How to Retire Early

by | Mar 7, 2023 | Financial Planning

When you picture retirement, you may think of sandy beaches and a good book, fishing with your grandchildren, spending your days tending a garden, or maybe just sleeping past dawn. No matter how you plan to spend your retirement, you’re probably in a hurry to get to that idyllic place.

For many people, the only thing standing in the way of an immediate retirement is a lack of funds. While a lack of retirement savings can be a significant obstacle, it can be overcome with careful planning. To begin overcoming the barriers to an early retirement, follow these steps.

Understand Your Current Financial Position

The first step to retiring early is understanding your current financial position. To do this, you should start by predicting how your retirement would look if you stopped working today. This means you should understand your income, expenses, and special needs during your retirement years.

Estimate Your Guaranteed Retirement Income

Begin by estimating your guaranteed income. This type of income does not fluctuate or depend on the performance of investments. It could include sources like Social Security, pensions, or stable rental income from investment properties.

Estimate Your Retirement Expenses

Your income is only one half of the equation. You also must decide how you plan to spend your retirement and estimate how much that will cost. If you plan to travel, move, or offer additional support to your family, remember to include these expenses in your estimate. Also, don’t forget special needs like long-term care or escalating healthcare expenses that are common for retirees.

Calculate Your Income Gap

After you’ve calculated your guaranteed sources of income and estimated your retirement expenses, you will likely notice a gap between the two. This is your “income gap” – or the amount of income your investments need to generate to cover expenses.

The rate of return your investments need to earn to cover your income gap is called your Required Rate of Return™ [RRoR™]. This rate is the key to understanding when you can comfortably retire.

Determine if Your Investments Can Comfortably Cover Your Income Gap

Once you know your RRoR™, you can determine if it is a reasonable target without taking excessive risk. For example, it would be extremely unlikely you could reliably earn a 70% annual return on your investments without undertaking enormous risk. If your RRoR™ is too high for your comfort, there may be more work to do before retirement is a viable option.

If all these calculations seem overwhelming, don’t worry. You don’t need to perform the analysis alone. An experienced financial advisor can help you forecast your income and expenses, determine your RRoR™, and even account for common barriers to a comfortable retirement – like inflation.

Close the Retirement Income Gap

If your current savings are not enough to cover your retirement expenses, you have two options: increase your savings or lower your expenses. Depending on your personal situation and the size of your income gap, you may need to implement one or both of those options.

Increase Your Retirement Savings

One way to close the retirement income gap is to increase your savings during your working years. After all, a more sizeable nest egg is likely to generate more income, all other factors remaining constant.

While saving more may seem like an obvious solution, it is still an important one. Some ways to increase your retirement savings include:

  • Add a higher percentage of your salary to retirement accounts. To do this, you may consider reevaluating your budget or shifting your focus from other financial goals toward retirement.
  • Use tax advantaged accounts. If you contribute to a Traditional IRA or 401(k), you may be able to deduct these contributions from your taxes. With lower tax expenses, you may have more money to contribute to retirement.
  • Maximize your company match. If your employer matches your 401(k) or other retirement plan contributions, ensure you are contributing enough to receive the full match.
  • Review your investments. Work with an experienced financial advisor to ensure your retirement savings are invested to maximize growth while remaining within your risk tolerance.

There are many ways to increase your retirement savings without disrupting your current lifestyle. An experienced financial advisor can help you set saving goals and create plans to reach them.

Lower Your Retirement Expenses

In addition to saving more for retirement, you could lower your retirement expenses to help close the income gap. However, reducing your anticipated retirement expenses doesn’t have to mean lowering your standard of living. Some other ways to reduce expenses include:

  • Pay off debt. Mortgages, car payments, credit card bills, and other forms of debt can come with significant monthly payments. Eliminating these obligations before you retire can help reduce monthly retirement expenses.
  • Pay taxes now rather than in retirement. Taxes are another significant source of retirement expense. Contributing, or converting, to Roth retirement plans could help you avoid income tax in retirement.
  • Use life insurance. If an inheritance for your heirs is an important part of your financial plan, you could choose to fund this goal with life insurance rather than investments.
  • Reduce risk of unplanned expenses. Often, retirees must keep a significant portion of their funds set aside in case needs like long-term care arise. Insurance can help reduce these risks, giving you the freedom to spend your funds on your dream retirement, rather than saving for what-ifs.

Much like increasing your retirement savings, the right choices for reducing expenses will depend on your unique situation. An experienced financial advisor can help you evaluate these options and others to choose the ones that fit your plan.

Considerations for Early Retirement

While an early retirement has significant advantages, it also presents unique challenges that must be overcome. One of these challenges is that government benefits, like Medicare and Social Security, have set beginning ages.

Most people become eligible for Medicare at age 65. If you retire before age 65, you’ll need a plan to cover your health care costs before Medicare begins. This could include private insurance, or insurance through your previous employer if they offer it.

Social Security benefits can be claimed as early as age 62, but your benefits are reduced if you begin Social Security before reaching your Full Retirement Age. When to begin Social Security is one of the most important retirement planning decisions you will make, so discuss your choice with an experienced advisor.

Other factors that could impact your ability to retire early include having less time for investments to grow, fewer working years used to calculate Social Security and pension income, and a greater length of time retirement income needs to last. However, if you begin planning early and partner with an experienced financial advisor, you can overcome these obstacles.

Factor an Early Retirement into Your Plan As Soon as Possible

The most important thing you can do to retire early is make your plan as soon as possible. With a financial plan, you can understand your income, expenses, and investments. But a financial plan is more than an accounting of your financial position. It is also a roadmap to helping you achieve your individual goals.

To guide you on the path to achieving your retirement goals, you need a trusted financial advisor to create and implement your plan. An experienced advisor can help you maximize savings, minimize taxes, effectively use insurance, plan your estate, and even adjust your plan to changing market conditions.

Retire Early with Financial Fingerprint™ by Brookstone Wealth Management

At Brookstone Wealth Management, we strive to help you turn your retirement dreams into a reality. If your dream is retiring early, we can help every step of the way.

Our comprehensive financial plan, Financial Fingerprint™ is quick to assemble, easy to understand, and simple to modify as your circumstances change. Financial Fingerprint™ can help you understand your current financial position, calculate your income gap and RRoR™, and account for common retirement planning components like government benefits, investment income, and longevity of your funds.

At Brookstone, our focus is on coaching, teaching, and mentoring our clients. We create a long-term partnership to help you find your True North and turn your financial goals into a reality.

To get started, contact us today.