Early retirement can be one of best choices you ever make. But it needs to be right for you, and more importantly it needs to work with your financial situation. Many people have been able to retire early, far before the average retirement age. Do you think you will be able to do the same?
The most important thing with early retirement is to have financial discipline, mixed in with a little creativity. Contrary to what most people think, you do not need millions of dollars saved. Interested? Here we go through the steps needed to stop working earlier and live a comfortable retired lifestyle!
You don’t need to live on 70% of your income
The current thought in the financial circles is you need 70% of your current income saved per month in order to retire. But upon closer look, this number is very inflated, and we will explain why.
Certainly, if you plan on spending your retirement staying in 5-star hotels and dining in extravagant restaurants, that can be true. But if you’re happy to live how do you did during your working life, retirement savings is a lot more affable (and realistic!).
Most people planning for retirement overestimate how much they need in retirement because they do not take into account how much of their income is put towards high taxes and one-time expenses.
For example, your house. Once it is paid off, you will not be buying another house, which drastically frees up your monthly expenditures. Furthermore, other retirement investments will start to kick in. Think of it this way. You can live extremely well on an unassuming income once your children have grown up and/or you no longer have a mortgage payments each and every month.
So, taking care of these one-time purchases and ensuring your children are financially stable upon entering your early 50’s is extremely important. What will also happen, and works to your advantage, is your taxes will dive as your income decreases. In a lot of cases, 50% of your previous incoming will be more than sufficient to keep you and your loved one living in the same lifestyle as you did during your working times.
So how much should I save?
A good way to estimate the amount needed to save is to figure out your real, disposable income.
Start with your gross income, before taxes, and then take out what you pay into your taxes and house payments and mortgage. Then take out any retirement contributions, job related expenses, and any savings you put away for your children’s educations. Then cut out any money-wasting areas or habits that you can stand to give up.
After these subtractions, the number you are left with is your actual, real disposable income. This is the amount you should be trying to save and replace for when you are retired.
Upon turning 65 there are government stipends that replace much of a person’s current disposable income, but if you are choosing to retire early, you need to save extra in order to reach the point whenthe 65 and over income kicks in.
Let’s say that you and your spouse are similar in age, within 3-4 years, and have a real disposible income of $40,000 a year.
In order to continue to enjoy the same income at retirement one method of doing so is the purchase a financial product issued by insurance companies known as an annuity. What an annuity does is guarantees you stead income in exchange for a one-time up-front payment.
This can be a great technique to bridge the gap between retiring early (say at 55) and making it until the retirement age when the income and pensions starts to kick in (65).
You can’t rely on pensions and federal aid
Yes, it will help supplement your income, but do not try and fully rely on government pensions. The economy can always change, and quite frankly these programs have not taken into account inflation accordingly.
Our advise is to plan for retirement assuming you won’t see a dime from social security, old age security or a company sponsored pension. If you end up receiving a pension or federal aid upon retirement this will be the cherry on top of your retirement sunday!
Instead, time to be creative!
With some creativity, especially if retiring early. One way to do this is to downsize.
Often people realize they no longer need quite as big of a house, once the children have moved out. If in a good market, you can see your (hopefully, already paid off) house and move into a less expensive home, pocketing the difference.
Also, now that you have more time, any items that you no longer need (or don’t fit into your newly downsized residence, can be turned into income. Ebay and local websites are also great for selling items you no longer use or need. Often times this can turn into a nice secondary source of income.
When it comes to creating and building your own retirement plan, remember that it is not entirely about your income, but also a great deal your expenditures. One suggestion to further improve your quality of life is have the higher earning spouse get to claim the tax deductions, but the lower earning spouse maximize the payments into retirement plans and investments.
Another huge challenge is timing. When do you start tapping into your mutual-funds and retirement investments? If you can start collecting earlier, the research shows you tend to collect more, being that often people pass away before their payments have been completed.
How do I get started to retire early?
Once you have paid off your big-ticket once in a lifetime purchases, such as your house and paid for your children’s educations, you should try and put every dollar into your retirement programs.
Especially if your work has a matching system. If you do this early, you can take advantage of the compounding interest and build up a large amount for your early retirement!
What is important is that you get out of debt as soon as possible. Too many people get themselves trapped, not to mention the tremendous anxiety and stress, from debt. This further puts off your early retirement, since you cannot pay into retirement programs if in debt and sending your money to pay down the interest and amount owed.
For many people, an early retirement means a chance to pursue new hobbies, focus on their passions or even turn them their hobbies and passions into a second career.
Really, since you’re the one retiring early it’s complete up to you! Maybe there are other things that are of interest and that you always wanted to try!