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How to Prepare for Early Retirement

Have you ever considered retiring early? Perhaps you have friends or colleagues that have done so, and you can’t help but feel that you would like to follow the same path. When it comes to an early retirement, there are a few key components. Here we’ll primarily focus on the benefits of early retirement, and the preparation involved; both financially and emotionally. 

The “When” and “Why” of Early Retirement

First, the “when” 

So, why would you want to retire early? First, we need to define what the word early means in the context of retirement. Generally speaking, retiring before age 65 could be considered “early.” Several factors play into what may be considered early.

For one thing, your Social Security. That’s because Social Security will have a “full retirement age,” or the age at which you can receive the full amount of your benefits without any reduction. 

If you do choose to retire early, there will be a slight reduction in the amount you receive. Check this chart to see where your age aligns with full retirement.. 

Another factor in early retirement is Medicaid. Keep in mind that your assets and total net worth impact the premiums you’ll pay.

Now, the “why?”

There are several reasons you may want to retire early. 

You may feel burnt out from years of working in a fast-paced or high-intensity environment. You may want to pivot and do something completely different with your life. This might mean pursuing a hobby or passion (and maybe even making money from it!) You may want to enjoy the last few years you have with your kids still in the house before you’re an empty nester!

Having your own personal “why” is crucial to this decision. You don’t want to end up retiring early, then realize you miss working, need more funds or any other situations that may negatively affect your finances or lifestyle. 

You’ll want to discuss and make calculations for early retirement with your wealth advisor, and of course, your spouse, if applicable. But at the end of the day, you know what’s best for you. If you decide to retire early, do so, knowing that’s what you need at this juncture in your life. Now, for the planning. 

Preparation is Two-Fold

Preparation for an early retirement is twofold — preparing financially and emotionally.

Emotional Preparation 

When it comes to emotional preparation, ask yourself what you’re retiring TO. We mentioned some options, such as spending time with family or seeking new opportunities. This may also look like consulting, working freelance, or starting a business.  

No matter what you’re retiring to, have a lifestyle plan. You may now daydream of this new chapter and how different and great it will be. But diving into an early retirement without a lifestyle plan can sometimes lead to depression.

But don’t despair; that’s why we mentioned finding other things that will fulfill your mind, body, and soul. Making a plan that includes filling your days with these types of endeavors is a great way to stave off depression and ensure that your golden years are full of rich experiences and quality time. 

Financial Preparation 

As far as financial preparation, you need to know that you have enough money saved. Start by examining your expenses by checking your bank or credit card statements from the past 2-5 years, as well as average yearly spending totals.

Don’t underestimate when it comes to this – if anything, plan for longevity. People often live longer than planned, so retiring early means you need to have that much more saved up. This is not something you want to take a leap of faith on!

You may want to use the “bucket” investing strategy. These buckets represent short-term, mid-term, and long-term goals or accounts. For example; cash you need now, money for the near future, and money you won’t even touch until many years down the line. 

This also allows your nest egg to continue to grow while insulating yourself against market fluctuation in the near term. Buckets are a great way to visualize where your money stands and where it’s going. 

The Future is Bright

If you’re preparing for an early retirement, your motivation and planning will take you far. Find your “why” and build from there. You’ll find there are amazing opportunities waiting for you ahead!