The idea of retiring early is a dream many people hold. While you might love your job, you also want to see the world and spend quality time with your family while you still feel good and vital. You can retire early and how early, depends on how well you plan. Early retirement planning for retirement that starts before your reach 62, when you can start a lower Social Security payment, requires even more planning and more money.
Decide first how you want to live in retirement. Early retirement planning is different for each person. If you simply want the pleasures of home and time to garden or just relax, you won’t need as much as if you want to travel the world and spend time in luxury accommodations. Remember, retirement is often more expensive than living as you are today because of ever increasing prices and taxes. If you have health insurance through an employer, you’ll also have to purchase your own and by retirement age it’s very salty. Calculate the amount in today’s dollars. Since the average inflation rate is three percent, use the rule of 72 to find how inflation affects your living standards. Divide three into 72 and the answer is 24. That’s the number of years it takes for prices to double. Divide 24 into the number of years until retirement and multiply that times the amount you need each year.
The next step in early retirement planning is to decide when you want to retire and whether you want only to use growth or use growth and principal. If you attempt to deplete all the assets before you die, plan for death to occur at a ripe old age so you don’t run out of assets when you are least able to get even a job in customer service at Walmart. Most people like the idea of living on only the growth of their 401(k) investments and other investments and leaving the principal to their children or a charity.
If you’re living on interest only, use seven percent as your average return. Simply change seven percent to a decimal and divide it into the number you chose as your annual income. Whew! That’s a lot of math. If you want a shortcut, use one of the retirement calculators online.
How do you reach that amount now that you know how much you need? The easiest way is to use an online investment calculator. Once you find how much it takes to get to your destination, the rest is simple and you can plan your 401(k) investments and other investments around this number.
When you invest toward retirement planning, you use the rule of thumb, “the younger you are, the more risk you should take.” Since the peaks and valleys of the stock market is the riskiest area, this means that at age 20 to 30, you should have about 80-90 percent of your funds in stocks with the balance divided between bank products and bonds. If you’re investing in tax-deferred instruments, such as a 401-k, select those options. Even though the market may drop, it doesn’t mean you’ve lost money, it just means that you’ve purchased stocks at a lower price. You don’t lose funds unless you sell.
As you approach retirement, you begin to shift your assets toward more secure investments. Someone with less than ten years to retirement needs to have at least a fifty blend of stocks and fixed instruments. This way, if the market drops dramatically, over half of their assets remain unaffected. Even if you begin your retirement when the market drops, you can still use the assets in fixed instruments until it recovers without selling off and facing a loss.
