Step 1: Estimate Your Retirement Expenses
If individual want to retire early, the first step is to estimate how much money they will spend each month once they retire. Start by adding up expenses for things they cannot avoid, such as housing, food, clothing, utilities, transportation, insurance, and healthcare. Ideally, individual will enter retirement debt-free. That means no mortgage, no credit card balance, no outstanding medical bills, and no student loans or other debt. However, if they are still paying off any debts, be sure those payments are included in their budget.
Next, add in any discretionary expenses individual will have, including those for entertainment, travel, and hobbies.
Of course, keep in mind that individual budget will change as they reach different phases of retirement—they may decide to drop their life insurance policy, for example. This preliminary budget will be a good starting point, so it is worth taking the time to make it as accurate and realistic as possible.
Step 2: Calculate How Much individual Need to Retire
Now that individual have an estimate for their monthly spending, the next step is to calculate how much money they need to save. There are several ways to estimate this. One approach is to have between 25 and 30 times their expected yearly expenses plus the cash to cover one year’s worth of expenses.
Start with their monthly expenses and multiply by 12 to obtain an annual estimate. Next, find own “target” range.
Step 3: Adjust Current Budget
Here’s where the discipline comes in. They will have to work hard to make up that $1 million shortfall—particularly if they want to do it quickly. Many people who want to retire early live on 50% of their income. The remainder is used to pay down debt and invest in that nest egg.
Individual have three options here spend less, earn more, do both. It is essential that they create a budget so they know where their money goes—and where they can cut back. There are lots of budgeting apps that can make this tedious process a little easier.
Step 4: Max Out Your Retirement Accounts
Regardless of when individual plan to retire, it’s wise to start early and save frequently. Retirement accounts like individual retirement accounts are a great way to do this.
While they are still working, do everything can to max out their retirement accounts. A traditional IRA allows individual to contribute to their retirement, the earnings grow tax-free, and they get a tax deduction in the tax year they make a contribution. However, when the money is withdrawn in retirement, it’s taxed at their income tax rate in the year of the withdrawal. Conversely, a Roth IRA allows certain distributions or withdrawals to be made on a tax-free basis, and their earnings grow tax-free. However, Roth IRAs do not offer a tax deduction in the years they’re funded.
Step 5: Work With a Financial Advisor
Unless individual are a rock star investor, it’s a good idea to work regularly with a financial advisor. An advisor can help them develop an investment strategy to make it easier to reach their retirement goals. They can also show them exactly how much they need to invest each month to reach their goal within a certain number of years.
Once they retire, their advisor can help them manage their income streams to make sure the money lasts. Income streams might include income from dividends, required minimum distributions, Social Security, defined-benefit plans, and real estate investments.
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