Social Security benefits may not kick in before age 62, but that doesn’t mean you have to stay in the workforce until then. If you’re a disciplined saver, planner and budgeter, you may very well be able to retire early.
Don’t make the mistake of assuming that early retirement is a pipe dream. A number of Americans are making it work. Millennials and Gen Xers dead set on reaching retirement sooner are subscribing to the Financial Independence, Retire Early (FIRE) movement. Many Baby Boomers also decided to retire ahead of schedule in light of COVID and the ensuing recession.
As many as one in six Americans are now looking to retire by 55, according to a recent survey of nearly 6,000 households. Those aspiring to retire by 55 typically have less debt and more income saved, but only one in five households is saving at least 15% of its income, the survey found.
There’s a lot more to retiring early than saving, though. Erasing debt, sticking to a budget and mapping out how you’ll spend all that free time are also important. If you’re wondering how to retire early, here are five signs you’re ready to unlock the golden years in your 50s, 40s or even your 30s (it’s possible).
1. Your remaining debt is paid off or will be soon.
Debt is one of the biggest barriers to retiring early. Whether it’s student loans, credit card debt or other lingering loans, these types of expenses will eat through your savings in a hurry.
If you own a home, your mortgage will likely be the biggest obstacle to becoming debt-free—unless, of course, you paid cash. You might scoff at the idea of paying off a sizable home loan before you retire, but those on the fast track to early retirement are either buckling down or downsizing to get the job done. Making extra house payments each quarter is a good strategy. So is refinancing to a loan with a shorter term.
You may not have the financial latitude to divert much money to debt, and that’s OK. But for many, rerouting expendable income to purposefully pay down loans is a conscious lifestyle choice. Offloading debt can remove a huge source of financial stress and provide the perfect entrée to early retirement.
2. You have adequate health care coverage.
You can’t retire early without health insurance benefits. If you’re leaving an employer-sponsored plan behind and Medicare doesn’t kick in until 65, you’re going to need a plan to bridge the gap.
There are only a few options available, and most of them have a hefty price tag. Some financial experts recommend setting aside 15% of your monthly retirement budget for health care expenses. In 2021, Fidelity estimated the average retired couple at 65 would need at least $300,000 saved to cover the rising cost of health care.
Under the Affordable Care Act, government-sponsored plans are available through state exchanges. However, many early retirees opt for the flexibility of private health insurance, which can be expensive. Others may seek out part-time employment with attractive health insurance plans. A low-cost plan with longevity is preferable.
3. Your savings and income are enough to cover your expenses.
Unless you have a crystal ball, there’s no way to know exactly how much money you need in the bank to retire early. That said, there are some generally accepted formulas to help you determine how much you need to save to cover your expenses.
Traditionally, retirement planning has hinged on two rules: the 25x rule and the 4% rule. In a nutshell, you need to save 25 times your annual retirement expenses and withdraw no more than 4% of your savings each year (or higher when adjusted for inflation). This retirement savings strategy has held up well over time, but those racing to retire early are recalibrating for a longer horizon.
Some are calculating their FIRE number, which divides the annual projected expenses by whatever they deem a more appropriate withdrawal rate. Others are fixated on their savings rate—a simple indicator of how much you should be socking away. Regardless of how you’re figuring this magical number, make sure you’re investing in interest-bearing accounts like a Roth IRA, 401(k), Treasury bond or certificate of deposit.
4. You’ve tested out your retirement budget for six months.
Wondering if your budget will hold up in retirement? Test it out. If you’re able to live comfortably for six months, you’re ready to retire.
Creating a budget is one thing, but putting it into practice is what really counts. If your calculations are correct and you toe the line, your retirement budget should work as planned during this trial run. That means no dipping into your savings, no side jobs and no credit card debt that can’t immediately be paid off.
Taking this approach will likely help you uncover where you may have missed the mark. Did you account for inflation? Do you need to budget more for travel or eating out? Maybe you overestimated your expenses, and you have a bigger cushion than originally thought. Regardless of the outcome, you’ll be able to adjust accordingly and step confidently into retirement when the day arrives.
5. Your children are financially independent.
Having children can be one of life’s biggest rewards. And as any parent knows, it can also be financially draining. When adjusted for inflation, the average cost of raising a child is about $285,000, according to the federal government. And that’s through age 17. What about college and beyond?
Most Americans think adult children should be financially independent by 22, but only a quarter actually reach that milestone, according to a Pew Research Center study from 2019. And young men have lagged while women have made strides. If you set yourself up as the bank of mom and dad, early retirement may be off the table.
Raising financial literate children has many benefits. Chief among them are kids who go on to support themselves. It’s hard to focus on reining in expenses and prepping for retirement when you’re doling out dollars to help your grown (sometimes gainfully employed) children. Here’s the rule: Make sure your kids are financially secure before retiring early. The occasional loan is one thing, but experts say financially propping up your kids in the long run can be a costly mistake.
As you can see, early retirement is indeed possible. By following these tips to retire early, you just might be able to reach the promised land sooner than you thought. If you’re ready to discuss retirement savings options, contact Community Point Bank today.
