The idea of retiring early and living on a beach somewhere sounds like a dream to many people. And for most, it may be a harder-to-reach goal than they realized. According to the Employee Benefit Research Institute, 57% of workers have less than $25,000 saved up for retirement when they estimate that they’ll need $500,000. Being prepared for retirement can seem like a world away, let alone early retirement. However, retiring early is definitely possible.
More and more people are striving to retire early. Why? Simply put: time. Retiring early gives you the ability to spend more time with the people you love and do things that excite you. It isn’t easy but it can be done. You have to start preparing now in order to do that. Here’s how:
Understand How Much You Need
The most important first step to retiring early is to understand your financial situation. It’s almost impossible to save up for retirement successfully without understanding how much money you need after the paychecks stop. At the minimum, estimate roughly 80% of your current expenses for retirement. Also take into consideration inflation and new expenses. For instance, what will you do about healthcare? You won’t be eligible for Medicare until the age of 65 and may need to purchase it on your own.
Save A LOT
Of course, if you want to retire early, you need to save a considerable amount. That means living well below your means and cutting out most of the fluff. That may mean less extravagant vacations and fewer nights out. However, keep in mind that cutting back on these things now will give you more time to enjoy them later on.
Take Advantage of ‘Free Money’
There is hardly such a thing as ‘free money’, but there are some things that come pretty close. For instance, take advantage of your company match for a 401k or 403b. Also, use credit card rewards to your advantage. Some cards will even directly put your cash back rewards into your brokerage account.
Invest with Withdrawals in Mind
Everyone should invest in preparation for retirement, but those hoping to become early retirees have to look at it a little bit differently. You may choose to have a similar asset allocation as someone who plans to retire in their sixties, but you better be flexible with the withdrawals in tough times because an early retiree needs the money to last much longer.
Downside Your Home
While you may love the home you live in, consider downsizing. Many people live in spaces that are too big for their families. As a result, not only do they get stuck with a hefty mortgage but also spend extra on expenses like maintenance and furnishings. Space is a luxury and you may be better off letting go of this one to save more.
When do you plan on retiring? Have you ever considered early retirement?
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Still working on saving a lot, I’m currently up to 49% of my pay is directed to retirement investments. I had a late start with my career field. Luckily, I get a pension and 401(k) match. I may have started later, but I’m making up for it by choosing wisely.
I would LOVE to retire early, but I’m not saving enough and I do not have any children yet. I’m right on the cusp of 35, and I have plans in place that will cover me if I make it to the standard 55/60/65 retirement age. I never really thought about in depth though. I’ve always said that I don’t want to work for anyone in a full-time job after the age of 40, but early retirement never crossed my mind.
It’s never too late to start if you want to give early retirement a go. Anybody could save more, so it’s really a matter of priorities. Do you care about your freedom or do you care about the things or conveniences you buy?
I would say that “Taking advantage of free money” is the most important takeaway! If you can at least muster up what your company will match, you are getting double the savings!
That’s right. Don’t give up free money by not contributing to a 401k at least up to the company match!
Sigh – downsizing in terms of our living space is a hard one. I have two boys that will be approaching their teen years. This seems like a time to expand not contract hahaha. We would love to retire early but this one thing I may not be able to do.
Then at least put it on your radar. Your boys will be in college before you know it and that could be your golden opportunity to downsize since they won’t be home anyway.
We downsized in 2011 when our son was a freshman in high school with the goal of paying the mortgage off when he graduated. He graduated in May 2014 and we paid off the house in August. I haven’t considered early retirement but I’m considering a career change because we have zero debts now.
Flexibility is one benefit most people don’t really talk about as an advantage of frugality. Good for you to consider a career change.
Is that a typo on your second link label (first paragraph last word)?
I took advantage of an employer buyout in my late 40s but I went back to work when management offered an inducement and I ran out of stuff to do at home. I’ll leave for good once I find something better to occupy all the free time.
I have no pension or retiree healthcare so my target was 33x of my annual living expenses, and I reached that in my mid 30s. I work in technology where layoffs are a growing risk as we get older, and having retirement funding set aside early means no worries in middle age. I like my job but I’d probably like it a lot less if I weren’t financially set for retirement.
Definitely a typo 🙂 Thank you for pointing it out, as I fixed it now.
And always to good to hear about your story. Find something to retire “to”. Otherwise keep working and enjoy the freedom your financial situation provides.