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.
- 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.
- 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.
- 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.
- 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.
