe income taxes on the amount you withdraw from traditional accounts funded with pretax contributions. If, for example, you withdraw $20,000 from an IRA before age 59 1/2 and are in the 15 percent federal tax bracket, you’ll pay $5,000 in taxes and penalties, leaving you with $15,000.
Retire And Stay Flexible
Go ahead and retire. Enjoy the fruits of your labor. Watch your expenses and portfolio every six months. Be flexible to change if your portfolio drops in value suddenly or if your retirement expenses shoot higher.
You did the hard work upfront in separating your desires and wants from your retirement needs. Dont hesitate to temporarily cut any desired expenses while you get back on track.
Life is always unpredictable. There will be plenty of recessions and bear markets. But that is no reason to delay your early retirement.
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Adjust Your Current Budget
Here’s where the discipline comes in. You will have to work hard to make up that $1 million shortfallparticularly if you want to do it quickly. Many people who want to retire early live on 50% of their income. The remainder is used to pay down debt and invest in that nest egg.
You have three options here:
Remember, the more you earn, and the less you spend, the sooner you can quit your 9-to-5 and start enjoying retirement.
Find Your Fire Number
The road to early retirement begins with your FIRE number the amount of money you need to have saved up to live the lifestyle you want after you stop working.
To find it, first determine the annual budget you plan to live on in retirement, McCurry said.
Maybe you want to live on the same amount you live on now, he said. Maybe it is more because youre going to be traveling. Maybe it is less because you plan to move out of an expensive city or even abroad to a cheaper place.
Next you need to determine your withdrawal rate, or how much you will pull out each year from your portfolio to live on in retirement.
The 4% rule is great if youre retiring at age 65, said McCurry. But if youre retiring early you should think about 3.5% and if youre retiring in your 30s or 40s you may take an even more conservative number.
Next, he said, take the retirement budget and divide that by your 3% or 4% retirement rate to get your magic number.
That will tell you what your saving goal should be, he said.
For example, if you plan to live on $40,000 a year in retirement with a 3.5% withdrawal rate, youd need to save $1.142 million thats your FIRE number. You can explore and tweak all the variables with an online calculator like this one at Networthify.
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How Will Your Finances Be Affected
Your finances are likely to be affected in multiple ways if you decide to retire early. When you’re evaluating your offer, it may be helpful to consider how the change to your finances will alter your life overall. If you think you need more incentives from your employer, such as better health coverage or more significant severance pay, you can try to negotiate a better deal.
If you’re happy with your offer, one thing you can do is consider what your monthly expenses are. It may be easier to plan your next steps if you know how much money you need.
If You Have A Mortgage Consider Paying It Off
In preparing for early retirement, eliminating consumer debt with high interest rates is a no-brainer, but paying off a mortgage early with good terms isn’t so cut-and-dry. For some, the peace of mind of being liability-free is worth it, while others may argue that the money saved in interest payments would pale in comparison to potential investment returns.
Tommy who only goes by his first name online retired nearly 10 years ago at age 51, after a more than three-decade career in telecom. He never earned a six-figure salary, but focused on saving consistently since his 20s and living frugally with his wife and three kids, he wrote in a blog post. One of his biggest regrets? Not paying off his mortgage before retiring.
“So much of our having a great retirement is mental. Being mortgage free certainly adds another level of mental freedom,” he wrote.
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Consider A Health Savings Account For Health Expenses
Health care costs are one of the main concerns when individuals contemplate early retirement and HSAs are an often overlooked tool for savings. HSA accounts, offered in conjunction with some high-deductible health care plans, allow for you to contribute tax free, have the assets grow tax-deferred and make withdrawals for qualified expenses tax free. Contributions made to the account carry on year to year and even carry on with you if you change employers. If you can avoid withdrawing from the health savings account during your working years, any amount remaining can be used in retirement for qualifying health needs. Its not for everyone but its worth considering and asking your advisor if it makes sense for you.
Save 15% Of Your Salary Every Year
One way to plan for retirement is to save 15% of your pre-tax income each year. Ideally, you should start in your 20s and continue throughout the rest of your working years.
Youll capture compound interest early in your career if you consistently set aside money for retirement. A 22-year-old who makes $30,000 a year and saves 15% of their monthly income will have $500,000 saved up by the time they reach 55.
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How To Retire Early With Rule Of 55
The Rule of 55 enables you to retire early at 55 without penalty on your 401 account withdrawals. It involves the idea of portability where you roll over all your prior 401 to the current employer plan if they allow it. And when you reach the age of 55, you can access your 401 without penalty, depending on your employer plan.
The advantage of the Rule of 55 over the SEPP provision is that you dont need to stick to the IRS specified required minimum distribution rules of withdrawal.
Why Do Some People Retire Early
Some of the biggest proponents of early retirement are followers of the FIRE Movement. FIRE stands for Financial Independence, Retire Early, and its based on a financial plan defined by an intense savings program that allows for individuals to retire much earlier than 65. Up to 70% of all income during their working years goes into savings. When FIRE followers leave the workforce, they plan to live off small withdrawals from their portfolio until they hit the age of 65.
FIRE does have some serious drawbacks to consider. Saving 70% of your annual income can mean you trade an early retirement for a potentially poorer quality of life during your prime. In addition, if the stock market drops or another unexpected event occurs causing a drop in interest rates, those depending on the FIRE plan may have to turn to Plan B to get by.
If the traditional FIRE plan seems too extreme, there are more measured approaches to saving for retirement you may want to consider as well. Most of these plans involve putting above-average contributions into retirement accounts, like a 401k account, adapting a more minimalist lifestyle, and potentially doing part-time work with early retirement.
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Considerations To Factor Into Planning To Retire Early
Besides doing the math to help you reach your retirement goals, its also important to know exactly what kind of retirement you want.
Here are some questions to ask yourself when planning for retirement:
- Are you planning on retiring in your hometown?
- Are you aiming to move to a tropical destination?
- Do you want to relocate somewhere with a cheaper cost of living?
Youll need to factor those kinds of living costs and lifestyle choices into your overarching plan. If your goal is to retire early, it might be a good idea to check out more affordable places to retire so that you can spend less on living expenses, like rent and food.
In addition to the above questions, you should also ask yourself certain questions like:
- Are you putting away enough of your paycheck each month to build your retirement savings?
- Will you have additional income like a pension?
- Do your spending habits reflect your goals?
If youre planning on early retirement, youll also need to think about other expenses that go above and beyond a general monthly budget, such as:
- Long-term healthcare
- Whether you plan to own a home
- Emergency expenses
Focus On Defining The Lifestyle You Desire
A lot of people could retire early if they were willing to dramatically curb their spending. Mamula wasnt necessarily interested in that.
His approach was: We just focused more on lifestyle design and how can we get everything we want without actually having all the stress that comes with traditional retirement. And thats been our approach.
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Form Passive Income Channels
Many people who retire early do so by creating passive income channels that will sustain them in their later years. This could include things like an online business or rental income. And if you have passive income outside of your retirement savings, this means you dont have to worry about living frugally just to get by.
Crunch Some Numbers And Get Ready To Work Hard
Wondering how to retire early? Lots of people would like an early escape from the rat race, whether it is to travel, pursue a passion project, start a business, volunteer, or just stop working.
However, retirement planning is tricky enough when you plan to work until your full retirement age. It is even more so if you want to stop working yearsor even decadessooner.
Can it be done? Absolutely. But unless you are independently wealthyand few people areit will take work and discipline. Here are five key steps to take.
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Determine The Lifestyle You Want In Retirement
Before you can start planning for early retirement, you need a goal to aim for. So, take the time to determine the type of lifestyle you want when you retire early.
Once youve defined the type of lifestyle you want, youll be able to determine how much money youll need to retire early.
Here are some questions to help:
- Where do you want to live? Do you want to relocate to be closer to your family? Would you consider living somewhere less expensive?
- Do you want to travel? If so, how often and where would you like to go?
- What will your daily routine look like? What costs are associated with it? For example, gym fees or travel costs.
- Will you still work in some way to create additional income? Perhaps youd like to start a small business or work part-time in a career you enjoy.
- What hobbies and interests do you want to pursue? For example, owning a sailboat costs a lot more than walking in nature.
How To Retire Early Budget
Knowing what you spend now and what you might spend in the future is critical for retirement and especially if you want to know how to retire early.
Gilbert recommended this: Weve never really been big budgeters. For a year, we tracked every single penny we spent because we wanted to know as realistically as we could, what our spending was. And then we adjusted it for how we thought things would change in retirement, etc
The NewRetirement Planner allows you to create a really detailed budget now and document how those numbers will change in the future. The system even enables you to enter necessary spending as well as nice to spend amounts. It is fun and easy to think through how your spending will change over the rest of your life in over 70 different categories.
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Early Retirement Comes With Challenges
There’s a reason most people continue to work until traditional retirement ages, and it isn’t because they love their jobs. Retiring early comes with serious financial challenges.
The primary challenge is ensuring that you have enough assets to provide an acceptable level of income throughout your remaining years. The average lifespan in the U.S. is just under 79 years. For someone who retires at 55, that means they need to save up at least 24 years’ worth of income. Healthier individuals who plan on living beyond the age of 79 will need to save up even more.
On the other hand, if you work until you reach age 70, your savings will only need to provide for a much shorter time frame.
Can Early Retirement Affect Your Pension
Early retirement may affect your pension because traditionally, you need to wait until you reach your company’s retirement age to receive full pension benefits. These benefits are usually based on your salary, age and the number of years you’ve worked at the company.
When your employer offers an early retirement package, they may offer incentives so you can still get your full pension, such as allowing you to collect the full amount despite your age or years of service. You may also receive reduced pension benefits if you retire early and your employer doesn’t include a pension-related incentive.
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Set Up Multiple Sources Of Income
This could include investing in income generating assets such as a rental property or small business, or more traditionally, taking on a part-time job or side-hustle. Alternate income streams help to cover your cost of living so you can save more towards your end goal.
People are living longer and therefore have more years to cover in their retirement. Retirement can mean different things to many people, whether its moving to paradise, spending more time with your family, or being able to do something you truly love such as volunteer work or travelling. Whatever it is to you, the more you plan now the better position you will be in the future to set yourself up for retirement and maybe, if youre lucky, fulfill your dream of early retirement.