While many Americans fear they will never be able to retire,
a fast-growing group of people in the Financial Independence, Retire Early
(FIRE) movement are not only planning to retire, but also plan to do so decades
before they’re eligible for social security benefit payments.
One of the guiding tenets of FIRE is to save up to 75% of
your annual income in order to retire much earlier than the typical retirement
age.
Retiring early will allow you to forego the headaches of
working life, but you’ll also miss out on the additional earnings that might
make your retirement more comfortable. With that in mind, plan carefully and
make sure you have a sound financial plan ahead of retirement.
1. You have an emergency savings fund
Before you retire, you should monitor your cash flow and
have at least three to six months of personal finance savings in an emergency
fund.
If you’re hit with an unexpected expense in retirement, you
can get cash from your emergency fund. That’s a better option than your pulling
money from your retirement savings, a move that could trigger an early
withdrawal penalty.
Keeping your emergency fund in a high-yield savings account
or money market account could earn you an annual percentage yield (APY) up to
10 times higher than a traditional savings account. These deposit accounts are
FDIC-insured and often come with no monthly service fee or minimum balance
requirements.
2. You have enough money in your savings account
Before you retire, your savings should meet or exceed the
Rule of 25, which designates a retirement savings goal of 25 times your
expected annual retirement expenditures.
That means, if you estimate you will spend $50,000 annually
in retirement, you’ll need to save $1.25 million before saying goodbye to your
job.
To figure out how much you should save for retirement,
calculate your current expenses as well as your expected expenses in
retirement. These numbers will help you estimate your annual retirement
expenditures.
3. You are debt-free
Debt is a drag on anyone’s budget, regardless of your
retirement status. Mortgage, student loans, car loans, credit cards and other
debts make it hard to save and invest for retirement. And, if you enter
retirement with debt, it could negatively impact your lifestyle and your
financial level of comfort.
By contrast, paying off a mortgage for any real estate and
paying off your debt balances means you won’t have to worry about making
payments in retirement. You’ll have more flexibility in your retirement goal
budget, less money-related stress and a greater ability to enjoy retirement.
Starting your retirement life debt-free and with sufficient
savings will better position you for the extra years not working.
4. You can access your money penalty-free
One dilemma facing those wishing to retire early is an
inability to access their money. They have enough money in their 401(k) or IRA
account, but it may be years or decades until they can pull money from their
account penalty-free.
Most retirement accounts have minimum age requirements with
penalties up to 10% for making early withdrawals. For example, 401(k) and IRA
accounts have a minimum age requirement of 59 ½, in most cases.
Diversification of your savings and investment is essential
if you wish to retire early, and you may wish to open an individual taxable investment
account. While these accounts don’t possess the tax benefits of traditional or
Roth IRAs or 401(k)s, they are free of age requirements on withdrawals.
A high-yield savings account can also provide you with a
measure of flexibility versus a checking account. With a high-yield savings
account, your money can grow in an FDIC-insured account – without the risk
exposure of investing in the market – and you can access it penalty-free at any
time. Compare savings rates for several high-yield savings accounts
simultaneously at an online marketplace like Credible.
The bottom line
Early retirement planning comes down to saving enough money
to cover your annual retirement expenses. Accurately determining how much those
expenses will amount to is a common obstacle for many. Take the time to
calculate your anticipated annual expenditures - maybe consider consulting with
a financial advisor or certified financial planner - including your housing,
health insurance, transportation, car insurance, food, utilities, life
insurance and health care.
With an accurate picture of your post-retirement financial
needs you’ll be in a better position to choose a suitable retirement date, one
that isn’t so early you risk running out of money or so late you end up working
longer than necessary.
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