Wondering How to Retire Early? 8 Tips to Financial Independence
If you’ve been wondering how to retire early, you’ve undoubtedly scoured the Internet for tips on how to bring in more income, live off less, pay off your debts, and invest more. But, the fact of the matter is that having an early retirement plan is your best tool. Without proper planning, you can’t budget appropriately, you can’t invest properly for retirement savings, and you can’t form a concrete picture of your future.
Before anything else, you need to decide on your retirement age.
Deciding when you want to retire can be a challenge. Sure, we’d all love to retire at 40 but, unless you started saving early and have a job that affords you a large income, that’s just not a possibility. And, while an achievable retirement age – say 55 – may be less exciting, it gives you a real, attainable goal that you can work toward. But, how can you be sure you’re starting off on the right foot?
1. Know your goals for an early retirement age
Before you start taking any actions to retire early, you’ll want to know your goals. What kind of lifestyle do you want to live? Are you planning to move into a smaller – or larger – home? Do you want to travel or pursue hobbies? Will you lead a simple life? Or a luxurious one? All of these questions factor into how much savings you’ll need to sustain yourself after retirement. So, as a first step, sit down with a blank sheet of paper and describe what your retirement looks like.
2. Contribute to your workplace’s 401(k) plan
As far as first steps go, contributing to your employer’s 401(k) plan is a time-tested way to start on the path to retirement. At the very least, you should contribute what your employer is willing to match. If possible, always aim to increase your contributions every year. And, if you get a nice raise, consider committing a percentage of it to your retirement plan. These tax advantaged accounts are designed for investing for retirement in the most effective way possible. If your workplace offers them, you can also get a tax advantaged retirement account with Individual Retirement Accounts (IRAs). Either way, you’ll start early in your career toward building early financial independence that can better help you reach your desired retirement age, even as an early retiree.
3. Don’t touch your savings!
Once you’ve accumulated a decent amount of savings, it may be tempting to withdraw a portion to fund a home improvement project, pay for an emergency, or complete a large purchase. But, the longer your money is invested, the more it grows. Even worse, withdrawals from retirement funds can be subject to massive IRS penalties if they’re taken before you turn 59½. Withdrawing from your retirement accounts should only be considered an absolute last resort, after you’ve exhausted all other options.
4. Make some cuts and rework your budget
If you want to retire early, you’re probably going to need to analyze your budget. One of the most common recommendations is to set aside 50% of your income for essential expenses. While this may require some sacrifices, it will allow you to set aside a good portion of your take-home income for savings, investments, and emergencies.
5. Take Social Security benefits into account
When looking at your monthly retirement income for early retirement, the amount of social security retirement benefits you qualify for should also be considered. You can claim Social Security retirement benefits as early as age 62. Although this is a much later “early” retirement than if you were trying to retire at, let’s say, 50, you can still retire early starting at 62 and receive some amount of Social Security benefits. However, it’s important to consider that your benefits would be about 30% lower than it would be at your full retirement age of 67. So, if you can still afford to pay expenses because you’ve saved enough, and Social Security would simply be supplemental more than anything, then it could be worth retiring early if financial freedom is more important to you.
6. Consider the health insurance options available to you
If you’re looking at ending your career earlier than the typical retirement age, health insurance options are a large factor to consider. Your monthly retirement income needs to be enough to live comfortably, and health care costs are notoriously expensive. A good starting point is using something like a retirement income calculator to check what your retirement savings will have available for you each month. From there, you can then look at different options in the healthcare market to better understand what is affordable for you. Some health coverage options to consider include:
• Insurance from a Spouse: The easiest way to keep your insurance coverage during retirement is staying on a spouse’s insurance plan (as long as it covers what you need).
• The Healthcare Marketplace: Similar to retiring at the standard age, the Health Insurance Marketplace offers different health care options, but they will be similarly high prices to when you were working. The difference lies in cheaper deductibles and copayments thanks to income amount being considered for premium tax credits and savings. With no regular income, this means your premiums could be much smaller.
• Health Share Plans: An alternative way to fund health insurance even for those still working, health share plans (sometimes called health share ministries) function through a group that pools money to cover medical care for each other. Because of health care costs, this is usually intended for basic health care or catastrophic care as needed. It’s important to note that these usually don’t cover preexisting conditions.
• Private health insurance: Similar to the marketplace, private health insurance differs in that you may have more plans available because of private deals working to meet your needs. However, premium tax credits do not apply, which could mean higher costs.
• Medicaid: With no standard income being reported when you retire, your overall household income drops, potentially putting you into the qualification window for Medicaid. What it covers depends on the state that you live in, so, as with most options here, make sure to do your due diligence before committing to this Medicaid as your choice of health care coverage.
• COBRA: More of a stop-gap in coverage than a long term plan, the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires most employers to offer coverage, although they are not required to subsidize this coverage, meaning you pay the full premium. And, on average, it typically only covers about 18 months. So, this option can be a choice for early months of retirement until you find something cheaper or longer-lasting, but also should be compared to something like the marketplace because of cost.
• Employer-sponsored health insurance benefit: Although not nearly as common as it might have once been, employer plans offer health insurance as a benefit when you retire. Rarely, this also includes continuing to cover some of your monthly premiums. Typically this covers a portion of Medicare costs and functions as a supplement to your retiree health plan through your employer.
7. Make a long-term investment strategy
Since you’re planning to retire early, you’ll have a shorter time to save money. But, that money will also need to last longer. Because of this, it’s important to start investing early in low-risk, long-term investments that will yield steady returns over time. If you haven’t started investing yet, it’s never too late! We encourage you to reach out to our team of financial advisors to discuss your goals.
8. Look for new opportunities and streams of income
If you’re really interested in how to retire early, alternate streams of income are essential. Whether you’ve got a second job, rental properties, or any other ongoing source, secondary streams of income will allow you to set aside more money toward the ultimate goal of retiring early.
Have questions about early retirement? Talk to a financial professional!
At Wiser Financial Group, we’re committed to ensuring that our clients have the financial tools and guidance necessary to make sound financial decisions. Backed by decades of experience in financial planning, we believe in a system of goals-based investing and have developed a six-step process to guide our investing.
With your future in mind, we can work with you to develop a plan that helps you achieve your goals. Whether you’re curious about investment opportunities or you want to know how to retire early, we’re here to help.
