Retiring early is a dream for many, but it requires careful early retirement financial planning to make it a reality. With proper preparation, you can retire decades before the traditional retirement age and begin living life on your own terms. This article provides tips and guidelines for crafting a solid early retirement financial planning strategy.
Calculate Your Expected Expenses
The foundation of any successful early retirement financial planning is having an accurate estimate of your expected expenses in retirement. Sit down and make a detailed budget of what you anticipate spending annually. Be sure to account for:
- Leisure activities
- Occasional big ticket purchases
Many expenses will decrease like transportation and some increase in retirement like healthcare costs. Budget generously to ensure your savings can sustain you for 25+ years of retirement.
Determine Your Retirement Income Sources
Once you know your retirement spending estimate, identify reliable sources of retirement income. Common early retirement financial planning income sources include:
- Investment portfolio withdrawals
- Pension payments
- Social Security benefits
- Part-time work
- Rental income
Aim to have diverse income streams to provide stability and flexibility in retirement. Having multiple income sources allows you to withdraw less from your portfolio.
Increase Your Savings Rate
Saving aggressively is required for early retirement financial planning. To retire significantly before age 65, you need to accumulate enough investments to produce consistent retirement income. Increase automatic transfers from your paychecks to retirement and investment accounts. Look for unnecessary expenses you can cut to direct more cash flow into savings and investments. Saving more now can translate into years of earlier retirement.
Run Retirement Projections
With your expected spending, income sources, and savings contributions identified, run long term retirement projections to see if you are on track for your goal retirement age. Quality retirement calculators allow you to input different variables like:
- Retirement age
- Life expectancy
- Investment return assumptions
- Savings rate
- Pension and social security payments
Tweak the variables until your projections show you saving enough to retire by your target date.
Invest For Growth
Your investment strategy should focus on growth during your working years to accumulate a sizable nest egg. Invest heavily in stocks through low-cost index funds and ETFs. As you approach retirement, gradually shift to more conservative assets like bonds to preserve capital. Work with a financial advisor to ensure your investment asset allocation matches your risk tolerance and time horizon.
Consider Supplemental Income Streams
Generating supplemental income streams can provide an extra boost to your early retirement financial planning. Possible options include:
- Consulting or freelance work
- Monetizing a hobby or talent
- Renting out a garage apartment or basement
- Starting a small business
Many early retirees enjoy the social and mental engagement opportunities to earn extra cash. Even a few thousand dollars of annual supplemental income can cover big vacations or home projects.
Relocate To Save Money
Moving to a lower cost of living area is a proven strategy to make early retirement financial planning more feasible. With remote work options multiplying, you may not have to change jobs or careers to relocate somewhere cheaper. Compare the cost of living between potential locations. Relocating from an expensive metro to a neighboring suburb can open up significant savings on housing, transportation, utilities, and general living expenses.
Delay Social Security Benefits
For each year you delay collecting Social Security beyond your full retirement age up to age 70, your benefit amount increases. Waiting longer to begin Social Security means a higher payment for the rest of your life. In early retirement financial planning, factor in how postponing Social Security can boost your income later in retirement when portfolio withdrawals may be less.
Consider Downsizing Your Home
As you approach retirement, assess whether downsizing to a smaller, less expensive home could benefit your early retirement financial planning. With kids out of the house, you may no longer need multiple bedrooms and a large yard. Selling your home to buy a smaller property or move to a cheaper area can free up major equity and cut expenses.
Review Your Plan Annually
Revisit your early retirement financial planning model regularly, at least annually. Update your expected retirement spending, adjust savings and investment rates, review your asset allocation, and rerun projections with current account balances. Life changes and market shifts can impact your original plan. Making incremental course corrections will get you across the retirement finish line sooner.
With diligent preparation, realistic assumptions, and dedication to your savings goals, you can make early retirement financial planning work. The key is giving yourself enough time to accumulate substantial retirement capital so your withdrawals and income sources can fund decades of life after your career. Get started early and enjoy the ride to a comfortable, rewarding early retirement.
- How to Retire Early: The Ultimate Guide – Investopedia
- 12 Essential Early Retirement Tips – DaveRamsey.com
- How to Retire Early: 21 Keys to Achieving FIRE – The Motley Fool
- What Is the FIRE Movement? Can You Retire Early? – NerdWallet