Early retirement: Steps for planning ahead

Hoping to retire early? That’s great. But keep in mind that achieving early retirement requires careful planning, and presents some unique financial challenges.

Here, we'll spotlight some of the essential steps involved in planning for retirement in your 40s, 50s or early 60s, from setting clear goals to addressing your current personal finance and maximizing savings. The average retirement age is currently 64 for men and 62 for women¹ – but if you’re intent on leaving the workforce before then, start with this step-by-step guidance to increase your chances of achieving early financial independence:

• What to consider when starting your early retirement plan

• The unique financial challenges of retiring early

• Determining how much money you’ll need to retire early

• How to save and invest for an early retirement

• What you can do immediately to help you reach your goal

STEP 1: Address the key questions.

Early retirement planning is a lot like normal retirement planning – but the sooner you want to retire, the sooner you’ll have to develop and execute your plan. You can start strategizing now with this retirement calculator – but first, think about the answers to these key questions:

1. Why do you want to retire early?

Do you know what you’re going to do with your newfound freedom? Will you be able to find new paths to fulfillment other than work? Does the prospect of unlimited leisure time make you uncomfortable? Or are you eagerly anticipating the opportunity to relax, travel or find new hobbies? By answering these questions, you’ll be better prepared to chart your course.

2. Are you prepared for unique financial challenges

There are lots of reasons most people wait until their 60s to retire. First, since you can’t join Medicare until age 65, you’ll have to bridge the gap with new health insurance when your employer plan or COBRA expires. Social Security is another issue. Claiming social security benefits before reaching full retirement age at 66 or 67 will result in a lower monthly benefit for the duration of your retirement. In addition, you may have problems navigating the rules on IRA withdrawals since accessing taxable retirement accounts before age 59 ½ often incurs penalties. Be sure to consider these issues when setting your retirement goals.

3. How early do you want to retire?

Do you want to retire at 45? 55? Or just a few years shy of the average retirement age? If you're not sure, take a best guess based on your circumstances and goals. It's important to know how many years you’ll have to build your retirement fund.

4. How long might your retirement last?

This can be a tricky calculation, but it’s important to have some idea of how many years you’ll have to rely on your retirement savings, especially if you retire early. Think about longevity in your family, your current health status and the expected lifespan of people in your socioeconomic group.

5. What type of lifestyle do you envision for your retirement?

Think about how you want to live after you stop working. Will you stay in your current home and maintain your current lifestyle? Will you move to a resort location where costs may be higher? Will you travel or take up costly hobbies? Or, conversely, will you downsize and cut back? These are important questions. Your lifestyle will, in large part, determine your expenses. In turn, your expenses will determine how much savings you’ll need—a key factor in figuring out when you can retire.

STEP 2. Figure out how much income you’ll need

Estimating what your expenses will be during retirement will take more than a few minutes, but it's central to the planning process. So, set aside some time to come up with a ballpark estimate that you can "tweak" as your circumstances change or you get closer to retirement.

• Start by calculating your current expenses, which will give you a baseline for estimating your retirement expenses.

• Think about inflation, assuming an average annual inflation rate of about 3%.

• Consider any anticipated lifestyle changes –– such as downsizing, relocating or traveling –– and how they might affect your expenses.

• Add in healthcare costs. Since you won’t enjoy Medicare eligibility until age 65, health insurance may be a significant expense after your employer plans or COBRA run out. In addition, remember that healthcare costs usually increase with age.

• Evaluate your outstanding debts – including mortgage payments – and figure out whether they’ll be paid off by the time you retire.

• Consider any other potential expenses, from helping an adult child to buying a new car.

Finally, assume that there will always be unanticipated needs such as emergency home maintenance, and build in some sort of cushion to reflect this reality.

STEP 3. Figure out how much income you’ll have

The next step is determining whether your anticipated retirement income will be enough to cover your anticipated retirement expenses. It’s an important step and will help to green light your plan or, conversely, red flag any issues of concern.

• Check your Social Security account to determine how much you can expect when you begin collecting. But remember, the earliest you can collect Social Security retirement benefits is age 62.So, if you plan to retire before that, you’ll have to rely on other income sources in the interim. For key details on how early retirement may affect your Social Security benefits, go to ssa.gov.

• Check the balance in your 401(k)s and IRAs and estimate how much they may grow before you retire.

• Estimate the amount of income these accounts will generate using an average rate of return, and remember: Withdrawals from taxable retirement accounts before age 59 ½ usually incur penalties that will reduce your total income.

• Review your investment accounts –– if any –– and estimate the anticipated annual returns after taxes.

• Add in pension benefits or other sources (such as a part-time job or rental income) that will contribute to your retirement income.

These first three steps should help you arrive at a good ballpark cost estimate and determine what, if any, changes you should make to your early retirement plan and savings goal.

Step 4: Build your retirement savings

The next step is to develop a retirement savings strategy that can help you reach your retirement savings goal. If you already have one, now would be a great time to review it and make any necessary adjustments. Here are some basic tips:

• Start by setting a clear savings goal –– how much money you'll need to accumulate by your desired retirement age. This will help you estimate the required savings and develop a savings plan.

• Estimate how much you can save for retirement each month –– how much is left over after accounting for living expenses, debt repayment, and other ongoing expenditures. If you're unhappy with the number, consider where you might economize to free up additional funds.

• Take advantage of employer-sponsored retirement plans –– such as 401(k)s –– and try to contribute the maximum allowable amount each year, which will also help you save on income taxes. And remember: Matching contributions offered by your employer add “free money” to your retirement savings.

• Leverage the benefits of tax-advantaged retirement accounts –– such as Traditional or Roth IRAs. Traditional IRAs provide tax-deferred growth, while Roth IRAs offer income tax-free withdrawals in retirement. As an early retiree, you may want to choose Roth IRAs over Traditional IRAs. Why? You can withdraw contributions from a Roth IRA at any age with no penalty. Withdrawing from a Traditional IRA before age 59 ½ will incur penalties.

STEP 5: Review your investment strategy

Take some time to review your investments, adjust them if necessary, and augment your invested savings with new protection vehicles –– such as life insurance –– if appropriate. Here are a few basic steps:

• Diversify your investments by using a combination of stocks, bonds, mutual funds and FDIC-insured vehicles to help balance risk and return. Consider your risk tolerance and investment goals when selecting the appropriate mix, and if you have questions get investment advice from a financial professional.

• Consider life insurance because, in addition to protecting your dependents in the event of your death, permanent life insurance has a cash value life component — whole or universal — which can help you to build tax-advantage cash value that can be accessed during your retirement years.²

• Think about annuities that offer a steady cash flow, financial stability, income that you can’t outlive, and tax advantages that can help to reduce tax burdens and maximize retirement savings.

Get started today.

Even if you don’t have the time or inclination to begin developing your early retirement plan immediately, here are some important steps that you can implement today:

1. Contribute to your workplace retirement plan.

2. Stop withdrawing from your retirement accounts.

3. Make lifestyle changes that can help you to save money.

4. Pay off existing debt and avoid adding to your balances.

5. Look into investing, and invest as much and as often as is appropriate for you.

6. Open a Health Savings Account (HSA).

7. Take advantage of every employee benefit, including employer stock plans.

8. Find ways to generate additional income.

Guardian can be a resource

The information above can be valuable in preparing for early retirement and can help you to develop your early retirement strategy. However, as you get deeper into the planning process, you may encounter financial issues and questions that require you to consult a financial professional with retirement planning experience.

If you don’t currently have a financial professional, Guardian can help. A Guardian financial professional will listen to your needs, and help you to better understand the retirement planning process and make the right decisions.