We all fantasize about the ultimate American dream – early retirement. However, not many of us get to quit the rat race and lie around the beach all day sipping on frosty drinks. For many of us, retirement won’t come until we are 65…unless we take some drastic steps to shore up our finances. Inside this post, we will discuss some steps you can take to hang up the boots and retire while you are still young enough to properly enjoy it.
How to Plan for Early Retirement
Perhaps the first step you should take when you begin the path of early retirement is to define what, exactly, early retirement means to you. A lot of people eye the age of 65 as the time that they will retire, so for some, quitting work and hopping on a fishing boat at age 60 is considered early. For others, the goal might be 50. For the dreamers out there, 40 is the perfect age – if only we could all be so lucky!
Knowing the goal age for your “early retirement” will give you part of a critical equation. The other half of that equation is knowing (or estimating) how much money you will need to actually achieve your goal.
While this can be tricky to figure out, you will basically want to try and estimate how much your monthly bills and living expenses will be at your retirement age. Be sure to include entertainment, Christmas shopping, going to the movies, and so forth into your tally.
Once you figure out how much it will likely cost you to live per year, you will need to multiple that number times the number of years between your projected retirement age and the average life span. So let’s say you want to retire at age 50 and the average life span is 85. That would mean you will need enough money to live comfortably for 35 years without gainful employment.
To make things simpler, let’s assume that you want to retire at age 60 and the expected lifespan is 85 – a difference of 25 years. Now, if we were to assume your yearly expenses were $50,000, then we could assume you would need $1,2500,000 to safely retire.
The next step is to assess your current situation. How much money do you currently have in your retirement savings accounts? Do you have an IRA and a 401k? Do you have stock investments? Is it likely that you will receive a pension or will retire from a company you have worked for for an extended period of time?
All of this has to be calculated into the amount of money you have and can be subtracted from the amount of money you will need.
Now that you know how much money you presently have saved and how much money you will need, you can begin the hardest part – figuring out how to earn the rest of the money you will need to retire early. This will involve many steps, including creating a budget (or fine tuning your existing one), taking a hard look at your investment portfolio and discussing it with a professional to make sure it has the right balance of risk and reward (if you want to retire really early, you may need to consider a more aggressive portfolio for instance), and setting up a savings plan.
In addition to the above, you can consider other clever retirement savings tricks, such as adding your income tax return to an investment instead of blowing it on a fancy new television, or working a part-time job to help pad your savings. While the initial extra work may not be ideal, in the long run it could help you retire early – and that, my friend, may well be worth the investment!