Want to Retire Early? Here's What You Need to Do


Who isn't in love with the idea of early retirement? The chance to stop working early enough to truly enjoy what you've earned is a classic American dream. It offers you freedom. The end of workplace stress. The ability to cultivate new interests.

Yet it's all strictly a fantasy for many workers -- even though, in some ways, retiring early is easier now than ever before.

For years, the cost of health insurance made retiring early much too expensive for many workers. You may have had the ability to retire at 58, but Medicare was still close to a decade away. That gap was often simply too large to close. 

The politics of health care reform are highly divisive. Yet no matter where you come down on the issue politically, securing private health insurance is now easier. Private insurers may no longer decline to offer coverage based on heart disease or other existing conditions. 

Yet insurance is just one piece of the puzzle. If you want to put yourself into position to retire early, there are a range of factors to consider.

Let's examine a few of the most important.

The value of "super saving"

Do you want to jumpstart your early retirement efforts? Embracing the "super save" model is a great way to do it. For the ordinary worker, a savings rate of 10-percent is fairly admirable. It's certainly much better than average. Yet if you want to make a dramatic difference, saving up to 25-percent of your income for an extended period is a game changer. Numerous studies have shown that "super saving" of this sort has a profound effect on your retirement prospects. Can you manage this kind of elevated savings rate for a decade? Then your odds of retiring early skyrocket.

The other key variable is spending. Many people aim to spend about 70-percent of their normal budget after retiring. Are you willing to cut this down to 60-percent or even 50-percent? Then you can retire that much sooner.

Elevate your risk and polish your skills

Early retirement typically will require strong portfolio performance. If you want to push for greater returns, you may need to increase your risk exposure.  Building a diversified portfolio with domestic and international stocks is a sound idea. Resist the temptation to chase long shots. Low cost index funds are always a smart approach.

As you get closer to retirement age, the natural inclination is to start winding your career down. Yet that's often the wrong approach. Having the flexibility to work part-time on your terms is one of the best ways to secure a retirement income stream. For many people, it's far more practical to continue working in their current field. Make a wholesale change isn't always practical. After all, retirement age workers with no relevant experience aren't always in high demand.

Leveraging your professional contacts can help you land part-time project or consulting work. It's important to keep your skills sharp and your credentials in order.

Consider downsizing

Housing is the number one expense for retirees. Most of us need less space as we age. Moving to a smaller home can help generate much needed cash to fund retirement or pay off your debts. It also reduces your day to day housing costs. Looking for an even more pronounced effect? Consider moving to markets where housing prices are extremely low.

There is one caveat. Some people pay steep association fees. In the worst cases, this can nearly wipe out the money you're saving by downsizing. It's important to pay close attention to such costs.

Understand the risks

Retiring early sounds like a dream. Yet there are very real financial drawbacks. First, you'll be missing on some prime retirement plan contribution years. That alone can have a massive effect on your nest egg.

Retiring early means your retirement will be longer -- and more expensive. The odds of outliving your money increase.  It's important to have a firm handle on just how much money you'll be leaving on the table by retiring early.

Action Plan

Given the option, almost everyone would choose to retire early. Yet far fewer are really willing to do the work. Are you focused on getting to the finish line ahead of schedule? Then here are some things to consider.

  • Saving a significant chunk of your income is critical. Are you willing to save 25-percent of your income for 10 years? Then your odds of retiring early increase by an order of magnitude.
  • Portfolio performance is another key variable. Given the low return on bonds, you may need to tilt strongly (or entirely) toward stocks, even as you approach retirement age. This doesn't mean you should pursue risky investment strategies.
  • Make a rigorous calculation of how much you will need to retire. Be realistic -- don't merely assume  you can live on 50-percent of your pre-retirement income. Instead, experiment by actually living on something close to your projected retirement income for a month.
  • Housing is a retiree's biggest expense. Explore avenues for downsizing. 
  • Keep your skill set sharp and your networks active. Early retirees are much more likely to want to work in some capacity. Don't let your skills or contacts wither. Attend trade shows, workshops, classes and other professional events at your leisure.
  • Do the math on exactly how much money you're forgoing by retiring early. This means income, employer retirement contributions, cheap health insurance etc. Delaying early retirement by as little as one year can have dramatic financial effects. 

Early retirement isn't for everyone. Yet if you're willing to make sacrifices -- and smart, long-term financial choices -- it might be more achievable than you believe.

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