5 Things to Consider Before You Decide on Early Retirement

early retirement

“Early retirement is a sexy topic right now,” said Joe Saul-Sehy, a former financial advisor and host of the popular Stacking Benjamins podcast. “It’s attractive to quit doing the crappy thing now and do something else you love.”

However, retiring early is tougher than many people think. You need to prepare your finances — and the rest of your life — for what comes after you stop working.

Learning how to retire early is all about planning ahead and living lean now — and probably in the future, too. Here are five things to consider before planning on an early retirement.

1. Consider inflation and longevity

The first hurdle is inflation. “I know people who save $600,000 and retire at 35,” Saul-Sehy said. “I question whether or not they can stay retired 20 years later.”

Too many people forget about the declining value of their money over time. That $600,000 seems like a lot now, but it won’t last long without careful planning.

Saul-Sehy also pointed out that medical costs are a huge factor that few people think about when they retire at 35 or 40. “By they time they get to the age where they really need money for healthcare, they’ve already gone through most of their nest egg,” he said.

It’s important to carefully consider how much you really need before you decide on early retirement. Otherwise, your retirement might get cut short.

2. Live frugally

“You have to commit to a life of frugality,” said Devin Carroll, a financial advisor and host of the Big Picture Retirement podcast. “You need to save at least 50 percent of your income for 15 or 20 years.” On top of that, he pointed out, you probably need to be prepared to live frugally during retirement.

Famous early retirees like Mr. Money Mustache (Peter Adeney) scrimp and save for years before quitting their job. Adeney invested a significant part of his income and pinched pennies — sometimes in extreme ways.

At one point during a cross-country drive, Adeney saved money on gas by using a spray bottle to cool himself down in lieu of air conditioning. He estimates he saved six gallons of fuel while only using one and a half gallons of water for cooling, resulting in a profit.

Early retirement may seem like a glamorous luxury, but you’ll likely need to make some big trade-offs to accomplish it.

3. Stretch your savings

Most of us won’t earn enough at our jobs to afford early retirement. Instead, you’ll need to grow your money through investments or alternative streams of income.

It’s vital that you sock money away into investments, Saul-Sehy said. Meet with a financial planner who can help you devise a strategy to meet your goals. With modest annual returns, your money should continue to grow even after you’ve stopped working.

Developing ways to earn a passive income will also help stretch your savings. Becoming a landlord, for example, can provide you with a regular monthly income. Even better, your tenants’ rent payments may cover your own expenses, in which case you’ll have little need to rely on your savings regularly.

4. Plan your taxes

One thing many people overlook, said Saul-Sehy, is the tax aspect of early retirement. If you plan to retire young, you don’t want to put most of your money into a tax-advantaged retirement account like a 401(k) or IRA.

“That’s money you can’t get at until you’re 59.5,” Saul-Sehy pointed out. “That’s no good if you plan to retire at 35.” Dip into those accounts before you reach the minimum age and you’ll throw away money on hefty penalty fees.

Instead, keep your money in taxable investment accounts. You can put a portion in tax-advantaged retirement accounts for much later in life, but you need to make sure you have money accessible now.

As you’re investing in your taxable accounts, don’t forget the tax planning. Make sure you plan for long-term investments and dividend-paying stocks, which come with favorable tax conditions.

5. Don’t forget about healthcare

Retiring early means you have decades to wait until you’re eligible for Medicare. In the meantime, you’ll need to pay for health costs without the help of an employer-sponsored plan.

One way to do this is to put money into a Health Savings Account (HSA). If you have a high-deductible health plan and you qualify, your HSA can help you pay for medical costs down the road. Plus, the HSA comes with tax advantages and no age restrictions as long as the money is used for qualified health expenses.

You will also need to buy private health insurance to cover you and your family in the event of medical emergencies.

Are you really ready to give up work?

Retiring early isn’t just about the money; you need to make sure you know what you’re going to do with the rest of your life.

Carroll has several clients who have achieved early retirement. Even if they have plenty of money, some of them are miserable.

“If you’re going to do this, you need to have a purpose,” Carroll said. “We’re born to be productive. You have to retire to do something. Otherwise, it’s just not a good life.”

So if you want to retire early, prepare yourself for that future. If after careful planning you decide it’s the lifestyle you want, follow these steps and you’ll be well on your way.

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