Planning now to retire early

Sure you want to retire.  In fact, you would like to retire early.  Who wouldn’t want to have time to enjoy all those things in life you never had time to enjoy when working.  But the reality is that many people are not adequately preparing for a comfortable retirement, much less an early one.

Reaching an early retirement successfully can be done but it takes planning and working.  You need to first come up with a viable plan and then second, use discipline to work that plan, every day, until you reach your retirement.

According to a retirement survey published by the EBRI (the Employee Benefit Research Institute™) in 2007, only 43% of the people surveyed have ever tried to work out how much money they would need to retire.  Why such a small percentage?  How can anybody guarantee success if he or she isn’t even working off a game plan?  Planning is confusing when you don’t know what to do and scary because you’re not sure you’ll like the results.

But here’s the cold fact: You definitely won’t be able to retire like you want to if you don’t do something about it now.  An early retirement will definitely not happen on its own.  Follow these steps to figure out how much you need to start saving now in order to retire when you want.

  • First, determine how much money you need a year to retire.  To figure this out, you can use a percentage of your current income.
    • How much is your annual income now?
    • Take your annual income and multiply it by 70%.  Retirement planning experts recommend using 70% of current income.  They reason your mortgage should be paid off and you won’t be worried about paying tuition in your retirement.
    • While using your annual income to determine your retirement needs, check that you are not currently building up debt.  That would suggest that you are not living within your current income.
  • Multiply your annual retirement income requirements by how long you plan to be retired. You can determine this by deciding how soon you want to retire and statistics on average life expectancies.
    • Write down how old you will be when you plan to retire.
    • Research life expectancies for where you live.
    • Subtract how old you will be when you retire from how long on average you can hope to live to.  The US Social Security Administration reported that for people reaching 65 in 1990, they could expect to live 15.3 (men) and 19.6 (women) years longer.
    • Multiply the number of years you will be in retirement by what your annual spending requirements will be in your retirement.
  • We’re almost done.  You’ve got a good idea of how much you would need to save in order to retire but that number is in today’s money.  We need to take inflation into effect.
    • Pick an inflation rate you are comfortable with.  You could use the current inflation rate or take an average over a period of years.  If you are pessimistic or wish to be more conservative with your planning, use a higher rate.
    • We’ll need to work in the impact that inflation will have each year that you will be retired.  Use a hand or online calculator to make calculating the accrual of inflation over your retirement period.
  • Now you have a number to work with.  Working backwards, figure out how much you need to save each year.
    • How far away is early retirement for you?  This will tell you how many years do you have to save.
    • Determine how much money you can make each year with your savings by investing it.
    • Remember to offset the amount you make in interest by the amount you will lose through inflation.  You could go with 5% for example (8% interest in savings minus 3% inflation).  Use a calculator to make calculating the accrual easier.
    • Now you know how much you need to set aside each month in order to retire like you want to, when you want to.
  • Is this number seems impossible, consider if any of the following initiatives could help:
    • Reduce your annual cash requirements for when you retire by working out a careful budget.
    • Investigate a better return on your savings.
    • Cut your current spending so you can save more.
    • Earn more now.
    • Determine if you are taking advantage of company matching for retirement plans.

4 thoughts on “Planning now to retire early”

  1. I’m still far enough away from retirement that I find it difficult to plan for (in terms of know how much I will need to save, or how much I will need in retirement years).

    I know that my income potential has a lot of room for growth, and I hope it continues to grow as years go by. For now I am maxing out what I can for my retirement accounts, and trying to also save outside of that for more short term goals. I plan on doing this for the near future while evaluating opportunities for income producing assets (real estate, dividends, etc.). I would love to have a passive income flow completely replace my day job. Anything in stocks and other investments would just be icing on the cake at that point. 🙂

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