Have you ever thought about early retirement? Some people spend a lot of time preparing for the future and planning for retirement. They may dream of hitting the golf course every day or buying a vacation property, but for many, these are nothing more than dreams that will never come true due to a lack of real preparation. Most people know they need to save a lot of money for early retirement, but haven’t thought about how much they actually need.
If you’re content to sit around and wait until you’re old enough to get Social Security benefits for your retirement, then you don’t have to worry about retirement planning. Living off meager benefits for the last few years of your life may be a tempting idea for some, but most people want to aim a little higher. When you’re old, you want to live comfortably and have money to spend on things you like. You want to be comfortable, not just barely making ends meet. This guide is for those who don’t want to settle for anything less than a comfortable and enjoyable early retirement.
- Importance of retirement planning
- Defining your retirement lifestyle
- How much money do you need for retirement?
- Investing with the goal of early retirement
Importance of retirement planning
No matter how old you are, it’s never too late or too early to start saving for retirement. Some people start as soon as they get their first job, while others don’t even think about it until they are nearing retirement age. Anything you can put toward retirement at any age can be a help to reach that goal of early retirement a little faster. Change the mindset that you’ve already wasted too much money to start now, or the mindset that Social Security will always be there to fall back on. No matter how true these things may be in your mind, they are not a reason to stop yourself from saving.
It’s interesting that when you save money, $50,000 looks like a lot when you stare at your investment statement, but when you start spending that same $50,000, it’s gone pretty quickly. The brutal reality for many is that they won’t have enough money to survive in retirement. That doesn’t mean they won’t have any income at all, but it does mean they won’t have nearly enough income to maintain their former lifestyle in their retirement years.
Defining your retirement lifestyle
If you want to start saving for retirement effectively, you need a goal in mind. You need to know what your ideal retirement plans are, and then you need to start planning how you’re going to get there. If you want to retire in a nice cottage overlooking the beach, then you need to start looking for that cottage now and put money into it. If your goal is to travel the world when you are old, then start putting money into an account for that today. And if you just want to live near your friends and family and have fun with them, then you need to put money aside now to do that. When you know what you want your retirement to look like, it’s easier to commit to a retirement savings plan.
In previous decades and generations, most people could live on 70% of their pre-retirement income. The logic of the day dictated that if you had no debt, no mortgage, no children at home and you worked to age 65, you could easily live on 70% of your income in retirement. As society has changed, that need has risen and many experts suggest that retirement income needs to nearly match your working income. The reason; People want more “stuff”, kids are living at home longer, retirees are carrying debt into retirement and they generally want to retire a little earlier so they can enjoy life.
How much money do you need for retirement?
How much money you need to save regularly to reach your future goal of retirement depends mainly on how young you are when you start saving. If you can start saving before age 30, a general rule is that saving 10% of your income on a regular basis is enough for most people to achieve a reasonable level of income in retirement. Of course, if your goal is early retirement, you will need to save a lot more or have additional income streams available.
If you delay starting to save even a few years past age 30, the amount you need to save increases pretty quickly. If you’re 40 and haven’t started saving yet, the bad news is that you now need to get closer to 20% of your income to reach your retirement goal. That’s a lot of money! When you combine that with the relatively low investment returns on so-called “safe” investments in recent years, it’s a tough situation.
What is your net worth right now? Knowing this will influence what you do to make your retirement easier. Make a simple list of all your assets, what you have available to invest in your retirement and what needs to be used for other things, and consider how you want to handle things. Some assets can be used and channeled into some type of retirement fund – for example, a portion of your monthly paychecks can go into a 401k – and others can be used for your current benefits and living expenses.
Obviously, you can see that determining how much to save for early retirement depends on many factors. If you are stuck, it is best to find a competent financial planner that you can work with and trust to guide you through such decisions. However, the worst thing you can do is avoid the problem. That certainly won’t get you anywhere! Be pro-active, seek the advice and expertise you need to get the answers, and save diligently. It’s a decision you won’t regret when you retire.
Investing with the goal of early retirement
Besides leveraging your income and living below your means, investing is one of the most reliable ways to build wealth over time. Most people will not be able to reach an early retirement without running a business or using other forms of investing. If you want to learn more about investing, you can read our guide on “How to start investing“.
Once you know the amount of money you can work with and what types of assets are available to you, you can start looking at investment options. Besides the 401k mentioned above, there are investment options such as real estate, life insurance, stocks, bonds, gold and more. As long as you use your money wisely with retirement in mind, you’re well on your way to retire early.
In the best case scenario, at some point in your life your investments will have reached a point that would give you the option to retire early. A commonly used rule of thumb for retirement spending is the so-called 4% rule. It’s relatively simple: you add up all your investments and withdraw 4% of that total in the first year of retirement. In subsequent years, you adjust the dollar amount withdrawn for inflation.
Conclusion: Achieving early retirement through retirement planning
Early retirement is not rocket science! In the end, it’s all about defining your personal goals and then planning accordingly how to achieve them. Unless you are running a successful business or have made extremely profitable investments, however, early retirement requires sacrifice and discipline in most cases. But if you don’t want to work your whole life, it may be worth it. In the end, it’s a personal decision.