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 different people what early retirement means to them, and you’ll get five different answers. Regardless of what it means to you, here are the three steps you'll want to take to make early retirement a realistic possibility—or to prepare for an unexpected forced retirement.

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 a five-year difference can have a serious impact on the amount of income you may need, so 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, such as 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 does not account for taxes, inflation, and other sources of income, such as Social Security, but it is a starting place.

As you expand upon your projection, all of the following factors should be accounted for eventually:

  • Your life expectancy and how it affects how many years you will need retirement income.
  • When you can and should begin taking Social Security benefits.
  • How you will cover the cost of health insurance until you reach age 65 when you become eligible for Medicare.
  • Lifestyle changes such as new hobbies that may cost more or hobbies that could make you money.

If you think you want to retire within 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" in Retirement

Some define early retirement as the day they no longer have to work in their current profession or career, but they would still like to earn income pursuing a new career, hobby, or passion. For others, retirement means they will have reached a point where they will never work for money again.

If your definition of early retirement means you don’t want to pursue any money-making ventures, you will need to save significantly more than those who plan on earning money in some way or another.

Even if you plan on continuing to work part-time, keep in mind that statistics show that many people who planned on continuing to work in retirement do not actually do so. This statistic can be either because they can't find work or changed their minds and decide they'd rather live on less and have their time free.

Get an Investment Plan With a High Probability of Success

Once you have calculated the amount of savings and future income you will need, you’ll want to spend time researching the various ways you can structure savings and investments to produce consistent and reliable retirement income.

Retirement is not the time to make quick, off-the-cuff decisions. Think about how much you know about your profession, the years of training and experience it took to gain that knowledge, and the amount of income it has paid you over your lifetime.

The investments you will now choose need to provide income for your remaining lifetime. You can’t afford to make mistakes, so take the time to do careful research, and don’t hesitate to seek qualified professional help.

And remember, the best retirement investments are chosen because they are part of a well-designed investment plan, not bought piecemeal.