A recent study from MSN found that two-thirds of millennials want to retire before age 65.1 That’s well before Social Security’s full retirement age of 67. While early retirement may be a desirable goal, it can also be a challenging one.
Early retirees face a number of unique obstacles. They spend more time in retirement, which means they need more savings to fund their lifestyle. They also may retire before they qualify for Social Security or Medicare, which means they’re even more reliant on personal assets.
The good news is it’s possible to retire early if you plan ahead and stick to your strategy. Ready to implement your early retirement plan? Below are three simple steps to help you get started. You may also want to work with a financial professional to help you analyze your needs and goals and develop a more detailed plan.
Estimate your need.
Every good plan needs a desired outcome or end goal. When it comes to retirement planning, your end goal is usually a savings target or funding need. Simply put, it’s the amount of money you need to retire.
It may seem difficult to predict how much money you will need. After all, you can’t predict the future. However, you can use your current expenses as a starting point to estimate your living expenses in retirement. Consider how your life may be different in retirement. Perhaps you’ll downsize to a more affordable home, or maybe you’ll have lower debt payments. Also, be sure to factor inflation into your estimate.
Once you have a spending estimate, think about how many years you may live in retirement. It’s possible that you may live into your 80s or even 90s. If you retire early, that means you could live in retirement for 30 or 40 years. Multiply your spending estimate by your years in retirement, and you’ll get a ballpark figure of how much money you may need to fund your lifestyle.
Calculate your savings plan.
Fortunately, you may have other income sources besides your savings in retirement. You will likely receive benefits from Social Security, and you may even have a pension. You may also receive rental income, investment income or other cash flow. Deduct that income from your funding need. The difference is the amount you’ll need to withdraw from savings every year in retirement.
Once you have that estimate, you can work backward to estimate how much you’ll need to save each year to hit your target. Set up automatic contributions to your retirement plans so you can stay on track. Also, be sure to implement an investment strategy that minimizes risk but also offers growth potential.
Your financial professional can help you develop these estimates. They can identify risks and possible expenses that you haven’t considered. And they can help you implement an investment strategy that’s aligned with your goals and risk tolerance.
Bridge a savings gap by making changes to your plan.
You might find that even if you save as much as possible, you’ll still fall short of your goal. This shortfall is known as a savings gap. You may need to make changes to your plan to eliminate the gap. For instance, you could push back your planned retirement date so you can save more money. Or you could consider part-time or seasonal work in retirement.
You could also scale back your planned spending in retirement. You could move to a more affordable location or downsize to a smaller home. You could also travel less and eat at home more often. Go back to your retirement spending estimate and look for areas where you can make cuts.
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17596 – 2018/4/19