The idea of early retirement sounds great when you are overworked and short on time. Retirement in your 50s or even your 40s can be done. However, you need to figure out how much you need to save and have the discipline to get there.
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Saving enough to retire early. The first question to ask when you’re thinking of retiring early is how much you need to save to afford an early retirement. Online calculators abound, but they’re often based on the assumption that you will retire in your 60s, when you’re at least close to receiving Social Security payments and government funded health care benefits.
When you’re considering early retirement, you’ve got a host of additional factors to consider, including:
Additional years of retirement. When you retire at 65 and expect to live to about 80, you only need to fund 15 years of retirement. But if you retire at 45, that’s an extra 20 years of time in retirement you will need to pay for. The more years you need your retirement accounts to fund, the more you will need to save in those accounts.
Health care costs. When you retire at 65 you will qualify for health care coverage through Medicare, which can seriously cut your retirement-related expenses. If you retire at 50, you will have to find another way to obtain health insurance, and it might have higher out-of-pocket costs. Even if you’re in good health, private health insurance could easily be a major expense in your retirement budget.
No more salary coming in. Of course, when you retire early, you will stop getting the salary you’ve worked for. Over 10 or 20 years of retirement, this lost salary can easily add up to $1 million or more in lost wages. It can be hard to make up for those lost earnings during your retirement years with investment gains alone.
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You’ll lose other benefits. Besides losing employer health insurance and your salary, you could lose other valuable benefits when you’re no longer employed. You won’t receive employer retirement account contributions, paid life insurance or disability insurance. The loss of those benefits may not present an immediate problem, but you might wish you had them later if a problem arises.
When deciding how much to save for early retirement, make sure you factor in these potential additional costs of early retirement. Retirement during your 60s is popular because that’s when many government benefits kick in that replace employer-sponsored benefits. There are some costs you simply won’t have if you put off retirement until age 65 or later.
Getting to early retirement. Early retirement is difficult to achieve, but not impossible. The key is to have a very high savings rate for the years that you are working.
The average American savings rate is abysmal. Most Americans spend much more than they save, and could certainly stand to save more. But the typical savings rate varies by household income, with wealthier people saving considerably more.
If you want to retire at around age 65, the common advice is to save about 10 to 15 percent of your income annually from the time you start working. But what if you want to trim five, 10 or even 20 years off of your working life and retire early. In this case, you should shoot for a much higher savings rate. Extreme early retirees, those who retire in their 30s or 40s, might need to save 50 percent or more of their annual household income.
If you can be disciplined enough to save half or more of your income for 15 or 20 years, you may be able to securely retire at the end of that period. If you only want to retire a few years early and are willing to live frugally, you may be able to knock your savings rate down some. However, you should still be aiming to save 20 percent of your income, at least, to retire even a few years early.
[Read: The Most Popular Ages to Retire.]
It’s important to learn to budget well and invest successfully if you want to retire early. You also need to dramatically increase your savings rate in order to sock away enough for more years in retirement.
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What Does it Really Take to Retire Early? originally appeared on usnews.com
