A Complete Early Retirement Planning Guide

Investing 07 December 2024

9 Mins Read

Did you know 52% of Americans plan to retire before 65 and 23% before turning 60? So, you can say early retirement is a trend in the country. But the question is- is early retirement an excellent economic decision? Well, there are debates over that.Enrich yourself with our article on a complete early retirement planning guide.

But readers may want to know why such a trend is so apparent. I can say one thing- there is no geometric framework for making financial decisions. Check what’s your current financial status. Then, tally your own financial goals. Nd then decides.

In this article, I will guide you to create a strategy investment plan for your retirement. You will also know which income strategy is the best for you. If you retire early, you will also need a passive income source. We will get into that as well.

Young professionals may not have etched their life’s fiscal priorities. But the mid-age professionals are breezing past a valuable phase where they must know when to retire and how much to save by then.

So, this article is for them mainly. And, of course, for the early retirees, in a bit of murk.

Section 1: Understanding Early Retirement

Early retirement seems a plausible option in the US. But why? What are its drivers?

1.1 What is Early Retirement?

The official retiring age in the US is 65. When you retire anytime before 65, that’s considered early retirement. However, there is a catch. You can’t meddle with your IRA or 401(k) accounts until you’re 59 years of age and working.

1.2 Benefits of Early Retirement

There are many pros of early retirement. After all, who doesn’t want to live and dream on their terms?

Financial freedom and flexibility.

If there’s one thing for which I support early retirement, that is financial freedom. You can also start any alternative career. For example, you can begin at a mom-and-pop shop. And do business on your terms. Meanwhile, there is a slight calculation that you can’t ignore.

To retire at 60, you must have a salary of $100,000 by that time. Meanwhile, you must have $1 million in savings, too.

Opportunity to pursue passions or hobbies.

Oh, the places you can travel to! You won’t be bound to the proverbial 15 days a year vacation tenure. Moreover, your body will combat more wear and tear when you retire early.

Improved health and well-being

Work-related stress after 60 is like poison to the mind and body. A real-life survey was performed with British civil servants. The results show that people’s mental and psychological health improved when they retire at 60 instead of 65.

1.3 Common Misconceptions

People often come up with strange myths about early retirement. I say I don’t need them. Let’s pop some of those myths today. Firstly, people will say- early retirement is only for the wealthy. And that’s the lousiest thing you could have ever heard of.

Following the financial schemes, I discussed earlier, you can quickly retire before 65 or even 60.

Secondly, people often say- it will be boring, or your personal life will be destroyed. These are hoaxes. When you have tim at your disposal, how can you be bored? Don’t spend idle days after retirement. Start a small business, offline or online. Or follow your passions.

Section 2: Assessing Your Current Financial Situation

There is no trend like early retirement. There is no formula for a happy early retirement as well. Hence, you must assess your financial condition and goals before deciding.

Below, I will try to make the process easier for you-

2.1 Evaluating Your Net Worth

Your net worth may vary. But there are some common economic trends you can’t escape. For example, the rule of thumb. We will use that to measure assets vs. liabilities here.

Before retirement, you must accumulate 12 times your pre-retirement salary as savings for a healthy retirement. There’s an even safer option. You have to save 80 to 90% of your pre-retirement income. And that’s difficult.

But we are not talking of mere savings here. We will consider retirement investments, retirement savings gap, mutual funds, etc.

When making your early retirement planning guide, consider these, too.

2.2 Understanding Your Expenses

Do you know what your main expenses are after retirement? Some are essential, while others are voluntary. Now, let’s break down the costs and make some estimate presumptions.

The essential expenses are housing, food, and medicine. You can’t ignore these basics so long you live. However, the trick is to create an alternative pension fund to host these expenses after retirement.

Now comes discretionary or voluntary expenses. They might be traveling, entertainment, etc. I will suggest investing in income annuities, bonds or CD ladders to cover your contingent essential costs. These are, in fact, the safest options for retirees.

2.3 Income Sources

Who said your earnings stop at retirement? There is a horizon of new options to try.

Your Social Security fund is always there. Meanwhile, your mutual funds are also static and will keep rewarding you. But what about other options?

You can first invest in real estate. It is undoubtedly one of the best alternative investments you can try right now. Secondly, you can go for income annuities. You can maneuver your returns from annuities in different ways:

Create a fixed return quotient
Expect variable payout from your scheme
Expect a return for a fixed period only.

Your investments will vary as per the return scheme chosen.

Section 3: Setting Goals for Early Retirement

If you are retiring early, you can’t enjoy the full benefits of your pension plan (SSN) or 401(k) account. So, it is better to sort your post-retirement financial goals accordingly.

3.1 Defining Your Retirement Lifestyle

Healthcare: one of the most static and assured expense sources in healthcare. Set aside 30 to 35% of your retirement funds for chronic and contingent healthcare costs.
Housing: Costs like housing repairs, property tax and others, will keep coming back till the day you breathe last. Save at least 20% of your income for that. Also, try to generate alternative income to support the cause.
Travel: you can save 20% of your funds on travel. Of course, you will have essential travel palms when you retire early.
Shopping: Don’t expel significant funds for shopping from your retirement portfolio. Revenues from stocks, funds, etc, will aid your additional shopping costs.

3.2 Calculating Your Target Retirement Savings

How much should your ideal retirement savings be? That indeed depends on your retirement cost and future financial goals. But you can use the rule of thumb to support the average American lifestyle after retirement.

The Rule of Thumb

We have talked about it before. The rule says you must save at least 20% of your annual income. If that seems complicated, save at least 15% of your income. Meanwhile, there is one non-negotiable thing. Start saving when you’re 25 years of age.

Subsection B: Using Online Calculators

Calculated moves after retirement are a must. Step 1- Foresee your investments. Step 2- Find a plausible source to fund that cost without a hefty pinch into your stocks.

Here are two retirement income calculators you can try:

T. Rowe Price retirement income Calculator is a good option. It keeps retirement scenarios side by side to compare variables and assumptions. It can also tell you the actual worth of your retirement savings in various market conditions.
Maxifi Calculator is another good option you can try. Mamy calculators ignore the tax component, which compromises the calculation accuracy. But this one accounts for all of your variable taxations. Hence, you can achieve better tax efficiency.

Section 4: Creating a Strategic Savings Plan

Your Early retirement planning guide must have the following components:

4.1 Budgeting Techniques

Try these two budgeting techniques for better retirement planning-

Subsection A: The Zero-Based Budgeting Method

I feel it is the most accessible and practical retirement saving plan calculator. This one starts with your post-retirement expenses as 0 for the beginning.

Then, it adds up costs one by one. But it also demands justification for each expense. Hence, you cannot add unscrupulous expenses to your bucket list.

Subsection B: The Envelope System

It is a cash-based retirement budgeting tool. Here you create digital tabs as per your voluntary expenses after retirement. You also allocate a fixed amount for each category. For example, you set a budget of $2500 for travel for a year after retirement.

Imagine you’ve spent the amount. But you are still willing to spend it on another trip in the same year. This tool does not allow that. You can only make extra expenses if you earn extra from some miscellaneous source.

4.2 Investment Strategies for Growth

Stocks can leverage your earnings after retirement like nothing else. I assume you had a stock investment profile before retirement already. However, the nature of investments changes after retirement.

The first thing in your early retirement planning guide is how to shape your stock investment. Wrong investments can siphon the whole retirement savings fund. So, the trick is to create a well-diversified portfolio after retirement. It should ideally be composed of 70 to 75% bonds. And the rest in stocks. You can also invest 5% in cash or cash equivalents. For example, money market accounts.

Real Estate Investments

Real estate income creates a substantial supplementary income potential after retirement. So, try to make a real estate investment fund before retirement. Firstly, you can create an alternative property and sell it or rent it. Secondly, you can refurbish your existing property and consider renting a portion.

4.3 Tax-Efficient Saving Options

How can you forget taxes after retirement? What you can do is plan your taxes well.

Roth IRA vs Traditional IRA

I feel that a Roth IRA account is better. It is an individual retirement account where you pay taxes on any income. But all withdrawals and earnings after 59 are free of tax. But traditional IRAs are different. This is an account where you can make small deposits. The deposit goes towards your post-retirement taxations.

Health Savings Accounts (HSAs)

It is almost the same as a traditional IRA. The money saved in the HSAs can be withdrawn after retirement to pay medical bills. And the amount you save is also tax-free.

Section 5: Preparing for Healthcare Costs in Retirement

Healthcare in the US is quite costly. So, go for a balanced Medicare scheme. Some people will say- schemes A and B are enough. But that’s a fad. You need schemes C and D equally. For example, Scheme D covers out-pharmacy costs. And trust me the same often crosses $15000 to $20,000 in your med bills.

5.1 Understanding Medicare Eligibility

You need to meet certain conditions to get Medicare benefits. Firstly, you can withdraw Medicare benefits after you are 65. Here, your early retirement doesn’t matter. When you have any disability, you can claim a portion of your funds. The same applies to end-stage renal disease patients.

5.2 Long-Term Care Insurance

Long-term care insurance is the basis of your end-of-life health and financial safety. You may choose a scheme that suits you. But try choosing one when you are still 50 to 55. You get the best rates, then. As your age grows, the rate also increases.

Section 6: Building Passive Income Streams

Don’t settle for what you’ve earned till your retirement. There are lots of hassle-free retirement options you can try-

Go for dividend stocks. The rates are lower, maybe. But there are the least risks. You can also go for rental properties. Renting is the safest and most hassle-free option. Your early retirement planning guide must include both.

Section 7: Adjusting Your Plan as Needed

Here are some pro tips to adjust your early retirement plan as and when needed:

Regularly Reviewing Financial Goals: the market rate, inflation, and tax rate may change with time, track and save more, opt for additional earnings, etc.
Adapting to Life Changes: You may incur life diseases. There may be complications with your children, etc. So, steer clear for a mayday fund. Use it only when it is essential.

Conclusion

Early retirement may be a good option, depending on your financial goals and current fiscal status, but it may sound reasonable if you had planned early.

Start your early retirement planning guide with an investment calculation. Track how much you need. Then, think of an ideal retirement value. And start saving.

You may refer to the rule of thumb. Hence, create a budget for yor expenses for the next 20 years. However, I feel it is essential to plan post-retirement earning options. Here’s a complete guide for the same. If you need elaboration on any section, comment below. I will write a detailed blog on it.

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