For you, retirement may be right around the corner or years down the road. Regardless of where you are at age-wise, most of us would like to retire early or at least earlier than later . For your retirement years, you may dream of traveling or spending more time with family and grandchildren. Whatever is fueling your lifestyle and financial goals, working into your 60s may not be very appealing, or maybe you’d rather retire well before 64, the average U.S. retirement age.
More and more people are trying to figure out how to retire early. If you are one of those people, this article will help you start planning for retirement and hopefully set you up to retire early at 40, 55 or 60.
How to Retire Early, In General
Retiring early doesn’t necessarily mean you aren’t getting a regular paycheck. In fact, lots of early retirees define retirement as financial independence or not having to work to live. You may choose to leave your desk job and pursue your own passions or travel and spend your time enjoying hobbies that don’t produce income. Trying to imagine what your ideal day-to-day looks like will help determine exactly what retirement means to you.
Determine Your Target Early Retirement Age
Want to retire early at 40, 55 or 60? Great! The first step is to determine your target early retirement age! This will put a timeframe on your savings goals and make it easier to quantify how much money you’ll need to be saving each month to retire realistically.
Create a Realistic Retirement Budget
The first step is to estimate how much money you’ll need to live on each month during retirement. Start with the necessities, like food, housing, clothing, utilities, transportation, insurance and health care. Ideally, you’d have no debt when you retire early; however, if you still have a mortgage or other outstanding debts, make sure those expenses are included in your budget.
After necessities, add discretionary expenses to your budget. These include money for entertainment, hobbies, travel, etc. Combine these expenses to generate a preliminary retirement budget illustrating how much money you will need to live on each month.
Investor Tip: Two retirement expenses that are often overlooked are taxes and health care.
Calculate How Much You Need to Retire
With your preliminary retirement budget determined, you’ll need to calculate how much money you need to save. Financial experts share different opinions about how to best estimate how much to save.
One way is to save between 25 and 30 times your expected annual expenses, plus enough cash in the bank to cover 12 months worth of expenses. Take your monthly expenses and multiply by 12 to get a yearly estimate.
For example, assume your monthly expenses will be $4,000 a month or $48,000 a year. With this approach, $48,000 multiplied by 25 to 30 means you will need to save between $1.2 million and $1.44 million, with an additional $48,000 in cash.
Evaluate Your Current Financial Situation
To see how close (or far) you are to hitting your retirement goal, subtract the amount of money you currently have from your target number. If you need $1.2 million to retire and already have a $400,000 nest egg, you know that you’ll need about $800,000 more.
Adjust Your Current Budget
This is where the discipline comes into play. Keep your expenses in check and live below your means. If you want to retire early, try living on 50% or less of your income. Use the rest to pay down debt and invest in your nest egg.
It’s extremely important to create and stick to a budget so that you know exactly where every penny is going. This will also help you see where you can cut back. There are tons of free budgeting apps, like EveryDollar, to make tracking your spending on the go easier.
To adjust your current budget, consider these three options:
- Spend less
- Earn more
- Do both
Max Out Your Retirement Accounts
No matter when you decide to retire, it’s wise to start saving early and often. Contributing to retirement accounts like IRAs and 401(k)s is the best way to do this. While you’re still working, try to put as much money into your retirement accounts as possible. In 2024, individuals can contribute up to $7,000 to a traditional or Roth IRA. Individuals over 50 can add another $1,000 yearly as a catch-up contribution.
If you have a work-sponsored 401(k), you may contribute up to $23,000. Those 50 and older can make an additional catch-up contributions of $7,500. Make sure you are taking advantage of employer 401(k) matches as it’s free money.
Invest for Growth
Perhaps the best thing you can do if you wish to retire early is to leverage your income. Put every extra dollar you earn toward investing. The returns you will get from your investments are essential to sustain early retirement.
In order to get the best returns, invest in a balanced portfolio to minimize risk and work toward long-term growth. Keep in mind that just because you have less time to save for retirement does not mean you should take less risk. No matter what age you retire, your invested money will continue to grow in retirement.
However, the closer you get to your target retirement date, the more likely you will want to adjust your portfolio to include a small amount of safer, more liquid investments. That way, you won’t have to worry about selling investments at a loss. Slowly shift your assets to cash as needed.
Consider Paying Off Your Mortgage
Many soon-to-be retirees wish to have all of their debts paid off beforehand. Debt like credit cards, student loans, or any other type of consumer debt should be eliminated as soon as possible.
But what about paying off a mortgage early? If the peace of mind of being completely debt-free is worth it, consider paying off your mortgage before you retire. If the money saved on interest payments is less than the potential returns you could receive from investing, you may not want to pay off your mortgage.
Learn more about whether to pay off your mortgage or invest the money.
Increase Your Income
Making more money should undoubtedly help you reach your retirement goals faster. That’s easier said than done. People tend to spend more money as they make more money. Essentially, canceling out increased income with spending. If you can increase your income, don’t let it impact your current budget and spending. Use that extra income to build wealth and work toward your retirement goals.
Build Wealth Through Passive Income
Passive income is any money made from your investments. The IRS describes passive activity as “any rental activity OR any business in which the taxpayer does not materially participate.” The most popular types of passive income include real estate, peer-to-peer (P2P) lending, and dividend stocks.
Building wealth through passive income has many benefits, including tax deductions and ongoing revenue or distributions from your already-invested money.
Investing in real estate is one way to earn passive income because you generate income from money already invested in the property. These days, a growing number of people are choosing to take their money out of the stock market and buy rental properties instead. While risk is always associated with any type of investment, it’s imperative to do your due diligence and purchase properties in growing markets.
Know Health Insurance Options
Many people fail to realize that leaving a full-time job means giving up your employer’s health insurance. Because Medicare doesn’t start until age 65, you will need to figure out your options for health insurance. If your significant other is still working, joining their employer-sponsored health care plan will be the most affordable option.
If that’s not a viable option, consider continuing coverage through a former employer (COBRA) or researching plans on the Marketplace through the Affordable Care Act. Health-sharing plans are also available, and they are usually more cost-effective.
Make a Backup Plan
If there’s anything in life we can count on, is that it usually doesn’t go according to plan. That said, there’s no harm in developing a backup plan. Consider the following as part of your retirement savings backup plan:
- Reevaluate your ideal retirement
- Consider where you plan to retire
- Decide if you will work or not
- Keep an eye on Social Security and health care
- Know how to manage your income streams
- Get out of all debt
- Lower your retirement budget (if possible)
- Retire later
- Get a second job or source of income
How to Retire Early at 40
If you’ve set a goal to retire by 40, know it will take a lot of planning and aggressive saving. You’ll also need to consider how much money you need to live on for the next few decades.
Set Your Savings Goal
Decide on your savings goal based on your current age, how much you have saved or invested, and how much you expect your monthly expenses to be. Once you’ve determined a savings goal, you will be able to see how much time you have to have enough money saved to retire by age 40.
Estimate Your Savings Growth
After setting your long-term goal, consider how much you have already saved and how many more years until you turn 40. This will give you an idea of how much money you need to save monthly and yearly to reach your retirement goal.
Come Up With Ways to Save More
No matter how much you think you can live on each month during retirement, you’ll want to do everything possible to shoot for a higher amount and see where you can cut expenses and save more.
A couple of ways to save more and retire early include:
- Look for ways to cut down on expenses as much as possible. Any unnecessary costs like Cable TV packages and sharing online streaming subscription costs (Netflix, Hulu, HBO, etc.), selling a more expensive vehicle for a less expensive one, or getting a roommate. By trimming your monthly expenses, you can decrease your outgoing cash.
- Work to increase your income. Then, use the extra money you’re earning to invest. Whether you can work more hours or take a part-time job, any additional cash flow may go a long way.
Be Strategic About Your Investments
Choosing the best savings vehicles will help ensure your early retirement goals are met. That said, you must be strategic about where to invest your hard-earned money.
If your employer offers a 401(k) retirement plan, start contributing now. Your company may also match a percentage of your contribution, so make sure you put at least as much as they’ll match into retirement. If you don’t, you’re giving up free money.
Maximize your contribution amounts for your 401(k) and Roth IRA. When you start taking money from your traditional 401(k) you will be taxed. However, your Roth IRA is pre-taxed, so withdrawals will be tax-free if you’re over the age of 59 ½.
Investor Tip: Max out your 401(k) first, then consider investing in a Roth IRA with any leftover money.
How to Retire Early at 55
Retiring early requires considering several factors that would otherwise be irrelevant to retirees hanging up their work shoes at 65. The main things to consider if you plan to retire early include longevity (how long you need your money to last), health care, and how you plan on spending your time.
Consider Longevity
Retiring early means you’ll need to generate enough income to sustain your lifestyle for an extended period, as opposed to someone who retires later in life. Remember, Social Security doesn’t kick in until age 62 (at the earliest), and there are added fees and penalties for taking money out of your retirement accounts (on a traditional IRA) if you are under the age of 59 ½.
This means that you’ll need to consider which sources of income you can use during the years leading up to “normal” retirement age. One option to avoid the early withdrawal penalty of 10 percent is using 72(t) payments to access an IRA early.
Be Aware of Health Care Costs
Thanks to the Affordable Care Act, everyone can get health insurance coverage, regardless of a pre-existing condition. Since you won’t be able to get Medicare until a certain age, you’ll need to secure health insurance.
Depending on your chosen plan, premiums (sometimes over $1,000 a month) can be expensive. Many hopeful early retirees overlook the expected costs of private health insurance, as employers often subsidize the cost by up to 75%, on average. The best strategy is to start planning for these extra costs so that your early retirement goals are achievable.
Prepare to Fill Your Time
Looking forward to the day you retire is what many of us think about during the day-to-day grind of work life. The picture we paint in our heads may include afternoons spent golfing, extended vacations to bucket list locales around the globe, or finally, buying that dream car you’ve always wanted.
While all these retirement “dreams” sound nice, early retirement may put many of these dreams on hold or out of reach entirely. If you have more expensive hobbies, you must plan for the added costs and determine how much money you’ll need to enjoy early retirement.
Don’t Forget About Taxes
Taxes during retirement occur when you withdraw money from specific retirement accounts. A great thing about a 401(k) and traditional IRA is that they grow tax-free. However, they will be taxed whenever you take money out of these accounts.
This is why many people choose to open and contribute to a Roth IRA. Any money you put into a Roth IRA has already been taxed. So when it comes time for you to withdraw cash, you won’t be taxed because you’ve already paid them.
If you plan to retire to a different state, make sure you’re aware of state-imposed income taxes. Check out which states offer no income tax for retirees and where you can make your money last longer.
How to Retire Early at 60
The trick to retiring early is to start saving early and save a high percentage of your earnings.
Save a High Percentage of Your Income
The longer you wait to start saving for retirement, the harder it will be to retire early. Let’s say you start saving 15 percent of your income at age 25. Reaching your early retirement goal at 60 may be somewhat easy. But if you start saving later, you’ll need to save a higher percentage of your monthly income. Look at the following graph and the impact of when you start investing for retirement.
Diversify Your Investments
Saving a higher percentage of your income is only half of the retirement equation. You’ll then need to look into ways to grow your money. Putting your money into compounding investments is what makes early retirement possible.
If you decide to buy into stocks as part of your investment portfolio, ensure you are still diversifying your assets to minimize risk. A financial advisor can help set up your portfolio according to your current age and the age you wish to retire. As the years pass, your investments should be continually evaluated and reallocated for the best returns and tax breaks.
Meet with Your Financial Advisor Regularly
There are a couple of big hurdles if you want to retire early: 1) you have less time to save for retirement, and 2) you have more time to spend in retirement. Unless you are an investment expert, it’s always a good idea to work with a financial advisor and meet with them regularly to make necessary adjustments. A financial advisor can help you create an investment strategy to achieve your retirement goals.
Utilizing a financial advisor shouldn’t stop when you retire. Your advisor should also help manage your income streams to ensure you don’t run out of money. Income may come from dividends, distributions, Social Security and real estate investments.
Final Thoughts
After reading this article, we hope you have a better idea of how to retire early. Even if your retirement savings goals seem a long way off or nearly impossible to achieve, there’s no better time to start planning now.
Whether you’re getting a late start or not, a growing number of people are looking into other ways to grow their nest egg and retire early. One of the best ways to start building real wealth, retire early, and live life on your own terms is through investing in real estate. If you want to learn more, join RealWealth to get educated and connect with turnkey property teams selling single family and multi-family investment properties in top real estate markets nationwide.
