Today, millions of people long before the traditional age of 62. But even retiring a few years early requires plenty of financial planning to ensure you have enough money to carry you through retirement.
If early retirement to you means retiring in your 30s or 40s, you’ll have to do even more planning since you’ll add 20 to 30 years of living expenses to your budget.
So how do you retire early? While each situation looks different, here are the top tips.
- Know your lifestyle
Think about what you want out of early retirement. Will you live a low-key lifestyle or travel the world? Each lifestyle has different costs and needs. Knowing what you want out of your time will help you determine how much money you’ll need.
- Predict your retirement spending
You don’t need a concrete number you can’t ever change, but predicting your annual spending in retirement will give you a starting point. The number you come up with today, we suggest you add a 20% cushion to it to account for inflation and the unexpected.
- Start cutting back now
While you’re still working, cut back to a frugal lifestyle. Only you know where you can cut back and still feel satisfied. At the very least do the following:
- Don’t use credit cards so you live within your means
- Cut back on any unnecessary expenses (you’re saving for your future)
- Live a simple lifestyle
- Pay off your mortgage as quickly as you can
- Invest now and regularly
If you haven’t invested yet, start now. Take advantage of all retirement (tax-deferred) accounts and even taxable accounts if you have the funds to contribute including:
- 401K – You can defer up to $19,500 of your income to your 401K. This decreases your tax liability today and grows your retirement income. If your employer matches a portion of your contributions, you’ll grow your retirement account even faster.
- IRA – You can contribute up to $6,000 to an Individual Retirement Account each year too. Choose between a traditional IRA (tax-deferred) or Roth IRA (tax-free) retirement account.
- Taxable accounts – If you maxed out your retirement accounts invest in taxable accounts too. This gives you money to live off of when you retire before age 59 1/2 – the age you can withdraw from retirement accounts without penalty.
- Meet with a financial advisor regularly
Check up on your investments regularly and work with your financial advisor to reach your early retirement goals. As the market ebbs and flows, you’ll see fluctuations in your account balance, but looking at the big picture will help.
A financial advisor can help you adjust your allocations accordingly as you get closer to your target retirement date to reduce the risk of a loss close to when you plan to retire.
Early retirement requires careful planning, regular contributions, and choosing the right investments. It also requires a somewhat frugal lifestyle starting today so you have the extra money to put away for retirement.
Don’t think of it as a sacrifice, but rather an investment in your future, and it will feel easier to be frugal today to enjoy your time free from work.