A Google search for “ early Retirement ” will return millions of results. Many of these are about retired people who have saved heavily and left the workforce before they reach 40.
However, most people see a simpler target: According to NerdWallet’s new survey, Americans who have not yet retired but are planning to do so by age 57 on average, they expect to be out of full-time employment. This is still a good age — it’s 10 years before full Social Security retirement age of 65 — but it can be done without having to make drastic budget cuts. These are five steps that you can follow to give your notice 10 years earlier.
1. Get more savings
You need to start saving as soon as possible to be able to retire when you are ready. Experts recommend saving between 10% and 15% of your pretax earnings for traditional retirement. Let’s take, for example, that you are 22 years old and earn $40,000 annually. You could retire with $1.13 million if you can save 10% of your income and get a 6% average annual returns on your investments. This is possible if you retire at age 85 and spend 70% of your preretirement income in retirement. All of this is based on NerdWallet’s retirement calculator. It assumes that there will be 2% annual salary increases, 3% inflation, and a 5% return on your investment once you retire. )
Let’s suppose you decide to retire at the age of 57. All the above assumptions are true. You’d have $570,000 to retire. This isn’t enough money to pay your expenses and doesn’t allow you to drastically reduce your lifestyle in later years. The calculator estimates that you would need to save 22% each year to be able to retire at 57.
This is a big difference. However, if you are looking to retire early, it’s important to save more and spend less. It gives your money time to grow.
2. Find your number
The survey found that more than one in five Americans (22%) don’t know how much they will need for retirement. It is common to replace 70% of your preretirement income, but it can be adjusted for your specific circumstances. You might not need as much if your mortgage is paid off before you retire. You might also need more if your retirement goals include a long list of travel plans. You can use a retirement calculator to help you find the right retirement goal for you.
3. Assign accordingly
As you get closer to retirement, it is a good idea to shift your investments in order to be more conservative. Retirement early can mean you spend more time in retirement. This generally requires a more aggressive portfolio. You need to keep growing the money you have invested. Although you could technically retire with an all stock portfolio, it is safer to have a mix of assets, including stocks, bonds, and cash, so that your retirement plans don’t get thwarted by market crashes.
One good plan is to maintain a more aggressive asset mix, or, more heavily toward stocks than bonds and cash. However, you can shift a few years worth of spending money into cash. This will provide you with a reserve of cash that you can draw on in case of an unexpected downturn or volatility.
4. Learn the rules of withdrawal
Retirement accounts often have rules regarding when you can withdraw funds. You may be subject to a tax penalty if you withdraw your money from a 401(k), even though there are exceptions. Social security is not available until the age of 62 and you will be subject to a penalty if you draw on your benefits prior to that age.
If you are planning to retire early, it might be a smart idea to have a variety accounts for saving, such as a Roth IRA or a taxable investment account. You can withdraw any Roth IRA contributions at any time, without penalty. Taxable accounts don’t have a tax advantage, so you can withdraw your money whenever you want. To avoid any surprise penalties, make sure you are familiar with the withdrawal rules for each account. Talk to a financial advisor to learn how withdrawals are taxed, and to help you plan for tapping the right accounts at a specific time.
5. Part-time work is an option for retirement
According to the survey, 22% of Americans believe that part-time work is part of their retirement plan. Part-time work can help you save money earlier in your career. This is especially true if you are able to find a job that pays your daily expenses while also allowing you to invest your retirement savings so that it can grow more slowly.