Gone are the days when the retirement age was fixed and people used to work most of their lives looking forward to the time when they could retire and spend the rest of their life in relative comfort and peace. Retiring early used to be a rare thing. But now according to the LIMRA Secure Retirement Institute more and more people are choosing to retire early. Most workers dream of retirement but for many people the goal of retiring early is hard to reach. On the other hand some people have set an early retirement goal early on for which they strive every day.
Reasons behind wanting an early exit from the rat race are many. Whether you wish to pursue a passion project, travel the world, commit to a noble cause, or start your own business, realizing your dream of early retirement takes time, careful planning, hard work, and discipline.
Retirement planning is not easy even when you are working till the traditional retirement age. But when you wish to retire years or decades earlier it means you have to work extra hard. However, with the right financial planning you can be on the right path. If the idea of an early retirement appeals to you the following tips are a good place to start.
Think what retirement means for you
Before you begin your retirement planning though, you need to decide what an early retirement would mean for you. Early retirement can mean so many different things for different people. Your vision for retirement will define what you need to do to achieve it. Early retirement does not necessarily mean never working or earning money again. To most early retirees it means the financial freedom of not having to work for a living. It might mean you leave your corporate job for something more fulfilling where you don’t have to count your hours. You might want to open your own restaurant or studio if you’re the creative type. Maybe you want to pursue hobbies without worrying about income. It could even mean an unconventional work style interspersed with travel or even mini-retirement.
The first step in your early retirement planning is actually figuring out what the idea of retirement means to you. A helpful tip is to visualize your ideal daily life. This will help you decide what you want and then estimate your retirement expenses. You need to identify how much you will be spending on a monthly and yearly basis once you retire.
Take stock of your finances
The next thing you should do is take stock of your financial situation. This includes calculating your net worth and then assessing your annual spending. For this you need to list down your assets and their value after deducting whatever is owed. A look on your credit card statements can give you an idea of your yearly spending habits. If you have trouble tracking your spending try an automated tracking app to monitor your expenses.
Identify how much you need for retirement
Once you’ve identified your ideal early retirement scenario and assesses your finances, deciding a target number is the natural next step so you know just how much money you need to retire early. Financial experts generally recommend an ideal saving of 25-30 times your annual expected expenses in addition to one year’s expenses in cash. Once you have your big target figure you can break it down into shorter monthly and weekly goals. If you can afford to consult a financial planner they can help you calculate your figures and help you account for any possible downturns or emergencies etc.
Adjust your budget and limit your spending
There are three ways to go about preparing for that dream of early retirement: spending less, earning more, or doing both at the same time. Let’s discuss the first way. You’re probably tired of hearing this but living below your means is the first step to saving money and building your investments. You will have to adjust your current budget and make a plan for saving. This takes a lot of discipline. Typically people in this stage spend about half of their income and use the rest to pay debts and put in retirement savings. To make the process a little easier consider using a free budgeting app so you can keep track of where you’re spending most and see where you could cut back.
Find more income streams
The second way is to earn more. Finding ways to increase your income can make a big difference for your retirement plan. Limiting your budget and saving is a short term solution towards financial freedom, increasing the amount of cash flow is a more long-term solution. There are many ways to go about diversifying income streams. It can mean a side hustle, part time job, or some passive income through investments like real estate.
Make the most of your retirement accounts
The most common advice you’ll find about gaining financial freedom and retiring early is to start saving early and frequently. And it works. Retirement accounts are a great way to optimize your savings. Individual retirement accounts (IRAs) or employer sponsored retirement plans offer tax advantages. If you can max out on your retirement accounts.
Invest the remaining amount
After your saving target is achieved, if you have money left over, invest it. You can choose a brokerage account to make investments in the stock market. Another great option is to go for low-cost index funds which minimize your investment risk.
Other things to consider before retirement
You need to pay off any outstanding debts before retirement. Also consider paying off the mortgage. Moreover, you might want to consider health insurance options.
It might also be a good idea to consult a professional financial advisor. They can help you with a solid investment strategy and guide you on how to invest in a way that will make your financial goals easier and faster to achieve. Their financial expertise can also minimize your risks.
Have a plan B
Despite your best efforts and careful planning, things can always go wrong. No amount of financial acumen can give you the power to look into the future. It is wise to consider all possible scenarios and prepare for the worst case. Go through what could go wrong. What if there’s a recession around the time of your expected retirement? How can you navigate financial shocks? What if you are unhappy with life in retirement? Considering potential scenarios can help you be better prepared.
Conclusion
Early retirement is an attractive idea for many but most people lack the resources, financial knowledge, and the discipline to achieve it. If retiring early is what you desire and have the means to achieve it, start with the above tips to start on your journey towards financial freedom. Of course it will take time to get there so the sooner you start the sooner you can get there. While you have sight focused on the future, it is also important to remember to live in the present moment and be grateful for what you have already. Be sure to celebrate small achievements along the way and treat yourself now and then.
