How to Have Enough Money for an Early Retirement

How to Have Enough Money for an Early Retirement

July 12, 2021
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The road to retiring early isn't easy. It takes time and discipline to earn, save, and invest as much as you possibly can.

Many Americans dream of having more free time in their later years. Perhaps you want to relocate some place warmer. Or maybe you feel led to do volunteer work, or even set off on a brand new business venture. Whatever the reason, the question is the same: What would it take for me to retire at 60? Or even younger? Unfortunately the reality of quitting work can be far different from the fantasy.

In order to retire from your job early entails finding a way to replace the income it provides, or produce enough income to fund your lifestyle. which is why unfortunately, early retirement isn't for everyone. In fact, it isn't for most people. Just 11 percent of today's workers plan to retire before age 60, according to an Employee Benefit Research Institute (EBRI) survey. For many of those who do take the plunge, the reality of early retirement can turn out to be far different than the dream. But it's not impossible.

5 questions to ask yourself before retiring early include: 

  • Can I really afford to stop working?
  • Do I need to get a part-time job to make ends meet?
  • How will I get health insurance?
  • What will I do to occupy my time?
  • Are my plans in sync with my spouse/partner's?

Here are three moves to help make the early-retirement fantasy a reality. 

1. Making Adjustments to your Current Budget

You can get by with less if you'll have other sources of income. Retiring early means making some changes to how you earn and spend money, so in the future you get to relax. For many people, that means cutting their budget to the bare minimum. To learn to budget is a very important life skill. Here are some tips you can use to budget successfully.

  • Write down all your expenses: what you spend and what you have to pay back on loans.
  • Work out your income minus your expenses.
  • Work out a budget you can stick to.
  • Use a financial calculator
  • Check at the end of the month if you have spent what you budgeted for. If not, decide:
    − Where you can reduce your expenses on unnecessary items.
    − Whether your budget is perhaps unrealistic.
    − Whether you have to adjust your budget.

2. Calculate your Annual Retirement Spending

Living on a small portion of your income translates into needing less money for retirement. To do that, take a look at your current monthly spending and consider what will go down, what could go up, and what might be added or eliminated altogether. Add your final monthly expense estimates up, multiply by 12 and you have the magic number: your annual retirement needs. Most financial advisors recommend increasing it by 10% to 20% so you have some wiggle room.

There are a few exceptions to the early distribution rules. One popular among early retirees is to start a series of substantially equal periodic distributions, which are allowed by the IRS provided you follow specific protocol. Working with a financial planner to develop a strategy for tapping your investments while ducking taxes — where you can — and avoiding penalties. 

3. Invest for Growth

When it comes to investing, there's no shortage of ideas. At the risk of stating the obvious, retiring early means (1) you have a shorter period during which you can save, and (2) you have a longer period during which the money you’ve saved needs to support your spending.

Both of those mean investment returns are going to be your best friend. And to achieve the best returns, you need to invest in a balanced portfolio geared toward long-term growth. We recommend low-cost index funds, with an allocation that is tilted toward stocks for as long as you can stomach it. Here are5 smart investing strategies to follow when investing for growth.

  • Don't time the market
  • Asset allocation
  • Investment selection
  • Dollar-cost averaging
  • Rebalance your financial portfolio

And remember, you can't control all the risks associated with early retirement, but what you can control is having a plan. Work with a financial advisor that is knowledgeable in early retirement planning to develop a customized portfolio, and help you manage your finances before and during retirement.

Summary

It takes planning and discipline to retire early. The earlier you start investing, the more you can benefit from compounding. That's why you need to get going as soon as possible!

Not all financial advisors have the same level of experience or will offer you the same depth of services. So when contracting with an advisor, do your own due diligence first and make sure the advisor can meet your financial planning needs.

If you have any questions on our company, services, values or more, contact the retirement income experts at Agemy Financial here today. Our trusted advisors in both Denver, Colorado and Guilford, Connecticut are waiting for your call.