For many Americans, early retirement is just a dream. In fact, according to a recent study by the National Institute on Retirement Security, 65% of current workers say it's likely they will have to work past retirement age to have enough money to retire.¹ But retirement- even early retirement - is achievable with a plan, and there are things you can do to get that much closer to living the lifestyle that you want. The following are three points to consider when planning for an early retirement.
Determine when you can retire
For some, early retirement means leaving the job at age 40; for others, age 55. Whatever the number, your target age or date should be based on how many years of retirement income you'll have. In other words, you need to do the math. For example, if you plan on retiring at 55, will you have enough to live off of for the next 20 plus years?
And there are other income and expense factors to consider. For instance, do you plan on taking Social Security early to help supplement an early retirement? If so, keep in mind that drawing Social Security before age 70 means you'll have less income to work with. And leaving your job early means you also need to consider that you might be footing the bill for your health insurance until you're eligible for Medicare at age 65.
Know your numbers
Use a retirement calculator or meet with a financial advisor who can help you estimate what you might need in order to retire early based on your target age/date and existing assets. The idea is to know what the differential is so you can see if retiring on your target date is feasible.
For example, if you planned on retiring at 55 and the gap is wider than expected, it may still be possible to retire early. However, you may need to supplement your income by working part time. But if doing any type of work isn't your idea of retirement, you may need to revisit your target age/date. This would also be a good time to review your investment portfolio (and even your household budget) to find additional sources of generating more retirement income and better ways to save more.
Make a retirement plan and invest wisely
Creating a retirement plan will reveal the actions you need to take to prepare for a financially secure future. This could be something as simple as creating a household budget. And while it's not always easy to pay the bills and still save for retirement, a budget can help you look strategically at where you can be smarter about your investments.
For example, are you maxing out your employer-sponsored 401(k)? Yes, it means you'll have less take-home pay, but the tax savings benefits will partially offset that figure. And if you're age 50 or older, you can take advantage of catch-up contributions so you can save even more. Does your employer have a matching program? The money your employer is matching is essentially free money, so the more you put in, the more they'll match/contribute up to a predetermined limit.
Automate your savings
A good way to help shore up your savings is to automate them. By making your 401(k) contributions automatic (having your employer pull money from your paycheck before you even see it) you can effortlessly save without having to write a check every month or transfer money between accounts.
If you're not the disciplined type or if a busy life just seems to get in the way of your savings plan, then set up your savings account to where you can have money deposited every month into your account. Many financial institutions have savings programs that will automatically pull money from an account (say your checking account) each month, and make a deposit into your savings (you set the amount and date of the deposit). With an automatic savings plan, money is pulled before you see it and moved where you can't easily access it.
When setting your sights on an early retirement, there really isn't a magic formula to follow. But what you can do is determine a realistic target date, know how much you'll need to live on, and get smarter about where you should be saving by creating a plan and working within a budget.