What it Really Takes to Retire Early

You might have heard the recent buzz about the FIRE (Financial Independence, Retire Early) movement. These are young to middle-aged people who have dedicated themselves to an early retirement, or are in the planning stages to do so. But what does it really take to retire in your forties or fifties? And is it possible for anyone?

A Double Whammy. This is the primary obstacle faced by anyone who hopes to retire early: You will have less time to accumulate a sizable savings, but that savings will need to last much longer.

For example, let’s assume an individual plans to begin working and saving at age 25, and to retire by 56. That gives them 31 years to save for retirement. But if that person lives to age 90 (increasingly common these days), their retirement income needs to last for 34 years.

For each year that you spend in your career, you need one less year of retirement income.

No Social Security… For a while, anyway. Obviously, you can’t count on Social Security until you reach at least age 62. So until that time, you will only be living on whatever income you generate via your savings.

Healthcare. You aren’t eligible for Medicare until 65. So, those who retire in their forties or fifties will be paying for potentially expensive health insurance policies, for a decade or more.

Retirement accounts aren’t really designed for early retirements. With most qualified retirement accounts, distributions before age 59 ½ are subject to a 10 percent penalty. However, a Roth IRA allows you to tap into your contributions (but not your earnings) at any time.

A lower standard of living is common. Those who are diverting 30 to 40 percent of their income toward retirement savings are usually living more frugally. For some people, that is difficult, while others enjoy a minimalist lifestyle. The upside is that as you transition into retirement, you’re already accustomed to living on a budget.

An early retirement is definitely a challenge, but for many people it is not an impossibility. The main thing to remember is that planning and strategy becomes even more important when you expect to retire much earlier than the norm. So, meet with us regularly and we can discuss how to make your dreams a reality.