In order to retire early, you are going to have to find a way to live differently—even radically different—during the years that you are preparing to make your exit from the world of work.
Getting there will probably be the biggest challenge you ever face in your life, and it will take efforts on several fronts to make it happen.
Here are seven steps toward a rewarding early retirement:
1. You Won’t Get There Without Living Well Beneath Your Means
This step is listed first because there is no getting around it. Early retirement will require a lot of sacrifice and a lot of savings. The only way to make that happen will be to make plenty of room in your budget.
That extra room will be what you will use to get out of debt, and to save and invest money for early retirement.
There are actually two mission-critical purposes to this step:
- To free up income to dedicate to savings, and
- To become comfortable living on less money than other people do
#2 is more important than you think. While it’s nice to think of retiring early to live in the lap of luxury, the reality will probably be the opposite.
In fact, if your standard of living is too high, you probably won’t be able to retire early—or even to retire at all. A high standard of living requires a lot more money to support. That’s not consistent with the goal of early retirement.
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You may have to think in terms of living on no more than 50% of your after-tax income. That’s not a hard and fast recommendation, but it’s a worthy goal. You’ll have to come up with a number that works for you.
2. Cut Your Basic Living Expenses to the Bone
Living beneath your means starts with keeping your basic living expenses as low as possible. That may mean renting a small apartment or buying a small house with a monthly payment of $800, rather than living in a McMansion with a monthly payment of over $3,000.
It will likely also mean owning and driving cars that you purchase for cash, so that you don’t have a monthly payment. And, needless to say, many of the extras in life—that are now commonly considered as necessities, such as eating out regularly and 24/7 entertainment—will have to go. All will drain your resources, and slow your progress toward your overall goal of early retirement.
3. When Planning for Early Retirement There’s No Such Thing as Good Debt
We often hear the good debt/bad debt debate, as if there is some innate wisdom it will impart upon us. But if you’re serious about early retirement, that debate is a nonstarter. All debt is bad debt.
The reason that is true is because debt is a drain on your cash flow. That will leave you with less money to save for retirement.
And the last thing you need to do is to be carrying debt into early retirement. And, yes, that includes your mortgage. That will have to go, too.
4. Save and Invest Until It Hurts … Then Save Some More
Because retirement savings will need to cover more years with early retirement, you have to save more than you ever imagined you would.
After all, while retirement at age 65 may require you to have enough money to cover 20 or 25 years, retirement at 50 may require you to have enough money to last 35 or 40 years.
At a minimum, you should plan to maximize your contributions to any retirement plans that you participate in. If you’re part of an employer-sponsored 401(k) plan, you can (and should) contribute the maximum of $18,000 per year ($24,000 if you’re age 50 or older).
But don’t stop there.
IRS regulations allow you to contribute a maximum of $53,000 to all retirement plans ($59,000 if you’re 50 or older). That means you can also contribute to a traditional or Roth IRA, Gold IRA, or set up a solo 401(k) or SEP IRA for your business.
That might also mean that if you have a job, you should start a side business so that you can have a self-employed retirement plan to go with your company plan.
But don’t stop there either!
While it’s natural to think of retirement savings in terms of formal, tax-sheltered retirement plans, early retirement requires you to go beyond those plans. You should also save money in non-retirement plans, such as taxable brokerage accounts, mutual funds, and exchange traded funds.
There is no limit on how much money you can save in non-retirement plans, and it will be an excellent tax diversification when you do retire, since withdrawals from those accounts will not be subject to income tax.
As far as determining exactly how much money you will need, you’ll have to use a good retirement calculator to come up with an actual number. AARP has a good retirement calculator, and you should spend some time crunching numbers there.
In fact, you should do that periodically, as your circumstances change, and as a way to determine whether or not you are meeting your retirement investment goals.
5. Find Out How Much You’ll Get From Social Security
No, Social Security will not help you with early retirement, unless you are thinking in terms of early retirement at age 62. But you will still need to know what your Social Security benefits will be.
Since you will be retired for many decades, Social Security could be the financial shot in the arm that you will need by the time you turn 65 or 70. You will have to live on retirement savings until you’re eligible for Social Security.
But once you reach that age, your Social Security benefits will kick in, and you won’t need to rely so much on your savings.
You can check out your Social Security benefits using the Social Security Retirement Estimator. Check and see how much you will be able to collect at ages 62, 65, 67, or 70.
The difference in what you will collect at each age will be significant, and may determine when you actually begin taking your benefits. Social Security will be an important part of your strategy to make your savings last the rest of your life.
6. Early Retirement Special Consideration: Health Insurance
America is in the throes of a healthcare crisis. Sure, if you have an employer plan or you’re on Medicare, all is well (generally). But if you retire early, as in before the age of 65 when you become eligible for Medicare, you won’t have Medicare, and you certainly won’t have an employer-sponsored health insurance plan.
It will be up to you to make sure that you have proper coverage. And that will be important, because a single catastrophic medical event could wipe out your retirement savings completely.
Under current law, you’ll almost certainly be dependent upon the Affordable Care Act (ACA) Health Care Exchanges to get coverage. But be forewarned: health insurance from the exchanges is not inexpensive when you’re over the age of 50.
You will have to make a generous allowance in your retirement plan to accommodate a high monthly health insurance premium. You can partially offset this by taking the highest deductible plan available, and making sure that you always have enough money in a dedicated medical emergency account to cover that deductible.
In addition, take good care of your health now. The fewer health issues you have when you enter early retirement, the lower your out-of-pocket medical costs will be.
7. Have a Backup Plan
Planning to cover 20 years of retirement income is complicated enough. But if you need to cover 40 years, the task is much more difficult. Forty years will bring a variety of economic and financial circumstances—including various crises—as well as financially taxing personal circumstances.
For example, you may go through a long-term illness, or you may be required to provide financial assistance to an aging parent, or an adult child who is going through a difficult time.
There may also be periods when the financial markets will not provide the kind of return that you need in order to live without drawing down the principal amount of your investments.
If these declines are sharp enough, or go on for long enough, they could force an early end to your early retirement. You’ll have to be ready for whatever life throws at you.
There are various ways that you can be prepared, including:
- Maintaining passive business interests that you can return to on an active basis if need be
- Career skills that will enable you to jump back into the job market on short notice
- Passive income sources to supplement your income
- Assets that you can sell to raise additional cash in a crisis
Any of these efforts could help you get through a prolonged rough patch in your early retirement. Flexibility is incredibly important when you’re planning for decades of retirement, and these are some of the best ways to provide yourself with options.
So there you have seven steps for a rewarding early retirement. No doubt, it’s a tall order. But the payoff will be even bigger—decades of living life on your terms, without being constrained by the need to earn a living.
Are you up to the challenge?
The post 7 Steps to a Rewarding Early Retirement appeared first on AllBusiness.com
The post 7 Steps to a Rewarding Early Retirement appeared first on AllBusiness.com.
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