Early retirement is the dream for many. While everyone else you know is off commuting to and from work, you could be on vacation, enjoying a new project or simply spending time with your loved ones.
The key to figuring out how to retire early is effective financial planning. Being financially prepared — both for a long retirement and the ups and downs that could come with it — will help you get the most out of your golden years.
Here are some things you may want to consider as you approach early retirement.
Think about the basics
There are a lot of things to think about when it comes to retiring early, but start with the basics. Determine exactly when you want to retire so you have a solid timeframe. From there, you can start planning around the additional years you need to save for.
Next, you want to consider your lifestyle in retirement. Do you plan to retire early so you can devote a few years to traveling? Are you hoping to start up a side business focusing on a hobby? Do you want to carve out plenty of time to hang out with your grandkids?
Regardless of what your goals are, you'll want to get a realistic picture of expected and anticipated costs throughout your retirement. For most people, they are typically more active in the early years of retirement versus the later years. Since you could have far more years in the early stage of retirement, you want to keep your finances in check so they'll last.
Create a budget
When it comes to any sort of financial planning, making a budget is a great way to help you get a full picture of where you stand — and help you determine the path to reaching your goals.
Thinking about how to retire early? Look at your current income and what you've already saved for your retirement. What do you have to do to maximize both of these figures? Some options include making sure you take advantage of any employer matching on 401(k)s, as well as maxing out contributions to your retirement funds. After the age of 50, the Internal Revenue Service allows for catch-up contributions so you can increase the amount you save.
As you're thinking about the long-term, pay attention to your current debt. Having high levels of debt can put a damper on your retirement plans. However, trying to pay off debt could reduce the amount of money you have to put into your retirement savings.
Many people consider increasing payments on their debts or reducing housing expenses in the years before early retirement. Not having a mortgage payment, for example, could potentially be a significant cost saving over the long term.
Watch early withdrawals
Remember, you might have a decade or more before you hit retirement age and can tap into Medicare and Social Security.
You might have to pay for your health insurance out of pocket until you're eligible for Medicare. As you age, health care costs tend to rise, so you'll want to account for potential health care costs before they come up.
Also think about how you want to approach Social Security. If you choose to withdraw from Social Security early, you could have less income to work with as you age. Another area to pay attention when it comes to early withdrawals is your retirement accounts. For example, if you choose to withdraw from your 401(k) before age 59 1/2 you could face a 10 percent penalty.
Since you might be heavily relying on your savings through the early stages of your retirement, any penalties on your retirement savings could have an impact on the funds available in your later years.
Stick to the plan
When setting your sights on early retirement, there really isn't a magic formula to follow.
What you can do is determine a realistic target date, know how much you'll need to live on and maximize your saving by creating a plan and working within a budget.
Do that, and your dream of early retirement might just be within reach.