Yahoo Finance 5 Ways to Prepare for Early Retirement
Retirement is a major life step that takes significant planning and prep work. This is especially true if you plan on retiring early. Retiring early requires particularly aggressive saving because you have less time to set aside money for retirement and more time you'll need to survive on those savings. Here's how to get ready to retire early:
[See: 10 Ways to Celebrate Your Retirement.]
1. Assess your current financial situation. If you plan on spending fewer years in the work force, it is especially critical that you know where you stand financially and what you will need over the long term. First, determine your current debts and assets and how much you are currently putting toward retirement savings. You will need to estimate what your annual expenses will be during retirement. You should get a clear view of those numbers so you can determine how soon you can retire. From there, it's simple math. How many years from now do you plan to retire, and how much do you need to save by that date? That will give you your annual savings target.
2. Create a game plan. Once you have a goal in place, the hard part is getting there. If you need to save aggressively to hit your retirement target, look closely at your budget. Determine what expenses you can cut and where you can add more income. Consider how you can make more money in your career as well as where you can add income from other sources.
Retiring early sometimes takes sacrifices. If you can pay off your mortgage before you retire, it may cut your expenses significantly. But don't forget that you still have to pay for property taxes and home insurance even after you have paid off your house. Perhaps you could sell your house and downsize or wait a few more years before upgrading your car. The sooner you want to retire, the more you might need to cut out of your current spending.
[See: How to Max Out Your 401(k) in 2017.]
3. Check your investment and health insurance strategies. If you have less time to save, the typical investment strategies might not apply. You will likely want to save some money outside of your retirement accounts, since you will trigger a 10 percent early withdrawal penalty for taking money out of a 401(k) or IRA before age 59 1/2. You could subsidize your retirement accounts with a brokerage account with tax-friendly mutual funds or exchange-traded funds.
You will need a plan for health insurance. Medicare isn't available until you are 65. If you are retiring before age 65, make sure to research the cost of an individual health insurance policy. You might be eligible for coverage through a spouse's health insurance policy. Some employers provide COBRA continuation coverage, but it typically lasts for only 18 months. Make sure that you have coverage lined up until you are age 65.
4. Plan for the retirement you want to have. There is a big difference between retiring at 50 and retiring at 70. If you retire in your 50s, you will have more time to travel, take up hobbies and be active. Someone retiring at 70 has fewer years to spend money. People tend to spend money less as they age, with the exception of medical costs. Your ideal lifestyle might change over time as you get older.
[See: How to Become a Millionaire by Retirement.]
5. Offset inflation. Inflation is one of your largest obstacles when you're planning for an early retirement. If you'll be spending nearly half your life or more in retirement, it can be challenging to predict how much inflation will affect your future finances. Think about the purchasing power of a dollar 50 years ago versus today. The current average inflation rate is around 3 percent, and at that rate prices double every 20 years. That's a big increase and a lot of risk and uncertainty to plan for. To keep up with rising costs you need to have a percentage of your investments in something that combats inflation such as equities. Compared to fixed income, equities have the ability to provide a return above the rate of inflation over the long term.
Early retirement is an enormous challenge, but it can be done. With the right tools and a serious commitment to your goal you can set yourself up for an early retirement.
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