How to Retire Early: A Step-by-Step Guide

By January 21, 2022February 8th, 2022News

A senior woman with a dog and coffee sitting outdoors on a terrace in summer.

Are you wondering about retiring early? The average retirement age is 62, but you might be able to retire early if you plan and invest appropriately. Let’s dive into the crucial steps you need to follow in order to retire early with a comfortable, steady income. 

Step 1: What Kind of Lifestyle Do You Want When You Retire Early?

The number one question people ask when thinking about early retirement is, “How much money do I need to retire early?” The answer depends entirely on what you imagine your early retirement to look like. If you plan on staying home, living comfortably, and maybe taking an occasional trip, you’ll need less money than someone who hopes to take several big trips each year. 

The best way to come up with a realistic number for early retirement is to sit down with a budgeting tool or financial advisor and start thinking about all the expenses you might have during retirement. Begin with living expenses, like mortgage, insurance, utilities, and food, being generous to accommodate for rising prices. 

Once you have the essential expenses factored into your budget, it’s time for the fun part: Think about how much disposable income you would like each month during retirement to cover hobbies, activities, and travel. Once you have a reasonable number for monthly discretionary spending on top of your living expenses, you can calculate an annual average.

Step 2: Calculate Your Necessary Nest Egg to Retire Early

After creating your retirement budget and giving yourself plenty of wiggle room for unexpected expenses and rising costs, you can take your annual average and use it to determine how much money you need to retire. Just subtract the age at which you plan to retire from your life expectancy and multiply that by your annual income.

For instance, if you decide that you need $10,000 per month during retirement, that’s $120,000 per year. If you’re preparing to live to be 90, and you wish to retire by the age of 55, that’s 35 years in retirement. That means you’ll need $4.2 million to cover your early retirement in full.  Of course, one can never know for sure how long they will live and it is important to plan conservatively in terms of time horizon. 

Of course, this doesn’t mean that you need to put away $4.2 million by the age of 55. Smart investing strategies mean that you can aim to retire early when you reach a smaller milestone and your retirement savings will likely continue to grow over the next 35 years, allowing you to take systematic withdrawals while the remainder earns interest and dividends. In addition, you might need to make adjustments to your needs based on your personal situation or simply due to inflation which is why it is important to review your needs regularly with a financial professional.

Step 3: Evaluate your Financial Situation

Once you know how much you need in total to cover your entire retirement, you can work backward to determine how much you need to have in savings before you can actually retire. Start by taking how much you need to cover your retirement, then subtract how much you expect to have in your retirement savings at your age of retirement. This includes real estate, cash, investments, and other assets.

If you’re currently 50 and have $750,000 in your portfolio growing at about $35,000 annually, you’ll have $925,000 by the time you retire early at 55. If you also plan to pay off your home during that time, you can add the value of your home (e.g., $450,000) to your portfolio.

In our example, that gives you $1.3 million by the age of 55, so you still need $2.9 million to reach your nest egg goal.

Once you have identified the gap between what you’ll have at the time of retirement and how big your nest egg needs to be, the first thing to consider is how you can save more between now and your target retirement date. You can also play around with your retirement budget to try and bring down your annual expenses. For instance, if you can drop your spending to $100,000 per year, you’d only need $3.5 million in your nest egg.

When you have determined the amount you will likely need to cover your expenses annually during retirement, you can run cash flows at different conservative rates of return applied to your savings to see if you are on track to achieve your goals.

Step 4: Support Your Retirement Plan

For most people, the gap between how much they expect to have at the time of retirement and how big their nest egg actually needs to becomes a surprise. It can be disheartening to learn that you won’t be retiring with enough to fully cover your expenses, but it’s not uncommon.

What matters is that you talk to a financial advisor to make sure that you know how much you need at the time of retirement so that conservatively estimated returns can continue to grow your portfolio as you live out your retirement plan. Once you know how much you need at the time of retirement, you can begin to close the gap by taking these measures. 

Create a Savings Plan

Let’s say that you have no debt, your house is paid off, and you’ll have $1.3 million in your portfolio by the age of 55. In order to start closing the gap so you can accumulate your necessary nest egg of $3.5 million, you’ll need to start saving more. The sooner you put money into your retirement portfolio, the longer it has to grow.

Your financial advisor can help you determine how much you need to save and offer advice on whether you should be pursuing more aggressive investments in order to reach your goal so you can retire early.

You can also look at ways of reducing your expenses and increasing your income so that you have more available to save in the years leading up to your retirement. 

Recalculate Your Retirement

Retiring early is possible as long as you start planning long enough in advance. If you run the numbers and you realize that retiring by 50 or 55 just isn’t realistic, the most responsible thing to do is recalculate your goals so that you figure out what is achievable.

Once you reduce your expenses and increase your income as much as possible, you’ll know the soonest possible date that you can retire. Even if it’s a bit later than you anticipated, realize that the harder you work to get there, the more likely you’ll be able to retire early. 

Step 5: Invest Your Money

What you invest in will vary depending on how far off your retirement date is, how much money you have saved, and how much risk you’re willing to take.

It is likely unwise to guide your own investments, especially if you lack experience. Putting your retirement portfolio in the hands of a professional who has the knowledge and time to actively manage it is likely your best bet for reaching your retirement goals. They can tell you what makes a good investment and help guide you with alternative investments if you’re interested in them. 

Step 6: Get a Financial Advisor

When it comes to retiring early, you can do a lot of preparation on your own, such as coming up with a mock retirement budget and running some rough numbers to figure out how big your nest egg needs to be to cover retirement. However, when it comes to figuring out if you need 100% of your nest egg at the time of retirement, or how much you can expect to earn on returns during retirement, it’s best to reach out to a professional.

By talking to a financial advisor, you can aim to get the peace of mind you need to make sound investment decisions. You’ll also get crucial guidance on budgeting, preparing for inflation, and other useful advice that will help you reduce risks and maximize your returns so that you can retire early with a steady income. 

Step 7: Don’t Put Retirement on The Back Burner

It’s not uncommon for people to go through the trouble of planning for retirement but failing to check in with their plan. Once you have a retirement strategy in place, you need to stay on top of it—and any changes that might impact it.

For instance, you should always keep your eyes on Social Security and healthcare news so you know what to expect in retirement. When big changes happen, it’s important to talk to your financial advisor about whether those changes will impact your plan, and how you need to respond.

Conclusion 

Ultimately, with the right professional by your side, it’s entirely possible to retire early, and it’s something you’ll have definitely earned. If you’re looking for more information, reach out to Churchill Management Group for assistance creating your plan to retire early. 

FAQs

How much money do you need to retire with a $100,000 a year income?

Most experts suggest that you plan for 80% of your current income to support your retirement, so those earning $100,000/year should plan to need $80,000/year once they retire. If you intend to spend 35 years in retirement, you’ll need a $2.8 million nest egg to achieve your goal.   Of course, cash flows can be run using conservative rates of return to best determine the amount you need at retirement.

What is the best state to retire in? 

Low cost of living, affordable healthcare, and overall lack of severe weather make Georgia the best state to retire in, followed closely by Florida, Tennessee, and Missouri. (source)

Financial Planning Services Disclosure; Churchill provides financial planning services to Clients that specifically engage Churchill for that service. The planning can include defining goals, designing a plan, assisting with implementing the plan, and evaluating and adjusting the plan over time, at the request of the client. The financial planning includes advice regarding securities investing and may include discussions of a client’s tax, insurance, employee benefits, estate planning, and other issues. Churchill, however, does not provide legal, insurance, employee benefit, estate planning, tax, or accounting advice, and the client must rely on legal, insurance, and accounting professionals for that advice and documentation.

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