Early retirement is a dream for many people who do not want to work until they’re 65. Not everyone has the foresight to plan several decades ahead and take the necessary actions to earn, save, and invest more.
To make this dream come true, you need to know the right course of action to make this possible. Let’s explore some steps to know how to retire early.
Know How Much Money You’ll Need Post Retirement
Figuring out how much money to save for your retirement means you will have to consider your monthly expenses. This amount will likely be less than what you need now since your needs will not be the same post-retirement.
A good guideline is to save up to 80% of your pre-retirement income for your post-retirement expenses. This amount will be sufficient because you will pay less in taxes, petrol for commute, etc. If you have post-retirement goals, such as traveling frequently, you will have to factor this in when you’re saving up for the future.
Know How Much You’re Allowed to Withdraw Each Year
After retirement, you can use the 4% rule to withdraw this amount of money from your savings each year. You can factor in inflation adjustments to ensure you have enough for your wants and needs.
For example, if you’ve saved up $1 million for 25 of your post-retirement years, you can withdraw $40,000 in the first year. If you need more than this to survive and lead a good life, you will have to save more than $1 million. So, you should plan at least 20 years ahead.
Figure Out How Early You Can Retire
Depending on how soon you started saving for retirement, you may have enough money saved to consider retiring at 55 instead of 65. Let’s consider two examples. If you’re 45 and wish to retire in 10 years but only have $50,000 saved up, you’re not in the best position to make your dream a reality.
You’re doing much better if you’ve saved up half a million dollars and need to have $1 million saved up in 10 years. As you begin to near your retirement age, you will naturally start saving more money instead of recklessly spending your money.
Create an Appropriate Savings and Investment Plan
You can hire a financial planner to help you make the right financial decisions for the future. Once you’ve determined your savings target and prioritized the right course of action to hit that number, you can feel good knowing you’re in a better position to retire early. Calculating exactly how much you’ll need and how much you’re willing to sacrifice will allow you to plan effectively and know how to retire early.
If you wish to retire early, you must consider various factors, such as income from fixed sources, insurance changes, healthcare, and inflation adjustments. However, if you have the foresight and prioritize effective retirement planning, you can retire at least ten years earlier.