How to Retire Early
Early retirement is within reach if you take the steps to make it happen. Retirement planning doesn’t have to be complex. Here are key strategies of people who have retired before their 60s, even though they’re not millionaires:
Be financially independent.
Figure out where your money is going now before retirement.
Monitor and reduce your current spending for important benefits. Track your spending using an online app, an Excel spreadsheet or even just pen and paper. Can you eliminate any unnecessary expenses? Periodically compare costs and shop around for savings on larger expenditures like insurance for your home and car.
Consider spending changes once you retire.
For example, you’ll stop sending money to savings and you won’t be spending money on commuting. However, health care and travel costs may rise. Early retirees typically consider a simpler lifestyle: They own just one car, if any at all, and it may be a Kia, not a late-model Mercedes.
Learn the 4 percent rule.
In your first year of retirement, you withdraw 4 percent of your total savings. In each succeeding year, you withdraw the same amount, plus inflation. But this rule comes with some caveats. Some financial planners think 4 percent is too optimistic a number given the outlook for lower financial market returns in the future, even though it’s worked long term for many early retirees. The key is flexibility — trim costs to withdraw less in years when the market tanks. Another rough rule of thumb: Before you retire, save 25 to 30 times your annual spending.
Be wise about investments.
Choosing an investment portfolio is a complicated and important task, and you may want to get some professional advice. In general, many investors have achieved success with a diversified portfolio of low-cost index funds that charge lower fees.
Keep an eye on housing costs.
The large house in a good school district may no longer be a priority. If you’re not commuting daily into a big city, a move to the outskirts can dramatically lower housing costs while keeping the city close enough for occasional visits. Alternatively, an apartment in a city can also lower costs, especially property taxes.
But first, make sure you have an estate plan to protect your property! Learn more here: Estate Planning Essentials You Should Know
Manage your taxes.
This is one of the most important financial issues you’ll face as you prepare for retirement, no matter your age. For example, if you’re pulling money out of a taxable brokerage account, you’ll most likely owe capital gains on the distributions. You’ll owe taxes on distributions from IRAs and 401(k) plans. You may want to take advantage of the so-called Rule 72(t), which allows you to avoid the 10 percent penalty on early withdrawals on certain tax-advantaged retirement accounts. But the rules are stringent.
By being prudent and getting expert advice, you may be able to make your early retirement dreams come true.
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