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Retire early: that is a goal for many working Americans. Typically, anyone who retires by age 60 is considered “young” for retirement. But many of us dream of that option daily. Rides on a subway to get to and from work, muttering to yourself during the work day … these experiences can have the most industrious among us figuring out how to ditch the daily grind.
Even though it’s a dream for many Americans, it requires a tremendous amount of planning. If you do go the early-retirement route, working through the numbers will help you understand what is necessary to make it work.
Want to Retire Early? Figure Out What You’ll Be Spending
If you have been in the habit of keeping track of your household expenses and working to keep them within a monthly budget, you already have a head’s start on these calculations. Some of your expenses will lessen with retirement. You may buy a good deal less gas when the daily commute is no longer part of your routine, and maintenance costs on the car may, likewise, fall.
What about housing? In one scenario, you may – between now and your 60th birthday – complete the mortgage payments on your home. If so, that will be a significant step forward. Assuming you plan to stay there, there will be neither rent nor mortgage payments in your future. But there will still be taxes and the house will require maintenance.
Prepare by considering: how will you be spending your time? Traveling, golfing or something in between? Each involves costs. Budget for it. As a general rule of thumb, expect to spend 80% per month what you are spending now.
Retire By 60: Assess Social Security and Medicare
Another rule of thumb for those who retire early is: 25/4. You should have 25 times your expected annual spending saved and put away before retirement. You should expect to withdraw 4% of that principal each year.
If possible, it is best in that situation to wait for your 67th birthday before taking social security, and receive the full amount thereafter. This means, of course, that as you calculate what you’ll want as a nest egg as you face that seven-year period you will have in mind the fact that you won’t be getting that monthly check.
Medicare kicks in earlier: on the first day of the month when you turn 65. In the usual situation, your employers’ plan will cease to cover you when you walk out the door for the last time. You will have to save enough to have a contingency for this. Perhaps you will be covered by your spouse’s plan, or you can benefit from COBRA. Otherwise, there are plans under the ACA that are designed to help early retirees. You should prepare by researching your options and add what you will expect to pay under such a plan to the size of the nest egg you’ll need.
Stop Work Early: Consider Your Investments
Understand that, even at modest rates of return or interest, it is better to put away a sum this year than next year, not only because of the interest the sum will earn, but because of the compounding consequences it will have after that. Here is a link to a primer on the arithmetic of compounding interest.
Beyond that: prepare for early retirement by investing wisely thinking about safety and growth.
Low-cost broad-based index funds, with an eye toward stocks, are a sensible way to combine the two. Investing in a fund-based on a broad-based index, such as the S&P 500 or the NASDAQ Composite, means that you aren’t betting on a particular horse. You are betting on every horse in the race.
Retire Early: Make Adjustments to Your Current Spending
Once you’ve gone through the above calculations, and you’ve adopted a plan for investing, you’ll have a sense of how much of your current income you will need to put aside. That, in turn, will tell you if you need to make spending cuts that impact your present lifestyle and, if so, how severe they will be.
It is likely you will then want to research how to make such adjustments. There is a lot of online help on the subject.
The “Financial Independence, Retire Early” movement, in particular, has given a lot of thought to the subject. Some of them are quite simple. You may have a lot of scarcely used subscriptions — to a newspaper you seldom read, to websites you seldom use, to television channels. See what you can shed.
These four steps — two stages of calculations, and the necessary behavioral changes as to both spending and investing — will help you prepare for a well-earned golden age in your golden years.