A Checklist for Retiring Early
Knowing how much money you have in the bank is just the start to early retirement planning.
Retiring early is a great idea if you can afford it. Unfortunately, few people plan for retirement as well as they should. A common rule of thumb is to save 10 times your final salary to retire by age 67. For someone with an annual salary of $50,000, that would mean having $500,000 saved in retirement funds. If you want to retire early, you probably already know you need to have a good chunk of money saved. But there are some other things you can do too:
Check Federal Benefits
The Social Security Administration has rules for when benefits can start to be collected. The longer you put them off, the more money you can get. To receive the full amount of benefits, you must reach full retirement age. Check out the agency’s to determine your full retirement age. If your full retirement age is 67 and you choose to collect Social Security benefits at age 67, you’ll get 100 percent of your benefit amount. If you start your retirement benefits at age 62—the earliest age to receive them—your benefit is reduced by about 30 percent. At age 63 it drops about 25 percent and at age 66 it drops 6.7 percent.
Starting Retirement Benefits
Retirement plans also have restrictions on when they can be used. Money can be withdrawn from a 401(k) retirement plan without paying a 10 percent penalty at age 59-1/2. However, there’s a provision for taking out 401(k) funds as early as age 55 without a penalty if you retire early. Your employment must have ended in the year you turn 55, and the money in the plan must stay in the 401(k) plan to access it without having to pay a penalty.
How Much Income Will You Need?
Determining how much income you’ll need in retirement isn’t easy. There are many expenses to consider, so your annual income in retirement is a moving number. One rule of thumb for calculating how much income you’ll need in retirement is to have 70 – 90 percent of your annual pre-retirement income. This can come from retirement accounts, Social Security and other savings you might have. You could also supplement it with part-time work. Withdrawing 4 percent from your retirement account is a good starting point. You may also have IRAs, investment accounts, rental property and dividend-paying stocks to rely on.
Your expenses in retirement should change. You’ll probably no longer need to use your car as much to drive to work, you can find a more affordable place to live and you may not have a mortgage any longer. But other expenses may increase. These can include healthcare, travel, retirement hobbies and a home remodeling project. You should also plan for emergencies, such as paying for emergency medical care, a major home or car repair and long-term care.