How to Save for Early Retirement

Early retirement looks different for everyone. Some people are motivated by helping to  raise their grandchildren. Other folks throw themselves into volunteer service,follow an artistic passion, or  finally on that  adventure you’ve been putting off for too long.. There are a lot of reasons to want to leave work before the full retirement age of 67 and only a small portion of them involve white sands and endless margaritas.

Just as the reasons for retiring early vary, so does early retirement timing. Some people save more than 50% of their income to retire in their 40s, while others simply want to finish working before their social security is available. Partial social security is available at 62 years old while full social security benefits aren’t available until the age of 67.

Those who are interested in retiring early often run into the FIRE movement. FIRE stands for Financial Independence, Retire Early. The community surrounding this movement values frugality, investments and extreme savings to embrace your independence.

Why is it important to start saving for retirement early? How much money do I need to save? Those who are early retirement curious have a lot of questions. In this article, we’ll answer those questions and delve into the steps you can take to prepare for your financial independence.

How Much Do I Need to Save for Early Retirement?

When people retire, they typically live on 70 to 80 percent of what they lived on while working. Members of the FIRE movement typically wait to retire until their savings reach about 30 times their yearly expenses. It’s vital to stick with a pre-determined savings withdrawal rate so that your savings can continue to compound throughout your life.

• Create a retirement budget: You have an idea of what you want your retirement to look like. Now it’s time to make a budget. Include your expenses and any potential income from side hustles, rentals or part-time jobs. You’ll also want to include the amount you’re withdrawing from your savings every month as well.
• Take your budget for a test drive: See if you can live comfortably on the amount you include in your retirement budget. These austerity measures will allow you to put even more away for retirement while making sure you’re headed in the right direction to suit your lifestyle.
• Reevaluate the budget: Maybe the budget just didn’t fit. Better to find out now rather than a year into retirement. The budget isn’t an immovable object once it’s set, it’s something to aim for and adjust according to your situation.
• Be mindful of the future: When you’re retiring early, you have to think far into the future. Consider what your healthcare might cost when you are in your eighties. Your medical care is going to be more expensive, no matter how fit you get in your post-work life. You should also take the general rise in daily expenses due to inflation into consideration. But it’s not all expensive news. Eventually, you’ll probably want to downsize your home or slow down your travel schedule. The key? Life fluctuates so make room for changes.

Steps to Saving for Early Retirement

There’s an anecdote that’s been traveling around the internet for a decade about a little girl who wants to become an astronaut. Her mom warns her that it’s hard work. She’ll need to study hard, go to college, learn a bunch of science and take a physical fitness test. The daughter doesn’t flinch, instead, she just replies, “That’s just four things”.

When you’re planning to retire early, it’s helpful to look at each phase like that little girl. Each step might take a long time and yet, there aren’t that many steps. When you zoom out, retiring early looks pretty simple.

Decide what your goals are

The first step in planning for early retirement is deciding what that retirement is going to look like. The FIRE movement has three different variations of retirement:

• Fat FIRE: A Fat FIRE retiree lives a traditional lifestyle, having saved a substantial portion of their high-paying salary.
• Lean FIRE: This retiree lives a minimalist lifestyle. Some lean FIRE followers live on less than 25,000 a year.
• Barista FIRE: Retirees who follow this variant have left their full-time careers and use part-time, seasonal or contract work to supplement their substantial savings.

Ask yourself some serious questions to help yourself picture how much money you’ll need. Here are some plans that people make:

• Traditional travel: Traveling via plane or car and staying at campsites or hotels will call for a large budget.
• Alternative Travel: Using housesitting, volunteering for room and board, or nontraditional transportation to get around will give you more financial wiggle room.
• Living with adult children to take care of the grandkids can greatly reduce your retirement needs.
• Snowbirds that live in two places depending on the season will need a budget that can accommodate having multiple homes.

Evaluate and adjust your current spending habits

Early retirement is the ultimate financial goal. When you’re laser-focused on ten to twenty years in the future, it can be hard to know what to do in the present. Everyone’s savings goals are going to be different, depending on when they start saving and how they want to live after retirement. However, the steps to make sure that you’re heading in the right direction are the same, no matter what your situation may be.

1. Set up your emergency fund: It’s recommended to use a high-yield savings account for your emergency fund so that this money stays liquid while keeping up with inflation. An emergency fund should have three to six months worth of expenses but that doesn’t need to happen all at once. Jumpstart your emergency fund and set up regular deposits until you’ve met your savings goal.
2. Pay off your debt: All your debt besides your mortgage will be too expensive to carry into your retirement. Before you can put a sizable percentage of your income into your retirement savings, you need to ensure that debt isn’t causing you to hemorrhage cash.
3. Rev up your retirement fund: Once your debt is paid off and you’ve saved three to six months of expenses in your savings account, you’re ready to start putting 15% of your household income into your retirement accounts.
4. Pay off your home: Once you pay off your home, you’ll be able to put even more into your retirement funds and your retirement living expenses will be greatly reduced. 

Supplement your retirement account savings

All these steps might seem like a long-term strain on your household budget, but remember to zoom out. This is quite literally a lifetime project to be taken one step at a time. However, there are ways to give yourself a financial boost and make those goals a little more attainable.

DCU can help you meet your financial goals. Learn how much you need to save in order to retire on your timeline.

• Get a second job or side hustle: If you take on a weekend job like working a customer service switchboard or take on babysitting duties, you can take those earnings and start investing them. This extra money can make a huge difference in your retirement plans.
• Invest in real estate: a home rental can help supplement your income when you’re saving for early retirement and help you keep your withdrawal percentages down after you retire.
• Expand beyond your retirement accounts: Many retirement plans only come into play until you’re over 59 ½. Build up an account that you can withdraw from, no matter how old you are. For instance, DCU’s money market account offers tiers that earn more interest depending on the amount in your account.

Make the lifestyle adjustments necessary

Understanding the need for lifestyle adjustments is a fundamental part of planning and saving for early retirement, even if you’re well-to-do. Cutting your budget doesn’t have to be painful. Many people save money by reducing their:

• Vacation budget: This might mean choosing simpler vacations or it could mean you’re leaving town less often.
• Clothing budget: Try buying used, mending or simplifying your wardrobe
• Streaming services and entertainment: Try sharing streaming services or rotating the services you use rather than signing up for multiple streaming services at the same time.
• Gym membership fees: be honest with how often you’re going to the gym. Can you get the same value from working out at home?
• Restaurant and bar expenses: The average American eats out more than five times a week. This leads to spending roughly $300 per month. Tracking how much you spend on eating out can save you thousands of dollars per year and put you in the mindframe of spending how you should once you’re retired.

Cost-cutting measures are a lot more enjoyable when you’re tucking the extra savings into your retirement accounts. Check out DCU’s retirement accounts to see your planning options.

DCU Is Here to Support Your Goals

Achieving your goal of early retirement might take decades of focus and sacrifice. But if you look at your financial goals like a little girl who wants to become an astronaut, your goal won’t seem so daunting, especially if you have a financial institution like DCU supporting you every step of the way. Check out our calculators and financial blogs to give yourself a boost toward your goals.

Of course, DCU offers more than moral support. Our range of retirement accounts can give you real financial gains. Whether you’re just starting or retirement is within your reach, DCU will be there with you every step of the way. Learn if membership is right for you, today!

Please note, membership is required to open a DCU retirement account or savings account. Visit our membership eligibility page for more information.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.