How to Plan for an Early Retirement

Follow Three Practical Steps

Couple enjoying early retirement that is possible with smart planning.
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Ask five people what early retirement means to them, and you’ll get five different answers. Some may wish to sell their home, travel the world, and never work again in their life, while others may prefer to scale up, keep their hobbies and side gigs, and maybe even take on more. In some cases, people may be forced to retire early, such as due to a layoff or illness.

No matter what early retirement looks like for you, here are the three steps you'll want to take to make it a realistic possibility, or to prepare for a forced retirement that you may not expect.

Decide How Old Do You Want to Be When You Retire

To some, early retirement means age 45, and to others, it means age 60. Even five extra years can have a major impact on the amount of income you may need. The first step in planning for early retirement is to pick a target age or date.​

You'll then want to project out what would need to happen by that age. Think about how much you would need to save, and what your expenses might be. A rough rule of thumb called the 4 percent rule says you can withdraw about $4,000 a year per $100,000 of savings. If you think you'll spend $40,000 a year, you'd need $1,000,000 saved. This simple rule is not meant to be precise, and it does not account for the true figures of taxes, inflation, and other sources of income, such as Social Security, but it is a starting place.

As you expand this future vision and add details, you'll want to account for all of the factors that may play into this vision, or that may affect your cost of living and income. These may include:

  • Your life expectancy and how many years you will need income once you retire
  • When you can and should begin taking Social Security payouts
  • How you will cover the cost of health care until you reach age 65, at which point you can enroll in Medicare
  • Changes in your future way of life, such as new hobbies that may cost more, or hobbies that could make you money
  • Assets you have now that can be sold, or must be kept
  • Costs you have now that can be cut to create a slimmer budget
  • Loved ones who may rely on you for support, or vice versa

If you're antsy to retire, such as within the next five years, you'll want to fast track your planning. Five years may seem like a long time, but it goes by fast, and you don't want to wait until the year you retire to start getting things in order. 

Decide If You Think You'll "Work" Once You Retire

Some define early retirement as the day they no longer have to work in their current career, but they would still like to earn income through a new career, hobby, or passion. For others, to retire means they have reached a point where they will never work for money again. Some will keep their jobs for reasons that have nothing to do with income at all, such as to stay active, social, engaged, and to keep their minds sharp.

If your version of early retirement means you don’t want to pursue any ventures that bring in income, you will need to save much more ahead of time than those who plan on earning money in some way.

Even if you do plan to work part-time after you retire from a full-time job, or if your plan includes a new side gig, keep in mind that many people who planned on working after they retire do not end up doing so. In a survey by the AARP, over half of all people over the age of 35 plan to work in retirement, yet they predict only 20% will end up doing so. There are a few reasons for this mismatch. It could be because they can't find work (as older people have a harder time getting hired). Or they may have changed their minds and decide they'd rather live on less and have their time free to spend with loved ones. Health issues can also be a factor that people don't foresee when planning to work into their golden years.

Invest With Income in Mind

Once you have come up with a figure of the amount of savings and future income you will need, the next step is to invest with this goal in mind. Spend some time to research the ways you can invest and structure your savings to produce steady income. Now that you have a dollar figure and a deadline in mind, you should be able to create a portfolio that suits your needs in a more precise manner.

Keep in mind also that planning to retire requires a personal shift, and you may need to assess the way you have invested in the past. Do you tend to take risks with your money? You may find that your risk tolerance will need to adjust as your income goals and time horizon changes.

If you have questions about how best to invest for income, whether you're shifting your current portfolio, or starting from scratch, it's always wise to seek out help from a qualified professional.

Retirement is not the time to make quick or reckless impulse choices. To compare, think about how much you know about your career field, the years of training and real work it took to gain that knowledge, and the amount of income it has paid you over time.

The way you choose to invest your money now will need to provide income for the rest of your life. You can’t afford to make mistakes, so take the time to conduct research, ask questions, and act with prudence.

A common piece of wealth wisdom is that the best retirement investments are chosen because they are part of a larger plan, not bought one at a time as the mood strikes. Look at the big picture, and invest with a plan to treat the whole of your life after you retire.