Many of us think of early retirement as a pipe dream or an oxymoron of sorts, yet stories of people who do so are widespread. The U.S. Social Security Administration considers 67 to be the standard retirement age for people entitled to Social Security benefits, although it's possible to begin taking reduced benefit payments as early as 62. There are plenty of people who decide to abandon the nine-to-five lifestyle in their 50s, 40s or even earlier. Some people who retire well before the standard age do so because they were lucky enough to save a substantial amount in a short time, but for most, it's accomplished with a mixture of diligence and sacrifice.
So what does it really take to retire early? Assuming you don't win the lottery, there are many factors to consider before setting your sights on this goal.
Finding a savings goal
As MarketWatch explained, early retirement by today's standards could be more appropriately called "financial independence." Depending on the circumstances, it could be a much more gradual process, and you might still want to work for periods of time. In general, financial independence is a point reached when you don't need to rely on working to meet an income to meet your spending needs. Therefore, the first step toward financial independence is figuring out how much you will need to save.
"Take a close look at your current spending to determine a savings goal."
Finding your savings goal requires some pretty basic math, but pinpointing it with certainty is a more complicated process. The most obvious way to determine how much to save is to look at how much you spend now. From here, you can reduce or eliminate budget items that you think you could get by without. For example, you might not need to travel as much without a regular work schedule, so maybe your transportation budget could be cut. Or you might be able to save on housing expenses by moving to a more affordable city.
Keep in mind that many people who retire early only do so after significantly reducing their spending and making some sacrifices. And you shouldn't just hope to save about a year's worth of living expenses - most recommend saving at least 25 times that amount before considering early retirement. For most of us, that means giving up their car, their large house, regular vacations, eating out at restaurants and much more. It also requires diligently tracking every expense and sticking to a much more strict budget than someone with a regular income would need. As you can tell, this may be a more challenging prospect than anticipated.
On the bright side, you might not need to bank on giving up your paycheck completely. Investing savings in the right way can generate a trickle of cash flow without risking your entire savings, but again, this is often easier to imagine than it is to accomplish. A professional financial advisor or wealth manager will be able to give you more concrete direction for how to manage savings in a way that could generate a small income over time. Remember, though, that no investment is entirely without risk, and that you may end up losing money instead.
Risks of early retirement
There are some clear dangers involved in early retirement, including the possibility that your savings will dry up faster than expected. Beyond that very real risk, there are a host of other complications that many do not consider beforehand:
- You might actually live longer than expected. Saving up for a 25-year retirement is great, but depending on the age you leave work, that might not be enough to last the rest of your life. That's especially true since health care costs and some other expenses tend to grow significantly later in life.
- Upon starting retirement, some realize they actually miss some aspects of working life that they took for granted. After all, it's not hard to get bored without a task or project. This might be easier for some people to overcome, however.
- If you contributed to Social Security in your working years, you might still be able to collect benefits upon reaching the standard retirement age. But in most early retirement scenarios, those benefits will be very low. It could also reduce the amount your spouse receives from Social Security, even if he or she did not retire early.
Just like any other major financial endeavor, early retirement is no cakewalk. Consult with a trusted financial professional to understand your options before committing to this goal.
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