Thinking about retiring early? Start with these 4 steps
By The dream of retiring early is a hot topic among millennials. There are countless podcasts, blog posts, and Reddit threads dedicated to exploring ways to achieve financial independence and gain more control over your time.
And retiring early is possible! But it typically requires more than finding a passive income stream. It involves consistent savings, smart budgeting, and long-term planning. So, if you’re serious about the idea, I’m going to give you four areas where building disciplined habits now may help support your goal.
Save, save, and save some more
Retiring early usually means saving a much higher percentage of your income than traditional retirement planning suggests. While the traditional rule of thumb for retirement is saving in the 10-15% range, early retirees often aim to save 25% or more of their income.
Tax-advantaged accounts like 401(k)s and IRAs can be part of the plan, but since they generally can’t be accessed without penalty until age 59½, they may not fully support an early retirement. You might also consider building a “bridge account,” such as a non-qualified brokerage account. While these accounts do not offer the same tax advantages, they can provide flexibility to help cover the years between early retirement and when retirement funds become accessible.
Live a modest lifestyle
The other side of the savings rate coin is keeping your spending in check. To support saving 25% or more of your income, it may be necessary to adopt a lifestyle that’s modest relative to your earnings. That could include taking inexpensive vacations, driving older cars, living in a smaller home, keeping to a strict grocery budget — anything that allows you to prioritize saving and investing.
This can be one of the more difficult challenges and is often a factor that makes early retirement harder to achieve. However, maintaining a reasonable lifestyle may help build a strong foundation of habits that could improve the likelihood of retiring early.
Eliminate all non-mortgage debt
High-interest debt can make it harder to build wealth. While carrying an affordable mortgage into retirement might be manageable, credit card debt, auto loans, and student loans can drain savings potential and add unnecessary financial stress. Living within your means, including driving a paid-off car or saving in advance for your next vehicle or major purchase, can help free up more money for investing and reduce reliance on debt.
Take care of your body now
An often-overlooked aspect of early retirement is healthcare. If you retire before becoming eligible for Medicare at age 65 and without employer-sponsored coverage, you’ll likely need to purchase health insurance on the open market, which can be expensive. There are options — we can look at saving money to buy a policy on the open market, or you could do part-time work to get access to relatively affordable employer-sponsored insurance.
Either way, maintaining good health now may help keep future healthcare costs lower. Anything can happen, but healthy habits today might help delay or mitigate some of the medical conditions that can arise with age and contribute to increased expenses over time.
Early retirement may be attainable, but it typically requires thoughtful planning and financial discipline. Working with a financial advisor can help you evaluate your current situation and explore available options. Talk to one of us at Family Financial Partners. We’re here to help you create a personalized plan, provide guidance, and keep you on track as your financial journey evolves.
Article by Kyrk Davis, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.