For many, the idea of retiring early means leaving the workforce before the age of 60 and enjoying their days with more “young” years under their belts. In order to do this, financial planning is essential to ensure the money will be there when its needed.
Preparing for an early retirement means making whatever changes are necessary now to add to the amount of money available in the future. With little to no income coming in, retirees must expect to cover their living expenses, any extra they plan on spending and also any potential health costs that may arise as they get older.
Setting money aside for an early retirement plan works in much the same way as saving for a home, getting out of debt or working towards other large financial goals. Each of these objectives can be accomplished by increasing earnings, saving more and/ or reducing the amount of money spent on a regular basis.
As every person’s circumstance is different, one family may reduce expenses by moving into a less expensive home or relocating to an area where the cost of living is less while another may take on another earnings source or job. So, setting money aside for retirement can be done in as many different ways as there are circumstances.
Changes in the national economy can greatly affect the steps a person needs to take to prepare for early retirement. During periods of economic downturn, returns from stock market investments and savings accounts can be substantially lower than those during healthy economic periods.
The 2008 recession has had drastic effects on the stock market and its ability to generate good returns on investments. Likewise, the drop in interest rates has also decreased the amount of growth that can be expected from a simple savings account.
As Social Security benefits don’t kick in until the mid- to late-sixties, the sooner a person begins preparing for early retirement the better. Under these conditions, decreasing expenses and finding additional income sources may be necessary; even when substantial investments have been made.
Debt & Spending
Regardless of how much a person earns or has invested, spending habits create debt. Unless a person’s spending habits are kept in check, it’ll be that much harder to reach an early retirement goal.
According to Jonathan Satovsky, CEO of Satovsky Asset Management, people who keep their spending within three percent of their income earnings have a better chance of meeting early retirement goals. Once spending exceeds five percent of earnings, people tend to take on more risk in terms of loans and credit accounts.
Also, part of preparing for early retirement involves figuring what budget expenses will be once a person enters retirement. With all that free time on hand, debt and spending may pose even more of a challenge than while in the workforce. Figuring necessary spending versus extra spending can help ensure retirement monies last as long as needed.
As earning sources, investment options allow for short-term as well as long-term planning depending on the type of investment used. Employer-sponsored 401K plans are a good way to put away money towards early retirement and may also offer a range of options for investment depending on the type of plan in place.
Those looking to prepare for early retirement may want to consider investing as much as 10 percent of their yearly salary in an employer plan. Also important is the degree of involvement a particular plan allows participants to have.
Early retiree planners should take an active role in managing their contributions in cases where an employer plans allows employees to select from different investment option. Staying on top of changes in the economic market as well as industry changes can help in determining where investment monies are best spent.
If at all possible, saving for early retirement outside of –and in addition to- an employer-sponsored plan provides an added layer of financial protection. Since retiring early means fewer income earning years, available monies have to last longer than when a person retires in the mid 60’s.
Ultimately, the longer a person lives the longer the money has to last. With increased age comes the potential for increased healthcare costs, which can have a considerable impact on a person’s financial condition. The cost of health insurance coupled with the cost of prescription medication must be factored in as new expenses. Setting up the added saving accounts can help prepare for unexpected health costs.
During hard economic times, saving at least as much as before the economy turned becomes especially important for those who hope to retire early. After all, there’s an increased likelihood that the cost of living will be even higher once the economy recovers so the additional savings will come in handy all the same.
With all these factors to consider, it’s important to have a written plan in place once a person decides on a retirement savings strategy. It’s also helpful to allow for flexibility in the plan as unexpected events do happen.