HOW TO RETIRE EARLY, part 1

Good-bye nine-to-five, hello golden years.

It’s never too soon to start saving for retirement but if you want to retire early, you’ll likely have to do some extra planning. That’s because traditional retirement planning advice—namely to save an annual 10 percent of income—may not be enough to fund a longer post-career plan, particularly if a pricey hobby or extensive travel is on the agenda. 

The good news: it may just take a little extra soul searching, some additional planning and consistent follow-through to make your early retirement dreams a reality. 

We developed this three-part series to help guide you through the decisions every early retiree wannabe should consider. Part one (which you’re reading right now) will focus on the necessary financial and emotional plans you’ll need to get started. Part two drills down to the modifications that can help make your early retirement dream a reality. And part three offers up ways to diversify your early retirement income stream, so your plan is less likely to be derailed by a bumpy economy. 

Ready to start making your early retirement dreams a reality? Let’s get started. 

First, think about what you want to do after you retire.

It’s surprising to some but many soon-to-be retirees are so focused on the end goal that they don’t always take time to plan out how they’ll fill the unstructured days that come with the end of a career. A well-thought-out strategy can help create a sense of purpose, especially for high-achieving workers whose identities were tied to day jobs. 

It’s important to note: what you think you’ll love—and what you actually do love—aren’t always the same. Take time to daydream, but also test out those dreams on the weekends or on vacation, before you leave your job. The reason for this is two-fold. 

  1. Immediate retirement gratification. You’ll be prepared to jump out of your career and into the thing you love. A well-developed test run can help you decide if you’d really like to travel the country in an RV, volunteer at a national park or start a new business. 
  2. Financial preparation. A test run on your dream can give you greater confidence in the financial strategy that includes the cost of your post-retirement plans. It’s not that you won’t be able to pivot—you’ll have the available time—but you’ll want to plan to reduce unexpected costs, so any new desires may also be within financial reach. 

Next, reflect on when you want your early retirement to start.

The earlier you plan to retire, the sooner you’ll need to stash cash in a dedicated retirement savings account. One important way to do that is to make sure you’re enrolled in your employer-sponsored retirement plan if offered. 

Technically, early retirement starts any time before age 65 but there’s no one-size-fits-all retirement plan strategy. Some motivated workers aim for an endpoint at age 55 while others more aggressively target ages as young as 35.

Younger retirees often need a greater nest egg to fund a greater number of years, but that’s not always the case. Some retirees choose to scale down their annual spending—sometimes drastically—instead. Either way, the number of years you expect to spend in retirement will likely play a part in calculating your savings needs. To prepare, think about the age when you plan to retire and compare that to your life expectancy. The difference is the expected number of years you need your savings to fund. 

Then, start calculating your retirement income needs. 

A few things to consider as you run your own numbers: 

  • The fewer debts you carry into retirement, the smaller your required nest egg. That’s because your annual spending will likely be lower if you don’t have to pay the mortgage or make car payments during your retirement years. 
  • When calculating spending, be sure to include any high-cost hobbies you plan to pursue during retirement. Also, consider often-overlooked expenses like the cost of healthcare and long-term care insurance. 
  • Also, consider the impact of any income you’re likely to earn. Even a small annual income can have a sizable effect on retirement cash flow needs. A part-time job or a few hours consulting in your industry can have more than just a monetary benefit. It can also keep you keyed into a career you loved, without the burden of full-time hours. 

Of course, this calculation should be used as a starting point. Market conditions vary over time, and any well-developed plan should be re-assessed at regular intervals. A financial planner can help you nail down a more specific goal, one that’s more likely to account for the nuances of your specific desired lifestyle during retirement. 

Consider reviewing your current plan with a financial professional to make any adjustments to help you reach your future goals. It’s easy to meet virtually with an  AIG Retirement Services financial professional

Get ready to fine-tune your plan.

Haven’t quite reached your retirement nest egg goal? (Don’t worry, few have!) Check out Part 2 in our How to Retire Early series, where we’ll discuss ways to reduce or eliminate expenses now, while you aggressively save for the future.

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