If the true “American dream” is to be able to retire early without finding yourself in the poorhouse, how much money does it take to achieve it? While there is no one-size-fits-all answer, understanding the minimum savings needed to retire early can help you create a realistic, personalized plan.
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Early retirement success depends on a combination of strategic planning, realistic budgeting, and smart investments. Here, financial experts offer some tips on how to achieve the goal of early retirement.
No one can really predict the future. While you can’t know your exact circumstances at retirement, especially if you still have a long way to go, you can spend as much time as possible planning for it, according to Gina Stoddard, chief of staff at Broad Financial.
“Preparing for retirement involves a lot of forethought and consideration of a multitude of factors. If you’re aiming to retire early, you’ll need to plan for your savings to probably last a few decades,” he advised.
You also need to evaluate the ideal lifestyle you want to live, any remaining debt, taxes owed and whether you will receive other sources of income, Stoddard said. Here are some key tips for early retirement planning:
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Start saving aggressively in your 20s and 30s.
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Maximize retirement accounts like Roth IRAs and 401(k)s.
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Consider alternative investments for diversification.
The first thing Melissa Fox, CFP and owner of Future-Focused Wealth, tells people who ask about retiring early is this: “There’s no such thing as average anymore. Especially not when it comes to savings, not when it comes to lifestyle, and definitely not when it comes to retirement.”
Since everyone takes a different path and has a different pace of retirement, no retirement calculator formula will work to find the specific amount you need. It is best to work with a financial planner to discuss your specific goals.
One of the most popular strategies for estimating how much you need to retire early is the 4% rule. This rule suggests that you can safely withdraw 4% of your retirement portfolio annually without running out of money for 30 years.
According to Michael Rodriguez, CFP and owner of Equanimity Wealth, if you have a $1 million portfolio, for example, you should be able to withdraw $40,000 a year and your money will last 30 years. Rodríguez also recommended aiming for a slightly lower withdrawal rate, around 3% to 3.5%, to allow for a greater cushion.
One of the biggest mistakes of early retirement is underestimating your expenses. Rodriguez advises tracking your expenses for six months to a year and adding a 20% to 30% safety margin to account for unexpected costs.
“If you don’t know what you spend monthly, start tracking your current expenses for six to 12 months and add a 20% to 30% cushion on top of your expenses to create a cushion.”
For example, if you spend $40,000 a year, it would be a good idea to plan for your retirement expenses to be between $50,000 and $60,000 a year. If you plan to retire before you’re eligible for Medicare (age 65), it’s also important to consider health care costs, he said.
If you are or will be eligible for Social Security, be sure to maximize the amount you receive, which usually means waiting until age 70, Rodriguez urged. Waiting until age 70 allows you to receive 124% of your full retirement benefit, which can be significant over the course of your retirement.
If your savings are not enough, partial retirement can help close the gap. Working part-time or starting a side hustle can reduce pressure on your wallet and expand your financial runway.
“If you can find a job that you find fulfilling and that also allows you to work at a level you are comfortable with in retirement, this can help you significantly expand your portfolio in retirement,” Rodriguez said.
You also need to take inflation into account in your planning, Stoddard said. Inflation typically affects expenses that retirees still pay, such as housing and insurance, which, he explained, “statistically increase in alignment with the rate of inflation. Sometimes even at a faster rate.”
While inflation tends to have a relatively stable rate of increase, unexpected changes can cause unusually high inflation rates.
The stunning stock market declines this month reveal that it is important to hold assets that are not invested in the stock market. Stoddard suggested alternative investments “like precious metals,” which tend to have some type of value since they are a tangible asset, and their value tends to work inversely to the stock market.
Likewise, owning real estate is typically considered to be owning an inflation-protected asset.
Some retirement accounts that allow alternative investments include self-directed Roth IRAs, traditional self-directed IRAs, and individual 401(k) plans or individual Roth 401(k) plans, Stoddard said.
Ultimately, early retirement isn’t just about hitting a number; It’s about aligning your finances with your values and the lifestyle you want to have. Fox encourages people to ask themselves why they want to retire early. In the end, early retirement may not be the right option for you. Cox said retirement planning requires not “obsessing over the number” and “talking about trade-offs.”
The right plan doesn’t always mean retiring early. Sometimes it means retiring smarter, with more purpose, more clarity, and more alignment with what matters most to you.
Caitlyn Moorhead contributed to this article.
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This article originally appeared on GOBankingRates.com: 9 Tips to Reach the Minimum Savings You Need to Retire Early
