Want to retire early? You have company. According to a recent study from MSN, two-thirds of millennials want to retire before age 65.1 That’s well ahead of Social Security’s full retirement age of 67. Retirement is always a challenging goal, no matter your age. Many Americans lack the needed savings to fully retire in their late 60s, let alone early.
Early retirees face a number of difficult challenges. They live longer in retirement, which means they have to fund more years with their savings. They may retire before they qualify for Social Security or Medicare, which means they’re even more reliant on personal assets.
However, it is possible to retire early if you plan ahead, stay disciplined and implement a sound strategy. Below are three simple steps to help you start your planning. You may also want to work with a financial professional to help you analyze your needs and goals and develop a more detailed plan.
Estimate your retirement number.
Any plan has to have an end goal. When it comes to retirement planning, your end goal is your funding need. How much money will you need to save to meet your goals in retirement?
That may seem like an impossible question to answer. After all, you can’t predict the future. However, you can probably come up with a reasonable projection based on your current spending levels.
Using your current expenses as a starting point, consider how much you might spend each year in retirement. What will change? Will you have less debt? Will you downsize to a smaller home? Do you plan to shop or travel less? Also, don’t forget to consider how inflation may impact your spending.
Once you have a spending estimate, think about how many years you may live in retirement. It’s possible that you may 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 years in retirement, and you’ll get a ballpark figure of how much money you may need to fund your lifestyle.
Calculate how much you need to save.
Of course, you may have income from other sources to help fund your living expenses. You will likely receive benefits from Social Security, and you may even have a pension. It’s possible you may have rental income or some other source of cash flow. Deduct that income from your funding need. The difference is the amount you’ll need to save.
Once you have that estimate, you can back into an amount that you need to save annually to hit your target. Set up automatic contributions to your retirement plans 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 identify the right strategy for you.
Make adjustments to overcome any savings gap.
You might find that it’s impossible for you to save enough to hit your goal. Even if you save as much as possible, you may fall short. This is called a savings gap, and you’ll need to take extra steps to overcome it. You may need to push back your planned retirement date so you can save more. 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 Nicky Derouen Financial Services. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
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