Fifth Third Securities
The Guide to Retiring Early

Fifth Third Bank

 

More than a quarter of Americans plan to retire before the traditional retirement age of 65, according to a survey from Allianz Life. And it’s not uncommon to hear stories of people retiring before they reach the age of 50 or 60.

Why Retire Early?

People aspire to retire earlier for various reasons—to travel, pursue a hobby, spend more time with family, or volunteer for a cause that matters to them. For many people, retirement doesn’t necessarily mean no more working; it may simply mean choosing to work at things they enjoy rather than remaining in a particular job or career just for the wages.

In fact, for many people today, “retirement” is less about a stage of life and more about financial freedom. The ability to retire early simply means you have achieved a level of financial independence at a younger age, so you are free to make choices about how you will spend your time without worrying about bringing in a regular paycheck to keep your bills paid.

How to Make It Happen

Not everyone wants to stop working before reaching the traditional age of retirement, but if your dream is to retire early, there are a number of steps you can take to help make that happen. The following four steps and strategies can help prepare you for early retirement.

1. Live simply.

Unless you have a trust fund or large inheritance waiting on you, retiring early requires consistent, strategic saving and investing: You need a hefty, income-producing nest egg to cover your expenses throughout your retirement years. To be able to save significantly for retirement, most people who retire early have learned to cut nonessentials from their budget and live on much less than they earn.

Look for ways to simplify your lifestyle. That may mean giving up a car or driving only older, paid-for models. For instance, the average American with a car payment pays almost $500 per month for that car, according to Experian’s 2017 State of the Automotive Finance Market Report. If you don’t have a car payment, you’ll have about $6,000 more per year to save for retirement.

In addition, think about downsizing your home. For instance, if you can cut your house payment by $600 per month, that’s $7,200 per year that you can put toward retirement savings, not to mention the savings on taxes and insurance for a less expensive home.

Stay on the lookout for other ways to simplify your lifestyle (and reduce your spending), such as cutting cable or Netflix, eating at home rather than dining out and shopping for secondhand items when possible. If you can start living on less now, you’ll be prepared to live on less in retirement, ensuring that your retirement savings could last longer.

2. Determine how much you need to save.

To make sure you save enough for retirement, you must create a budget for your future life. Think about how much you will need to live—which may vary based on where you want to live—and adjust your numbers for inflation. Historically, inflation averages about 3 percent per year.

If you plan to work until your home is paid off and stay in your home after retiring, for instance, you may not need to calculate housing expenses except for taxes*, insurance and maintenance. Also don’t forget to include in your budget the annual income taxes* you will owe on retirement withdrawals.

Once you’ve determined a general idea of how much money you’ll need for the years of your retirement, figure out how much you need to sock away in order to earn that annual needed income. It’s best to count on a moderate rate of return—such as 5 percent—on your retirement savings and investments. Consider using an online retirement calculator to help.

3. Invest wisely.

As you furiously save for your early retirement, you want to make sure that your money will not just be safe, but will also grow and compound to help you achieve your retirement goal as soon as possible. To that end, you need to make sure you are investing in a diversified portfolio+ that matches your risk tolerance and time horizon. One way to create a diversified portfolio is by investing in low-fee index funds and different asset classes. Look for a few funds that represent different asset classes and types of indexes, such as a small-cap fund, large-cap fund and international fund.

When you’ve begun investing, it’s important to keep an eye on your portfolio’s growth. But don’t buy and sell in reaction to market volatility; invest for the long haul. Remember, most investments will dip in value at times, but over the long haul, a well-diversified portfolio+ will grow in value.

In addition to building your own investment portfolio, contribute the maximum amount to your 401(k) or other employer-sponsored retirement savings vehicle. If your employer offers a matching contribution, be sure to contribute enough to receive the maximum match. Otherwise, you’re leaving free money on the table.

Keep in mind that some retirement savings vehicles have age restrictions regarding when you can withdraw the funds. For instance, if you withdraw any money from a traditional IRA before you are age 59 ½, you’ll have to pay a 10 percent penalty on those funds*. So if you plan to use some of your retirement savings before the traditional retirement age, those funds should be in a personal (non-retirement) account or other investment vehicle with no age restrictions.

4. Plan ahead for future large expenses.

In addition to preparing to pay for your future day-to-day life, think about other big-ticket items that you may want to fund as you grow older. Before you stop working, you may also need to make sure you’ve saved enough for those expenses as well.

For instance, if you want to help pay for your children’s education or their weddings, create special funds for those items now. For education expenses, a 529(b) plan can be an ideal vehicle for investing, as withdrawals may be tax-exempt when they are used for educational expenses*. And if you invest in your own state’s 529(b) plan, the contributions may be exempt from state income taxes*.

If you plan to take extensive trips abroad or hope to buy a vacation home, keep those goals in mind as you plan for an early retirement as well. If you can save money now for those future dreams, you’ll still be able to fulfill them when you’ve stopped working.

An early retirement isn’t out of the question. It just takes careful planning and discipline, and a laser focus on the goal of living the life you want while you’re still young enough to enjoy it.