Investing

Early Retirement: What You Should Know

June 1, 2022
A man holding his kids in a field

These days, one of the most popular aspirations is to retire early. After all, one lesson the pandemic has taught people is that there are far more things to focus on in life than one’s career. Many people dream of retiring early to pursue goals and passion projects. Whether you want to see the world, spend more time volunteering, or write the next great novel, early retirement is an excellent way to truly enjoy your time.

However, early retirement also requires careful planning. It is never too early to begin thinking about retirement and what you need to do in order to ensure that you don’t outlive your savings. Let’s take a look at some important things you need to know in order to pursue early retirement. 

Understand the 4% Rule

When thinking about early retirement, one of the most important things is to determine how much you need in investments and savings in order to retire. This can be quite difficult as there are many things to factor in. Fortunately, there is a way to help navigate this process. Enter the 4% rule.

The 4% rule states that people can typically expect to withdraw 4% of their total retirement amount each year without ever running out of money. A little bit of simple math can be done in order to convert the 4% rule into a savings goal. First, calculate your current annual expenses. If you want to be a little conservative, you can even increase the total a bit. Then, multiply that annual expense figure by 25 for a 25 year retirement fund. This is your goal savings amount for retiring early.

In other words, if you spend $25,000 a year, you would want to save $625,000 ($25,000 x 25) in order to retire. Then, you will only withdraw 4% each year you retire. If you make good decisions regarding investments or begin investing early in your career, you will find it is an attainable goal. 

Evaluate Your Lifestyle

People who want to retire early typically place a premium on things like time and experiences. These are important things to keep in mind. If you are someone that truly wants to meet your early retirement goals, one thing that you need to do is carefully evaluate your lifestyle.

One of the problems that people run into is spending money on things that they truly don’t need or even use. Carefully consider major purchases in order to determine whether you will actually use the item regularly or if it is just something you desire momentarily. This is not to say don’t buy anything but rather consider what you truly want to prioritize. After all, how many of us have lots of “junk” in our homes that we’d love to get rid of? Those are things that have taken money away from retirement.

Invest Raises

 If you’re like most of us, when we get a raise, we often think about things we can do with the money. Perhaps it is time for a trip to Europe. Maybe we’d like a nicer car or home. Time to spend it on a new video game system for the kids. However, one thing that differentiates people who retire early from others is the thought of investing that money.

When you think about it, you are already managing to live on your existing salary. There’s nothing wrong with wanting to add some things to your life; however, if early retirement is an important goal, consider placing 50% of any raises you receive into investments. This will ensure that you supplement your savings towards your magic retirement number while also giving you a bit of extra spending money to improve your present day.

Carefully Evaluate Investment Options

Yes, you want to invest in your company’s retirement plan, particularly if they provide matching amounts. However, one of the things that people wanting to retire early need to carefully do is consider the available investments. This can ensure they keep diversified assets while also encouraging contributing more than the minimum to retirement.

Roth IRAs are a great option for investment. Additionally, while you cannot withdraw interest earned without a steep penalty until age 59 ½, you can withdraw your contributions at an earlier age, and in emergencies, you can even “borrow” against it with the interest payments going into the account, essentially to your future self. Taxable brokerage accounts are also great options because you can withdraw the funds at any time. Additionally, many people find success investing in real estate as it can generate passive income. Finding the options best for your lifestyle and goals is important.

Final Thoughts

Early retirement is a dream for many people. Fortunately, it is not as difficult as it seems. It just requires planning and commitment. If you are hoping to retire early, start planning today. Remember the 4% Rule, frequently assess your purchase decisions, and take tactical steps such as evaluating different investment options and investing in raises.