Planning an Early Retirement

The concept or work has changed in the past few years with flexible hours, work-from-home options, and the rise of the gig economy.

It’s no surprise that the traditional retirement rules have changed too. More and more people are choosing to retire early, so they can spend time with loved ones, take up hobbies, or focus on work that they are passionate about.

But how can you fund an early retirement? Here are our top 5 tips.

Create a retirement plan

When planning for retirement, the question most people ask is, “How much do I need to retire?” Though it can be hard to predict the future, there are some broad rules of thumb that can get you started:

1. Aim for an annual retirement income that is roughly 70% of your pre-retirement income.
2. Multiply the annual retirement income by 25 − this will tell you how much money you need in your bank account on the day you retire.
3. Aim to draw roughly 4% of your savings each year of your retirement.

Of course, if you are planning to retire early, you’ll need to tweak these a bit.

Plan on earning extra income

With medical advancements, most of us are living longer, healthier lives. Retirement used to last 20 years on average. Now many people are living past 100, retirement is expected to last around 40 years. And if you plan to retire early, you’ll probably need to budget for around 50-60 years.

That’s a long time to be putting your feet up, so it’s no surprise that many people choose to work, either full- or part-time, after they retire. Because they also have retirement savings, they are able to choose flexible work that they’re passionate about.

The added benefit, of course, is that earning extra money helps to stretch your savings for longer.

Lower your withdrawal rate

A 4% withdrawal rate was originally suggested by William Bengen. He used historical market data to calculate the earnings on a retirement portfolio. Based on his calculations, he suggested that you could make your savings last 30 years if you only took out 4% each year (adjusted for inflation).

However, if you’re planning to retire early, and you need your money to last longer, then you may need to reduce your withdrawal rate, and use other sources of income instead.

Pick your investment accounts wisely

There are a variety of retirement and investment accounts available offering tax benefits and deductions that can save you thousands. Some of these benefits apply when you make a deposit, and others apply when you’re withdrawing the funds. Because tax laws can be complex, you may want to talk to an insurance or financial advisor to figure out the best strategy.

If you’re planning to retire early, it’s important to note that some tax benefits only apply if you draw your retirement funds after a certain age. In fact, certain investment products will refuse to let you access the funds if you’re below the age limit. When you’re planning for retirement, make sure you factor these rules in and organize other sources of income in the meantime.

Diversify your investments to ride out market downturns

Here are a few tips to help you ride out the inevitable ups and downs of an investment portfolio:

1. Take a long view. Markets fluctuate all the time, so if you panic every time share prices fall, you’ll be living a very stressful life. Instead, do your research, get some advice, and invest in things that you are confident will grow long term, even if they experience a dip now and again.
2. Diversify. When Bengen came up with his model, he used an investment portfolio that was 50% stocks and 50% bonds. Though you may choose a different mix, it’s important to diversify between stocks, bonds, cash, life insurance, and other assets. That way, if one market experiences a downturn, the others will hopefully earn enough to offset your losses.
3. Have a cash buffer. It’s important to have enough cash so that if the market goes down, you’re not forced to sell your stocks at a loss to put food on the table.

Conclusion

Early retirement can seem like a pipe dream. But with a solid financial plan and the right investments, your golden years are a lot closer than you think.