Guide To Early Retirement (2024)

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For those with an eye on early retirement before age 65, it helps to break your retirement planning into two phases: before retirement and after retirement. By planning for each phase, you can move toward an early retirement with a greater level of confidence.

How to Retire Early

If 9 to 5 until 65 isn’t your cup of tea, early retirement may be your ticket out. Retiring early is possible through a balance of living off less now, investing more, and living on less later. Through the magic of compound interest, the earlier you start the less you have to invest now and the more you’ll have available later.

Determining a goal post for when you want to retire early can help you determine how much you need to invest and where.

If you’d like to retire by 30, unless you have the salary of a CEO with the lifestyle of a monk, you’ll have a hard time. Investing aggressively in real estate to own as many investment properties as quickly as possible and taking on all the risk that comes with it may be your only option. Using geographic arbitrage to move to a significantly cheaper country can also allow you to retire extremely early if you’ve prepared properly.

Retiring in your 50’s is a much more attainable goal, especially if you start early. Increasing your investing rate kills two birds with one stone. If you’re able to invest more, the amount you need to live on decreases, which simultaneously reduces the amount you need saved to retire early, and gets you to the finish line faster.

The earlier you start and the more you save, especially in tax-advantaged accounts, the more likely you’ll be able to achieve your goal of retiring early.

What To Do When You Retire Early

Don’t retire from a bad life, retire to a good one. Many retirees who leave the workforce at a traditional age or early find themselves struggling to adjust to a new paradigm. While you are financially planning for an early retirement, you should be emotionally and socially preparing as well.

Develop hobbies, invest in your friendships and learn what makes your heart sing now, don’t put it off until after you’re done working. There’s no retirement police. If you find yourself wanting to work part-time on a passion project or taking a job with your favorite nonprofit, do it.

The true beauty of early retirement is the freedom it grants while you’re still physically able to pursue your dreams. The freedom of not needing a high-paying salary to maintain your lifestyle opens up a world of possibilities.

Early Retirement, Phase One: Pre-Retirement Planning

When people talk about retiring early, they most often focus on the investment strategy known as FIRE: Financial Independence Retire Early. Outside of planning which retirement accounts and brokerage accounts to use and how much you need to save, you also need to think about:

1. Your Vision for Early Retirement

It’s critical to start your retirement planning process with a clear vision of your life during retirement, says Jake Northrup, CFP, founder of Experience Your Wealth, LLC.

“I’ve found a lot of people say they want to retire early, but they don’t actually paint a picture of what early retirement looks like for them,” he says. “You don’t want to climb the retirement ladder and get to the top to realize it was leaning the wrong way.”

Phil Lubinski, CFP, co-founder of IncomeConductor, has found over his 30 years as a financial advisor that pre-retirees don’t measure their emotional readiness to retire.

“Fishing and golfing are great part-time activities, but what are investors going to do with the rest of their time?” says Lubinski. “They need to fill the 40 to 50 hours a week they were working with other activities.”

He also says that investors may not be prepared to replace the psychological and social benefits that their careers and work environments provided. That means thinking about the kind of part-time or volunteer work you might want to take on, the types of hobbies you want to pick up or the traveling you may like to do, among countless other goals.

Knowing your goals for your early retirement will also dictate how much you need to save for it.



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2. Your Health Insurance Plan

“The most common thing people fail to plan for when pursuing early retirement is health insurance,” says Northrup. “You can’t receive Medicare until you’re 65, and early retirement likely means you’re no longer covered by an employer plan.” Early retirees need a strategy to bridge the gap from their retirement date until Medicare kicks in.

COBRA coverage is one option and allows you to continue your last employer’s health insurance. The catch? High costs. Right now, you’re probably covering about 18% of your plan’s premium cost. But once you leave your job, you’re responsible for 100% of the premium—and then some. Due to administrative fees, you may be stuck with a bill that’s up to 102% the cost of the employer’s plan.

Keep in mind that COBRA coverage only lasts between 18 and 36 months, depending on your circ*mstance, so it alone may not be able to bridge you to Medicare.

To save on costs or to protect yourself after COBRA ends, you may consider a health insurance plan in your state’s insurance marketplace. While a policy through the marketplace may cost less than COBRA coverage, overall cost will likely be higher than you paid while still employed since most employers cover the vast majority of plan premiums. Deductibles and out-of-pocket maximums may be markedly higher than your employer coverage as well.

When deciding on a pre-Medicare health plan, be sure to compare costs across any COBRA and marketplace plans. You may also reach out to a health insurance broker for estimates.

3. Plan Out Your Early Retirement Housing

“Most pre-retirees focus on getting their investments ready for retirement, but attention should also be paid to getting their home ready while they are still working and making a good income,” says Lubinski.

Prepping your home for retirement could mean different things to different investors. To prepare your home for your early retirement, you might:

  • Pay off your mortgage early
  • Downsize your home
  • Make major repairs (replace your roof or sewer main, invest in tuckpointing)
  • Complete renovations (kitchen, bath, landscaping)
  • Research homes in your dream locale (if you’ll be relocating)
  • Plan to pay off any HELOCs prior to retirement to protect your home equity
  • Your first priority should be any major repairs you’ve been putting off as you want to avoid tapping your retirement savings to finance repairs. “Major home repairs during the early years of retirement can be very damaging to a long-term investment portfolio,” says Lubinski.

4. Plan to Keep Earning Income

“Early retirement is not about stopping to work, but rather gaining complete control of your time,” says Northrup. He suggests that after investors leave the 9-to-5 grind, they find part-time or gig economy work that fits with their new lifestyle while offering a modest income to offset living expenses. These jobs may even offer benefits, like health insurance, that can help bridge you to retirement.

“By planning to continue earning income, you are able to achieve early retirement far earlier because you don’t need as much money saved up in investments to support your lifestyle,” he says.

During your retirement planning phase, think about the kind of work you’d find rewarding during retirement. Take time to research your options. Knowing that you have options for retirement income can help alleviate concerns that you might outlive your savings or any feelings of discomfort from the thought of actually spending the savings you’ve accumulated over a lifetime.

5. Have a Social Security Strategy

Not only does your early retirement strategy need a plan for healthcare before Medicaid. You also need a clear vision for when you’ll tap Social Security. Starting Social Security payments as soon as you’re eligible can diminish your Social Security benefits up to 30%.

Talk with a financial advisor or use the planning tools on the Social Security website to make a plan for when you’ll start drawing benefits and potential delays you can make to ensure you receive the maximum benefit.

6. Create a 10-Year Financial Buffer

“At least five years before their early retirement date, investors should set aside the amount of money required to provide income for their first five years of retirement,” says Lubinski. “This will effectively put a 10-year buffer between the money they need for early income and any market volatility that could take place during their five-year countdown to retirement.”

This buffer helps investors safeguard the wealth they’ve accumulated by setting it aside from their main retirement savings. You could do this by opening a new individual retirement account (IRA) and rolling over the recommended five years of income. You can then invest this money in a capital preservation-minded portfolio, like one focused on cash-based investments like Treasury Bills or bonds.

By separating your funds you’ll need early in your retirement, you give yourself some buffer should the market experience volatility. Under this model, your remaining investments will have years to bounce back from any losses before you’ll need to tap them.

Early Retirement, Phase 2: Managing Finances in Early Retirement

Early retirement isn’t a destination so much as the start of a new journey. You can’t put your finances entirely on autopilot just because you’re no longer working full time.

1. Set Guidelines for Your Spending

To retire early, you need to know how much cash you need to maintain the lifestyle you envision. “The most critical variable in financial planning, and the one you can control, is your spending,” says Northrup. That’s why he helps his clients set up “guardrails” for their spending.

He recommends that investors identify a lean budget (left guardrail), a moderate budget (middle of the road) and a fat budget (right guardrail). “Most of the time you will drive in the middle of the road, but it’s helpful to know how far left and right you can go while still being safe,” he says.

This type of planning in advance will help you reduce anxiety about spending and also give you permission to increase spending on experiences you truly value, so long as you stay within the guardrails.

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2. Adjust Rate of Return Assumptions

“The past five or 10 years is not a good measure of what the next 30 to 40 years might hold,” says Lubinski. Wise words, given that the U.S. was recently in the longest bull market in history.

If you’re relying on epic rates of return during retirement, it could prove more prudent to adjust expectations downward. Given the average rate of return for the S&P 500 has been 9.8% over the past 90 years, you’ll probably want to err on the conservative side and model your portfolio with a lower rate of return than that.

Instead of 10% annual returns, you might conservatively estimate 5% or 6%. You’ll also want to keep in mind that you probably won’t have a portfolio invested entirely in equities in retirement, meaning you wouldn’t reach 10% even in a perfect market.

That’s why Lubinski says investors should focus on “reliability of income” during retirement instead of “return on investment.” This means adjusting your investments to a capital-preservation and income-centric approach. It doesn’t mean giving up all of your market upside potential, though your returns will likely be more modest than a portfolio invested only in stocks. Rather, your steady income becomes the leading factor in the investment decisions you make.

3. Consider Segmenting Your Savings

You may think about bucketing your savings to try to capture market upside while preserving the money you need for income in the near future. It can be helpful for some early retirees to break up their retirement savings into five-year portfolios and invest accordingly, allowing funds you won’t need to tap for 25 years to be invested more aggressively than those you’ll need to tap in the next five to 10 years.

4. Remember to Enjoy Your Early Retirement

Once folks are in early retirement, they should avoid a tendency not to enjoy their wealth. “My clients who were very good savers sometimes have trouble becoming spenders,” Lubinski says. That can be helped by creating a retirement spending plan.

“Retirees usually spend on a U-shaped curve, with higher spending in the early years when their health and energy is high, then a natural slow down, and in some cases an increased spending pattern in the later years when health care becomes an issue,” says Lubinski. “Having a written retirement income plan that is customized to the retiree’s actual spending goals gives them the confidence to spend and enjoy their retirement.”

You’ve saved it, and in early retirement, your plan is to have more years to enjoy what you’ve saved.

Why Is It Important to Plan Early For Your Retirement?

The earlier you start planning your retirement, the more likely you are to be successful. If you determine at age 54 that you want to retire at 55, but you’ve spent your entire career living off of a six-figure salary, saving nothing and going into debt, even retiring at a traditional age may not be possible.

Determining how to create a life that feels abundant but is still within your means is best done early. This can allow you to meaningfully and deliberately spend your money on your values from a young age while ruthlessly cutting out spending on things that don’t matter to you.

Mr. Money Mustache, an influential figure in the FIRE movement, published The Shockingly Simple Math Behind Early Retirement in 2012. This breakdown shows how many years you have to work to retire based on your savings rate if you invest in low cost index funds and plan on utilizing a safe withdrawal rate of 4% in early retirement. As the table shows, the earlier you start, the less you need to save.

Savings Rate (percent of your income)Working Years Until Retirement

Under 3

If you enter the workforce right out of college at 22 and decide to save 30% of your income, you’ll be able to retire by 50. But if you don’t start saving until you’re 43, you’ll have to save 75% of your income to retire by the same age of 50.

It’s better to start saving when you’re younger, and you’ll never be younger than you are right now. Don’t give up hope that it’s too late for you. The later you start, the more you’ll have to invest and think outside of the box for ways to increase your income and reduce your expenses.

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Guide To Early Retirement (2024)


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