If the real “American Dream” is being able to retire early without putting yourself in the poor house, how much money do you need to make it happen? While there’s no one-size-fits-all answer, understanding the minimum savings required to retire early can help you build a realistic and personalized plan.
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Early retirement success depends on a combination of strategic planning, realistic budgeting and smart investing. Here, financial experts offer some tips on how to achieve the goal of early retirement.
Nobody can truly predict the future. While you can’t know your exact circumstances at retirement, particularly if you have a long way yet to go, you can spend as much time as possible planning for it, according to Gina Stoddard, chief of staff at Broad Financial.
“Preparing for retirement involves a lot of forethought and considering a myriad of factors. If you have the goal to retire early, you’ll need to plan for your savings to last for likely a few decades,” she advised.
You also need to evaluate the ideal lifestyle you wish to lead, any remaining debt, taxes due and if you’ll receive any other sources of income, Stoddard said. Here are some key early retirement planning tips:
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Start saving aggressively in your 20s or 30s.
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Max out retirement accounts like Roth IRAs and 401(k)s.
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Consider alternative investments for diversification.
The first thing Melissa Fox, CFP and owner of Future-Focused Wealth, tells people who ask about early retirement is this: “There’s no such thing as average anymore. Especially not when it comes to savings, not when it comes to lifestyle, and definitely not when it comes to retirement.”
Since every single person takes a different path and has a different pace to retirement, no single retirement calculator formula will work to find the specific amount you need. Better to work with a financial planner to look at your specific goals.
One of the most popular strategies for estimating how much you need to retire early is the 4% rule. This rule suggests you can safely withdraw 4% of your retirement portfolio annually without running out of money over 30 years.
According to Michael Rodriguez, CFP and owner of Equanimity Wealth, if you have a $1 million portfolio, for example, you should be able to withdraw $40,000 annually and have your money last 30 years. Rodriguez also advised aiming for a slightly smaller withdrawal rate, around 3% to 3.5%, to allow for a bigger cushion.
One of the biggest early retirement mistakes is underestimating your expenses. Rodriguez advises tracking your spending for six months to a year and adding a 20% to 30% buffer to account for unexpected costs.
“If you are unaware of what you are spending on a monthly basis, begin tracking your current expenses for six to 12 months and add a 20% to 30% buffer on top of your expenses to create a cushion.”
For example, if you are spending $40,000 annually, it would be a good idea to plan for expenses in retirement to be around $50,000 to $60,000 annually. If you plan on retiring before you are eligible for Medicare (age 65), it is important to factor in healthcare costs as well, he said.
If you are, or will be eligible for Social Security, make sure you are maximizing the amount you receive, which usually involves waiting until age 70, Rodriguez urged. Waiting until age 70 allows you to receive 124% of your full retirement benefit, which can be significant over the course of your retirement.
If your savings fall short, partial retirement can help bridge the gap. Working part-time or starting a side hustle can reduce the strain on your portfolio and extend your financial runway.
“If you are able to find work that you find fulfilling that also allows you to work at a level that is comfortable to you in retirement, this can help you significantly extend your portfolio in retirement,” said Rodriguez.
You also need to account for inflation in your planning, Stoddard said. Inflation generally affects expenses that retirees still pay, such as housing and insurance, which, she explained, “statistically ascend in alignment with the inflation rate. Sometimes, even at a faster pace.”
While inflation tends to have a relatively stable rate of increase, unexpected changes can cause unusually high rates of inflation.
Stunning dips in the stock market this month reveal that it’s important to have assets that are not invested in the stock market. Stoddard suggested alternative investments “like precious metals,” which tend to hold some sort of value as they’re a tangible asset, and their value tends to work inversely to the stock market.
Likewise, owning real estate is typically viewed as owning an inflation-protected asset.
Some retirement accounts that allow for alternative investments include self-directed Roth IRAs, self-directed traditional IRAs and solo 401(k) plans or Roth solo 401(k) plans, Stoddard said.
Ultimately, early retirement isn’t just about hitting a number; it’s about aligning your finances with your values and the lifestyle you want to have. Fox encourages people to ask themselves why they want to retire early. In the end, an early retirement may not be the right fit for you. Cox said that retirement planning requires not “obsessing over the number” and “talking about tradeoffs.”
The right plan doesn’t always mean retiring early. Sometimes it means retiring smarter with more purpose, more clarity and more alignment with what matters most to you.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: 9 Tips To Hit the Minimum Savings You Need To Retire Early
