Are you ready to live the dream and retire early? Delaying retirement has become common for many Americans, either because they saved too little or they want to continue working because they enjoy it. Others want to retire early but need to figure out how to pay for it.
If you want to retire early, it is important to figure out how to create the income or savings you need to live. The people who choose to retire early, and the one thing they have in common, is a solid strategy to get there. It takes setting goals, a plan, hard work and a particular mindset to create the lifestyle you crave.
“The chief cause of failure and unhappiness is trading what you want most for what you want now.”Zig Ziglar
In other words, instant gratification is the killer of future plans.
Table of Contents
What Is Early Retirement?
Early retirement is considered to be retiring at any age before 65 since that is when you qualify for Medicare benefits.
Retirement no longer means not working at all but is about leaving your main career to pursue your dreams and passions. It can mean a significant drop in income or live on your retirement savings, so you will still need to be financially and emotionally prepared.
Some people want to retire early to start a business. You will need some income to tide you over until that business can sustain you through. You may opt to use some of your savings to start a business or to live on, or both.
There are also early retirement packages that some people may be able to take. Companies looking to reduce costs will generally offer this to people close to retirement age. I will talk more about this later.
People retire early for two reasons. Either because they planned for it or because they were forced into it. I believe that you should always plan to retire early, even if you do not want to retire early. Why? Because you may be forced into early retirement before you are ready. It is better to be prepared.
The Pros and Cons of Retiring Early
There are a lot of pros to early retirement, but there are several cons. The pros are pretty obvious.
Pros of Early Retirement
- Travel while you are still young enough to do everything.
- More free time to spend with family or friends.
- Ability to start a business or new career.
- Go back to college to finish or start a new degree.
- Spend more time pursuing your hobbies and interests.
Cons of Early Retirement
- Lack of medical benefits.
- The strain on your finances.
- Lack of intellectual, social, and emotional stimulation.
- Physical decline.
The cons are mainly financially driven. If you do not have enough saved or do not think you do, it can add stress to your daily life. It is important too, not only to be comfortable but feel comfortable, with your decision.
You may find your finances lacking, which can be an especially unnerving conclusion if early retirement isn’t really a choice.
Retirement often has emotional stages that you will go through, no matter how prepared you are. It is important to be prepared for those stages so you can take your retirement in stride.
How Do You Retire Early?
- Get yourself emotionally prepared.
- Determine the type of lifestyle you want in retirement.
- Create a budget using the future lifestyle scenario.
- Consider your current finances and how you can cut costs.
- Reduce your debt quickly.
- Set goals for the changes you need to make.
- Maximize your retirement savings.
- Meet regularly with a financial advisor.
- Stick to the plan when you retire early.
Emotionally Preparing For Retirement
Many Americans are ill-prepared both emotionally and financially for retirement. GOBankingRates has polled Americans to find out how much they have in a savings account. According to their survey: 69% of Americans have less than $1,000 in savings.
Preparing emotionally for retirement means you will need to change your mindset. If you are used to living paycheck to paycheck or utilizing your credit to maintain your lifestyle, that will need to end immediately.
You will also need to consider that you will be living differently than your peers. You will now be on a fixed income and possibly a much smaller budget. It is typical that your expenses in retirement go down. But so does your income.
Determining Your Lifestyle
Lifestyle choices are exactly that, choices. If you allow your ego or lack of discipline to control how you live, it will be difficult to make changes.
In 2012, we decided to downsize our home and live in one of our rental properties. We went from a 4500 sq foot home to a 2000 sq foot home. Was it easy? No. Was it fun? No. I can tell you I miss being able to entertain. I miss my neighbors. And I miss my much nicer home.
Do I care? No. I have traded the big house and all of its upkeep for sweet freedom! Many of the people I associate with seem envious of my lifestyle, but they are unwilling to make many sacrifices to get there. And I get that. It is not easy.
Here are some first steps:
Look at different lifestyle changes and see if they are something you can live with.
- Becoming an Ex-Pat.
- Downsizing your home.
- Not getting a new vehicle or downsizing your vehicle.
- Moving to an area with a lower cost of living.
- Cutting entertainment and travel plans.
Are any of these feasible to you? Remember, it has to be a lifestyle you are willing to live. If you decide you will move into a condo or other type of home and retire in another state or even live in another country, you will have to live with that decision.
You will have to consider family needs, environmental needs and emotional needs.
Creating Your Future Budget
Investigating different options is the key to creating your budget. If you have decided it is best to leave the US and become an Ex-Pat, you will need to look at the potential expenses you will need to move to.
There are some great resources to do this, like International Living. Each year they come out with the best places to live outside of the US.
Much of your budget will be determined by your housing payment. We want to assume your home or future home will be paid off, or at least low cost. Regardless you will have to crunch the numbers to understand your early retirement target budget.
Even if you stay in your existing home, you will want to create a realistic budget that you can stick to. Elizabeth Warren’s 50/30/20 rule can help you manage your budget. It says that people should devote 50% of their income to needs, 30% to wants, and 20% to savings and debt reduction.
Look At Your Current Budget – How Can You Cut Costs?
Go over your budget. Look for as many ways to cut costs but also add money to savings. Once your savings has over 6 months of expenses, start putting that money in a retirement account to grow. With compounded interest over 5 years, you will be surprised at how quickly that will grow.
Here Are Some Areas To Evaluate
- Cable or streaming services – Are you really watching that much TV?
- Phone services – Is there a lower cost carrier that will suffice?
- Clothing – Choose TJ Maxx and Thrift Stores over Macy’s.
- Dry Cleaning – Have you heard of Dryel?
- Insurance – Shop your policies annually.
- Home Services – Lawn, housekeeping, and pool care
- Groceries – Buy in bulk and shop sales.
- Utilities – Make sure unused electronics and lights are left unplugged when not in use. Keep your A/C or heat a couple of degrees warmer or cooler than normal.
Getting Out Of Debt
After the 2007 financial crisis, our retirement was at risk. We had all of our eggs in the real estate and banking industry baskets. We almost lost everything. So I was hugely motivated to change my behaviors and get out of debt on our rental properties.
The first order of business was getting out of debt. We still had our rentals, but we had only had them about 8-10 years, so not much principle had been paid off. For the next six years, we worked to get the mortgages paid off.
The goal is to retire with as little debt as possible. Here is one example of how to accomplish that.
Moving to Florida is so popular with retirees from the high cost of living areas such as New York or New Jersey. Here is an example of what this would look like coming from New Jersey.
They can sell their family home and buy something bigger here for about 1/2 of what they sold their home for up north. That adds a nice little chunk of money to your retirement savings. **
The goal is to retire with less money and still live well. There are many ways to accomplish that if you are willing to make changes.
Set Your Goals and Write Them Down
The first step is taking action. When you write down your goals and keep them in front of you, you are more likely to accomplish them. Remember, it will take sacrifice.
If you still have credit card or installment debt, pick the smallest balance and pay that off first. Once that debt is paid, start paying down the next one with the money you were using to pay off the last one.
Here is an example:
You have two car payments. One is $500 per month with a balance of $22000, and the other is $800 per month with a balance of $5000. Add any extra payments you can handle to the smaller balance of $5000. Instead of paying $800, pay $1000. The $5000 will be paid off in 5 months.
Next, you take the $1000 per month you paid on the first car and add that with the $500 making your total payment $1500 towards the $22000. You will pay off the loan in significantly less time.
After your cars are paid off, add that $1500 per month to your mortgage payment. Can you imagine how quickly you can pay down your principle on your mortgage, making an additional payment of $1300 per month??
Utilizing this method, you will be debt free in no time.
Once you are debt-free you can put any additional money you have into retirement accounts.
How To Maximize Your Retirement Accounts
- Max out your 401(k). Every contribution you make is tax-deductible and may help you to reduce your tax liability.
- Make catch-up contributions.
- Get an employer match. Seriously, it is free money!
- Take full advantage of IRAs.
Here is the good news. You can utilize the catch up program when you turn 50.
The catch-up contribution is $6,500 in 2020 and 2021. The general limit on total employer and employee contributions for 2021 is $58,000 (or $64,500 with the catch-up contribution).
What if you are self-employed? You can start a side hustle and create a solo 401k if you do not want to open one with your main business. You can also use the catch up feature with an IRA.
Meet With Your Financial Advisor
If you already have one you love, great. But before you commit to a financial advisor, you want to make sure you’re hiring the best person for your situation. You will need to be clear about your goals and what you are looking for in an advisor.
Here are some answers you need to have before the appointment:
- What lifestyle am I looking to accomplish?
- Does my investment strategy match my goals?
- What are my goals in 1, 5, and 10 years?
- What do I value the most?
Questions for your advisor:
- Are you a fiduciary?
- How do you get paid?
- Do you have a fee disclosure?
- What are your background and qualifications?
- How will you communicate with me?
- What investment philosophy will you use for my situation?
- How will you allocate my assets?
- How can I make more money?
- What investment benchmarks do you use?
- Where can I put my money so it will accomplish my goals?
- Are my loved ones financially protected?
Once You Retire Early, Stick With The Plan
One of the risks of retiring early is that you are even likelier than the average person to outlive your savings. Social Security will not be available until you are 62!
Unless you have a steady income, like a pension or rental properties, when you retire early, that means you will have to utilize more of your retirement savings. Also, you will have to pay a 10% penalty and regular income taxes on the money you take from your retirement savings.
You may want to keep a portion of your money in the market so it can continue to grow. Periodically there will be market volatility, and you may see your principle drop significantly.
It’s worth remembering that historically after significant market drops, the market has strong recoveries. Still, you should take steps to minimize your risk exposure when you meet with your financial advisor.
You will want to think of ways to earn passive income or create a side hustle so you can take less of your retirement savings.
One example of fixed income is real estate rentals. Certainly, there are downsides to being a landlord, but those who manage it right and carefully screen tenants may find this can provide a reliable income.
Owning rental properties can come with tax advantages. Beyond that, the property’s value typically appreciates in a strong market, making it a potential long-term investment.
If you don’t like the idea of handling upkeep and dealing with tenants yourself, you could hire a property management company, but that, of course, adds to your expenses.
Here is an example. Instead of taking $250,000 from your retirement and just living from those funds, you could purchase 1-2 homes that will provide rental income depending on where you live.
2 homes – $125000 with rents of $1250 each means a gross monthly income of $2500.00. Less taxes, insurance, and repairs could create a net income of approximately $1800 or even more if you want to do daily rentals like Airbnb.
All of this is dependent on the area in which you live, but it could be a way to grow your principle with real estate appreciation. Meanwhile, you will be earning an income. If need be, you can sell it later in life to pay for such expenses as health or long-term care costs.
Technically, you can take your social security payments as early as 62. However, you will take a large reduction in benefits. Depending on your health and financial situation, you may want to wait as long as possible to take your benefits to get the maximum payout from the social security system.
Is Taking An Early Retirement Package Worth It?
Much of this answer depends on your personal financial situation. Still, there are some questions you will want to answer before you accept a retirement package or retirement buyout from your employer.
- How long will I receive health benefits?
- How does it affect my retirement assets?
- Will it impact social security benefits?
- What if I am not ready to retire or can’t afford to?
- Can I negotiate my offer?
- What if I don’t accept my early retirement offer?
The key is to remember that the company is doing this to cut its expenses. Unless you are ready financially and emotionally, there may not be any real benefit to taking a retirement buy-out.
Depending on the offer, the company may include health benefits for 6-12 months and, depending on how many years you have been there, a certain portion of your salary. As an example, they pay you one week for every year you have been there.
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