Retiring early is a dream for many Americans, but can you really make it happen? And how much would you need to retire early?
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The truth is it’s hard to offer a generic dollar amount, as circumstances are unique to every person and depend on many factors ranging from how many years of saving and planning you put in to your health and more.
However, financial experts offered some considerations for how to retire as early as possible.
Start Planning Early
Nobody can truly predict the future. While you can’t know your exact circumstances at retirement, particularly if you have a long way yet to go, you can spend as much time as possible planning for it, according to Gina Stoddard, chief of staff at Broad Financial.
“Preparing for retirement involves a lot of forethought and considering a myriad of factors. If you have the goal to retire early, you’ll need to plan for your savings to last for likely a few decades,” she advised.
You also need to to evaluate the ideal lifestyle you wish to lead, any remaining debt, taxes due and if you’ll receive any other sources of income, Stoddard said.
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Don’t Try To Be Average
The first thing Melissa Fox, CFP and owner of Future-Focused Wealth, tells people who ask about early retirement is this: “There’s no such thing as average anymore. Especially not when it comes to savings, not when it comes to lifestyle, and definitely not when it comes to retirement.”
Since every single person takes a different path and a different pace to retirement, no single retirement calculator formula will work to customize the specific amount you need. Better to work with a financial planner to look at your specific goals.
Consider This Rule of Retirement
If you want to dial in a number, you can refer to a common rule for determining how much you will need in retirement, known as “the 4% rule,” which refers to the amount of money you can withdraw from your portfolio annually without running out of money.
According to Michael Rodriguez, CFP and owner of Equanimity Wealth, if you have a $1,000,000 portfolio, for example, you should be able to withdraw $40,000 annually and have your money last 30 years.
Rodriguez advised aiming for a slightly smaller withdrawal rate, around 3% to 3.5%, to allow for a bigger cushion.
Avoid This Mistake
A common mistake people make when planning for retirement is not understanding their expenses, Rodriguez said.
“If you are unaware of what you are spending on a monthly basis, begin tracking your current expenses for six to 12 months and add a 20% to 30% buffer on top of your expenses to create a cushion.”
For example, if you are spending $40,000 annually, it would be a good idea to plan for expenses in retirement to be around $50,000 to $60,000 annually.
If you plan on retiring before you are eligible for Medicare (age 65), it is important to factor in healthcare costs as well, he said.
Maximize Social Security
If you are, or will be eligible for Social Security, make sure you are maximizing the amount you receive, which usually involves waiting until age 70, Rodriguez urged.
Waiting until age 70 allows you to receive 124% of your full retirement benefit, which can be significant over the course of your retirement.
Consider Partial Retirement
If you do not have enough money saved to retire early, consider finding a way to partially retire, either by continuing to work part time or taking on new part-time work or side hustle, Rodriguez said.
“If you are able to find work that you find fulfilling that also allows you to work at a level that is comfortable to you in retirement, this can help you significantly extend your portfolio in retirement.”
Account For Inflation
You also need to account for inflation in your planning, Stoddard said. Inflation generally affects expenses that retirees still pay, such as housing and insurance, which, she explained, “statistically ascend in alignment with the inflation rate. Sometimes, even at a faster pace.”
While inflation tends to have a relatively stable rate of increase, unexpected changes, as seen during the COVID-19 pandemic, can cause unusually high rates of inflation.
Diversify Outside the Stock Market
Stunning dips in the stock market this month reveal that it’s important to have assets that are not invested in the stock market.
Stoddard suggested alternative investments “like precious metals,” which tend to hold some sort of value as they’re a tangible asset, “and their value tends to work inversely to the stock market.” Likewise, owning real estate is typically viewed as owning an inflation-protected asset.
Some retirement accounts that allow for alternative investments include self-directed Roth IRAs, self-directed traditional IRAs and solo 401(k) plans or Roth solo 401(k) plans, Stoddard said.
Consider Your Goals
Again, since retirement is unique to each individual, Cox urged people to consider why you really want to retire early. “Is it to finally rest after a long career? To travel? To care for aging parents or enjoy more time with your kids? Or maybe just to escape the burnout of a job that no longer fits? The ‘why’ gives us the direction. The dollars? That’s just the fuel to get there,” she said.
Be Willing To Make Tradeoffs
In the end, an early retirement may have less to do with how much money you have and more to do with your goals. Cox said that retirement planning requires not “obsessing over the number” and “talking about tradeoffs.”
The right plan doesn’t always mean retiring early. Sometimes it means retiring smarter with more purpose, more clarity and more alignment with what matters most to you.
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This article originally appeared on GOBankingRates.com: Experts Explain How To Retire as Early as Possible
