Early Retirement: Is It Achievable and How To Prepare

Retirement is undergoing a paradigm shift in our society. What was once a standard for those aged 65 and older has become a goal for hardworking 30- and 40-year-olds who are ready for the next phase of their lives.

Early retirement is an emerging concept that's increasing in popularity. It's a straightforward idea that isn't just about leaving the workforce — rather, it's a strategic financial decision and a dedicated lifestyle choice.

Traditionally, retirement is associated with the age of 65, occurring at the same time as you become eligible for Medicare benefits. Early retirement interrupts this timeline, allowing you to say goodbye to your career in your 50s, 40s, or even earlier.

Pursuing early retirement isn't without its challenges. Retiring early requires intensive planning, disciplined saving, and significant lifestyle changes. Early retirement is redefining the concept of financial independence.

How to retire early

The first step in pursuing early retirement is to calculate how much you'll need. Without a clear understanding of how much to save for retirement, you risk falling short of your goals and finding yourself without any savings. Calculating how much you'll need through your retirement, however, can give you a clear understanding of exactly how much you need to save and how much you can spend while still pursuing your goal.

You can start working out how much you'll need to save by calculating your expected monthly expenses.

Estimate your monthly expenses

Estimating your monthly expenses is one of the most important aspects of planning for early retirement. Start by taking stock of your current financial obligations, including your housing, utilities, groceries, transportation, insurance, and any outstanding debts. Don't forget to include entertainment, travel, and hobbies expenses — unless you plan to retire and not have any fun.

When estimating your monthly expenses, consider the fact that they may change over time. Adding new life insurance policies and taking exciting vacations can affect your monthly expenses.

The more accurate your estimates are, the better equipped you'll be to plan and save for your early retirement goals.

Calculate how much you'll need

To accurately plan for early retirement, calculating how much you'll need is about as important as it gets. This figure is the base of your financial strategy, providing a clear path to your retirement goals and revealing the steps necessary to achieve them. Without a clear understanding of your financial needs, you risk falling short in financing your retirement lifestyle or outliving your savings. There are various approaches to this calculation, including the 25x rule and the 4% rule.

The 25x rule suggests accumulating a nest egg that's 25 times your annual expenses, providing a sustainable withdrawal rate in retirement through 25 years of funds. On the other side, the 4% rule advises withdrawing 4% of your retirement savings annually, adjusted for inflation, to ensure that your funds last through your retirement. This also adds up to 25 withdrawals.

If you're planning on needing more than 25 withdrawals, however, it may be better to customize these plans to more accurately fit your goals. If you're hoping to retire at 45, for example, you'll need considerably more than 25 withdrawals for the rest of your life.

Consulting with a financial advisor can allow you to receive personalized guidance tailored to your specific situation, helping you develop a comprehensive retirement plan that aligns with your goals and aspirations.

Adjust your current budget

Adjusting your current budget is another important step in preparing for early retirement. As you aim to retire sooner than the traditional age, you'll need to make strategic changes to your spending habits to increase the rate at which you save and achieve your financial goals.

Start by reviewing your current budget to find areas where you can cut expenses or reallocate funds to retirement savings. Look for nonessential expenditures that you can reduce or eliminate without significantly impacting your quality of life. This may involve scaling back on discretionary items, such as dining out, entertainment, and luxury purchases. Remember, the more you scale back on discretionary expenses, the sooner you can retire.

Consider adopting a minimalist mindset focused on essential needs rather than wants. Simplifying your lifestyle not only frees up more money for retirement savings but also reduces financial stress and increases overall life satisfaction.

You should also explore opportunities to increase your income through side hustles or freelance work. Ironically, one of the best ways to stop working in the future is to work as hard as possible in the present. Generating additional streams of revenue can significantly boost your savings rate and expedite your journey to early retirement.

You can also create a detailed budgeting plan that aligns with your retirement goals. Plenty of budgeting tools and apps can be used to track your expenses, monitor progress toward your savings goals, and make adjustments as you need them.

By being proactive and adjusting your budget, you can save for retirement much faster. It's not easy, but getting to retire 20 years earlier than initially intended is surely worth it.

Max out retirement accounts

The last thing you can do to expedite your journey to early retirement is to max out your retirement accounts. It's an obvious move that isn't easy, as it requires you to reallocate funds that may have been headed to more enjoyable expenditures.

Maxing out your retirement accounts is a smart strategy for accelerating your journey to early retirement. These accounts offer valuable tax advantages and compound interest benefits that can significantly boost your savings over time.

One of the most common retirement accounts is the 401(k), which is the one employers offer most frequently. Contributions to a 401(k) are made with pre-tax dollars, reducing your taxable income. In addition, earnings within the account grow tax-deferred until withdrawal, allowing your investments to compound without being eroded by annual taxes.

For 2024, the maximum contribution limit for a 401(k) is $23,000, with an additional catch-up contribution of $7,000 for individuals aged 50 or older.

Another popular retirement savings option is the individual retirement account, which comes in two main types: traditional and Roth. Contributions to a traditional IRA can be tax-deductible, providing an immediate tax benefit, while earnings grow tax-deferred until withdrawal.

In contrast, Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. The annual contribution limit for IRAs in 2024 is $6,500 with an additional catch-up contribution of $1,000 available for individuals aged 50 or older.

Maximizing contributions to these retirement accounts allows you to take full advantage of their tax benefits and investment growth potential. By contributing the maximum allowable amount each year, you can accelerate the growth of your retirement nest egg and build a more substantial financial cushion for early retirement.

Retirement accounts like 401(k)s come with penalties for taking an early withdrawal or a withdrawal before you've reached the age of 59 1/2. If you take money out of your 401(k) before you've turned 59 1/2, you'll face a 10% penalty on the amount you withdrew, be subject to any relevant state income tax, and be subject to federal income tax at your marginal tax rate.

Using a 401(k) can be a great way to retire early, but be sure to plan your withdrawals around these fees because they can be incredibly costly in the short and the long term. There are some exceptions to these penalties, but most of them involve family or medical emergencies.

You can take up to $10,000 from your IRA for a first-time home purchase.

How to prepare for early retirement

Retiring early is no longer a dream but a tangible goal any hardworking individual can achieve. Through meticulous planning and disciplined saving, it's possible to achieve financial independence much earlier than projected.

Achieving early retirement requires you to budget strategically and maximize your contributions to your retirement accounts. It's essential to adjust your lifestyle and prioritize saving to build a substantial nest egg for the future.

With focus and determination, early retirement can become a reality for anyone. Visit our website for more information, or start your journey today by exploring current rates.

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