How to Turn Your Dreams of Early Retirement into Reality
8 Financial Planning Steps that Can Make Early Retirement Achievable
Many people dream of an early retirement, with free time to spend with family and friends and the ability to pursue hobbies and passions while you’re still young and healthy. Unfortunately, this dream can feel unreachable. In truth, though, early retirement is achievable if you’re willing to put in hard work and remain disciplined in your planning and saving. If you want to make your dreams of an early retirement come true, start with these eight steps.
Step 1: Visualize What Your Early Retirement Looks Like
Visualization can be a powerful tool in planning your future. Visual imagery techniques can help you imagine the future in exquisite detail and simulate future experiences. When you visualize an early retirement, consider the things that you imagine filling your time with. What you may find is that, after your weekly golf game, daily trips to the gym, and more time spent with the grandkids, you actually have a lot of remaining time in your days and weeks. So, how will you fill it? Could it be that your early retirement won’t mean a complete exit from the workforce? Many retirees choose to continue working well into retirement. This work can be a shift into part-time consulting or a job that is low in stress and offers flexible hours. Some retirees even pursue new careers, working professions they always wanted to but felt were never financially stable. There’s no right or wrong answer, but it’s helpful to figure out what you truly want when you think about an early exit from the workforce.
Step 2: Find Your Tangible Net Worth
If Step 1 was all about mindset, this step is about the black and white numbers. Sit down and calculate your tangible net worth. That is, the dollar figure you’re left with when you add up all your tangible assets and subtract your debts. (You may find it helpful to utilize a net worth calculator like this one.) You can’t properly plan for your retirement needs if you don’t know this baseline number, so take the time to do a quick calculation before moving on to the next step.
SEE ALSO: Can $1 Million Give You a Good Retirement?
Step 3: Determine What You Need for Early Retirement
This step involves a bit more important math – this time to figure out how much money you’ll need in retirement. Retirement comes in many shapes and sizes, and it’s tempting to use common benchmarks like $1 million to set your savings goals, but you’ll be served better by finding the retirement number that is truly right for YOU. Take the time to visualize not just what your income streams may look like, but the quality of life and specifics of your retirement. As you do the math, you will want to consider the following factors, too:
- Where will you be living? Are you planning to downsize your home? Will you move closer to family or friends? Will you be living in a city or a rural area?
- What are your monthly expenses? Will you gain more? Are there some expenses you are planning on cutting?
- Will you be working or volunteering? How many hours per week? What will you be doing to fill the rest of your day? Do your hobbies and passions come with a price, such as travel?
- How active are you now, and how is your nutrition? Are you focused on your health? Do you have enough saved up for potential medical expenses?
- How do you envision your quality of living changing in five, ten, or twenty years?
How you answer these questions will guide you toward establishing what your monthly or annual budget is likely to look like in retirement. Then, you can identify your “enough” number.
Step 4: Compare Your Net Worth and Your ‘Enough’ Number
Now that you’ve done some calculations and gotten down to brass tacks, you can compare your net worth and what you think you’ll spend over the course of your retirement. These numbers will be telling, and it’s possible you’re not in as positive of a financial position as you had hoped. However, this knowledge is crucial as you move forward with a savings strategy. If you aren’t working with a financial advisor, you may benefit from professional guidance in developing a saving, spending and investment strategy that can help you accomplish your early retirement dreams.
Step 5: Maximize Your Income
Whether or not you choose to work with a financial advisor, you’ll likely find that early retirement requires some sacrifices in the short-term. For instance, you’ll probably need to maintain a strict budget in order to maximize your income. Money management and an enhanced awareness of your spending habits will become essential knowledge moving forward. It may be helpful to create a spreadsheet to track your income and expenditures, which you can review monthly to see where you need to make adjustments. (If a spreadsheet isn’t your style, try a free app like Mint.)
If you find that you need to earn more in order to retire early, you might choose to take on a side gig to help you meet your savings goals. Fiverr and TaskRabbit are both great places to start.
Step 6: Make the Most of Your Retirement Accounts
If you’re working with a financial advisor, you’ve likely got a retirement plan in place already. If you’re going it alone, make sure you’re making the most of any employer-offered retirement plans, like 401(k) or 403(b) accounts. Not only are these types of accounts tax-advantaged, but many employers match the funds you contribute up to a certain threshold, and you should max out the amount matched every year if possible. Contributing more to your retirement accounts in the short-term may mean making sacrifices but keep your eye on the ball and remember that an early retirement is possible – even if it won’t come easy.
SEE ALSO: Answer These Important Questions to Know When You’re Retirement Ready
Step 7: Start Investing
Having a financial plan in place that maximizes your savings and helps you control your spending is a great start, but where you choose to keep your savings is important, too. Checking accounts won’t help you grow your money, and even high-yield savings accounts will leave much to be desired. Investing your money smartly means you can make the most of your savings, and it’s a great way to fill in any gaps in your earning potential.
Investing in property, stocks, bonds, or mutual funds creates assets and sources of income that not only grow money for retirement savings, but can also continue to earn for you well into retirement. Investments are not a golden goose as there is risk involved, but it is an option to consider if you aren’t currently pursuing it. It’s possible to invest on your own, but using an investment advisor is also a smart move if you are inexperienced.
Step 8: Ensure Your Safety Net
No matter how much you plan ahead, nothing in life is guaranteed. You may not be able to prevent the ups and downs of the economy or the unexpected expenses life throws at you, but you can create a buffer to help you weather any financial storms that may arise. Most financial experts agree that you should work to build an emergency fund with three to six months of expenses saved up as liquid assets. If you’re planning to retire early, you may want to increase your emergency fund so that it could stretch even further, if needed.
It IS Possible to Achieve Your Dream of an Early Retirement
Creating an early retirement for yourself may require a lot of financial planning and budgeting, but it’s not out of reach. What is most important is finding the retirement that is right for YOU. Following these steps may feel tedious – and you may have a long way to go toward achieving your retirement goals – but planning and discipline can help you turn your dream of early retirement into reality.
If you’re ready to build a retirement plan that serves your unique goals, reach out to us today. At Andersen, we offer our experience and knowledge to help you design a specific plan of action to achieve the goals that matter to you.