What if your nine-to-five work life could end at age thirty-five? This question seems silly to most, with 70 percent of Americans having less than $1,000 in savings, and the average American carrying $90,460 in debt. Well, what sounds impossible is actually completely possible if you believe in yourself and take action.
Early retirement can be an option for anyone with income and assets. Yes, you heard that correctly, but it is a mindset you need to fully commit to. Some people are taking on this challenge and living a life of financial freedom.
Read on to learn about what your early retirement plan could look like.
How does early retirement fit your goals?
Defining the life you desire once you gain financial independence, that is, when you’re not reliant on any regular payment from a job, is important. For some, early retirement means more time to devote to a dream house, children, travel, or volunteering. How will early retirement help you accomplish what you want out of life? This will be your motivation for the years ahead on the journey to financial freedom.
Get familiar with investing
Investing can be a great way to generate more money to put away for retirement. If you are wary about the process because of your income, in particular, consider talking to a financial advisor about building a solid portfolio.
Your portfolio of investments, in order to achieve early retirement, should be diverse. A mixture of bonds, cash, and stocks will allow you to minimize the risk of losing money. It’s important to remain informed on trends and outcomes. Stay informed without spending countless hours researching by keeping up-to-date with multiple buy lists, listening or reading financial news, and consulting a financial advisor.
Identify your investing budget by defining what you comfortably expect to invest, and then your extremes, which are the smallest and largest amounts you can invest while staying on track to retire early. Financial advisors are equipped to assist you in creating an investment budget.
Breaking up retirement savings into five-year portfolio “segments” can help you invest money you won’t need for a while more aggressively versus money you’ll need more immediately. It’s a safety net most early retirees recommend as opposed to a “bucket strategy” that traditional retirees might use to maintain an immediate cash reserve and a long-term investment bucket. While this strategy can work for retiring at sixty-five, retiring early might require more segmentation.
FIRE method and movement
If you search around for early retirement plans, you’ll likely come across FIRE—financial independence retire early.
FIRE is an aggressive plan to save, somewhere between 50–75 percent of your income, so you can retire sometime in your 30s or 40s. The FIRE calculator provides an estimate, based on your assets and income, for how early you can retire if you follow this plan.
This movement has gained a lot of attention in recent years after the documentary, Playing with Fire, was released. The film features testimonials from average American families and couples making their journey to early retirement.
Ask your financial advisor about FIRE to get an expert opinion on if this could work for you.
Healthcare and social security planning
Retiring early might compromise your ability to access Medicare or social security, so plan accordingly.
Before you age into Medicare at age sixty-five, you have options to remain on a healthcare plan without employment.
- COBRA (The Consolidated Omnibus Budget Reconciliation Act) is a law that allows employees, or an employee’s dependents, to keep their group coverage through their former employer’s health insurance plan for up to eighteen months after the employee has left the company. This can give you some wiggle room in finding coverage after you formally retire.
- With individual and family health insurance, you can purchase yourself and your family health insurance during the annual open enrollment period under the Affordable Care Act. Consider your current healthcare needs and any you anticipate in the future.
Tapping into social security before you qualify to collect it can reduce your benefits by 30 percent, in some cases, so you’ll want to avoid this by delaying when you’ll need to start withdrawing benefits. The Social Security Administration offers benefit calculators, but a financial advisor is a good resource for a more personalized strategy.
Planning a 10-year financial buffer
It is recommended that five years prior to retiring, early retirees set aside the amount needed to provide income for the first five years, so there is a buffer between your cash and any potential market volatility that can occur during the crucial years before retiring.
Enjoying your early retirement
Reaching retirement at an early age is an incredible accomplishment, so you deserve to enjoy it! Usually, early retirees spend on a U-shaped curve. The beginning years, when your energy and health are up, is prime time to spend on activities and luxuries. It’ll eventually come to a plateau, and then rise once again typically in your 60s or 70s.
If early retirement is piquing your interest, talk to a financial advisor to come up with the right strategy for you!