Are you one of the millions of Americans who wants to retire early? A recent study from MSN found that two-thirds of millennials want to retire before age 65.1 That’s well before Social Security’s full retirement age of 67. While early retirement may be a desirable goal, it can also be a challenging one.
Early retirees face a number of difficult obstacles. They spend more time in retirement, which means they have to fund more years with distributions from their savings. If they retire before they’re eligible for Social Security or Medicare, they’ll become even more reliant on personal savings and investments.
Even with these challenges, though, you can retire early if you stick to your plan. Below are a few questions to ask yourself as you get started. You may also want to work with a financial professional to help you analyze your needs and goals and develop a more detailed plan.
What’s your funding need?
Every good plan has to start with a goal or desired outcome. In your retirement plan, your goal should be your funding need or retirement number. That’s the amount of money you need to save to fund your retirement.
It may be difficult to predict how much money you’ll need in retirement. That’s especially true if retirement is decades away. However, you can use your current expenses as a starting point to estimate your living expenses in retirement. Consider how your life may be different in retirement. Perhaps you’ll downsize to a more affordable home, or maybe you’ll have lower debt payments. Also, be sure to factor inflation into your estimate.
Once you have a spending estimate, think about how many years you may live in retirement. It’s possible that you could live into your 80s or even 90s. If you retire early, that means you could live in retirement for 30 or 40 years. Multiply your spending estimate by your number of years in retirement, and you’ll get a ballpark figure of how much money you may need to fund your lifestyle.
How much do you need to save each month to hit your target?
Fortunately, you won’t be entirely dependent on savings in retirement. You will likely have other sources of income, like Social Security or a pension. You may also receive rental income, investment income or other cash flow. Subtract that income from your funding need. The difference is the amount you’ll need to withdraw from savings every year in retirement.
You can then work backward to estimate how much you’ll need to save each year to hit your target. Set up automatic contributions to your retirement accounts so you can stay on track. Also, be sure to implement an investment strategy that minimizes risk but also offers growth potential.
Your financial professional can help you develop these estimates. They can identify risks and possible expenses that you haven’t considered. And they can help you implement an investment strategy that’s aligned with your goals and risk tolerance.
Do you need to make changes to your retirement plans?
It’s possible that even if you maximize your savings, you’ll still fall short of your goal. This shortfall is known as a savings gap. If you can’t save enough to overcome this gap, you may need to make changes to your plans. For instance, you could push back your planned retirement date to help you save more money. Or you could consider part-time or seasonal work in retirement.
You could also scale back your planned spending in retirement. You could move to a more affordable location or downsize to a smaller home. You could also travel less and eat at home more often. Go back to your retirement spending estimate and look for areas where you can make cuts.
Ready to develop your early retirement strategy? Let’s talk about. Contact us at Peak Financial. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
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17596 - 2018/4/19