Early Retirement



When it comes to retirement, there is always a thought in the back of your mind saying, “how can I get there earlier?” Though some plan for traditional retirement, there is a vast majority that would love nothing more than to retire early to fully enjoy their golden years. With the right planning, that goal is achievable. There are 10 steps you will need to consider before gaining access to early retirement.

Creating Clear Future Plans

Creating future plans is something that is incredibly important. Those who do, move on to live comfortable, happy lives after retirement. Having a concrete plan isn’t going golfing every day. Like everything in life, it will quickly become stale. That’s why it is important to list everything you enjoy doing. The list should be long and thorough.

The goal is to retire to something. The rest of your life will revolve around this list. You never want to retire just to retire. Retiring to something will bring a newfound passion to your life that will not only help you be happy but will also help you live a longer life. Take your time creating this list, as long as it takes to create a list that is perfect for you.

Early Retirement Income

When you retire, that doesn’t mean your income sources stop there. Funding your early retirement comes from your liquid net worth. That is the amount of money you have in cash or cash equivalents such as assets. When putting away money for retirement, you should live by the 4% rule. This states, from your nest egg, you can draw 4% every year and never run out during retirement. If you are going to be spending $40,000, then you will need $1 million net worth to retire comfortably.  

Since the plan is to retire early, you will want passive income to help you along the way. Whether that be income from a rental property or a part-time job, the higher your income after retirement, the less liquid net worth you are going to need in the end.

Proper Budgeting

When it comes to early retirement, its key to know some of your expenses can go down, while others can go up. Since you are now retired, all job-related costs will drop to near nothing depending on what you are sending your time doing in retirement. On the other hand, the things you are now fully enjoying such as new hobbies, travelling, and other activities now need to be accounted for.

To create a solid budget plan, you want to first start with normal expenses such as, taxes, mortgage, rent, utilities, and food. Once that is complete, you will want to add another 15% for unforeseen expenses. Next you will want to add new expenses including travel, entertainment, golf, or any other new activities.

Healthcare Expenses

Healthcare is an important aspect of retirement that you need to think about. Once you reach age 65, your Medicare will begin kicking in. Until then, if you are retiring early, you will need to plan in your medical expenses. With The Premium Tax Credit, some or most of your health insurance costs can be paid for.

Inconsistent Spending

For early retirement, there are phases you will be put through. These phases include,

  • Prior to pension income and Social Security
  • Pension income and Social Security included
  • Obligatory distributions from traditional retirement plans

Retiring early means your savings will be more important than ever. That is, until your Social Security benefits kick in. Once it kicks in, it will cover most of your expenses, making your savings less important than before.

If you are curious to know when money will start being taken from your traditional retirement accounts. The IRS will require it once you reach 72 years old.

You must keep taxes in mind as well. Over time, property taxes will naturally rise, as does everything. That is why it is important to understand the importance of the 0% tax rate on long-term capital gains.

Bucket List

Now it’s time for the fun part! Your bucket list is incredibly important because it’s what your whole life has led too. These are things you’ve wanted to do; places you’ve wanted to explore your entire life. You have worked hard to get to where you are and its finally time to have some fun!

You will need to create a list. At first, list everything you can think of that you have always wanted to try. Once the list is complete, its time to filter out the things that don’t quite excite you as much as you originally thought they would.

As you filter through this list, begin numbering them from most important, to least important. Don’t worry, nothing is set in stone, change your mind as often as you please. The point is to have fun creating this bucket list.

Property: Rent or Own

A large portion of your budget may come from your renting or owning arrangements. When you own a property, there is more time and expense that comes along with it. If you aren’t fond of tending to a yard, household maintenance, it may be best to rent.

When you rent, it is much more inexpensive because you are simply renting the space. This means you aren’t responsible for most repairs around the property. You don’t have to waste your precious time and money on roof repair, property taxes, HVAC issues, and much more.

Where You Live Matters

Your cost of living will matter greatly on where you decide to live. If you are living in the United States, living on the coast will be much more expensive than living on the interior parts of the country. On the other hand, living abroad can offer an even lower cost of living. I know what you’re thinking, and the answer is no, Paris might not be the best choice for a low-cost living lifestyle.

The key is to do an ample amount of research on the various areas you will want to live and choose one that best suits your specific needs.

Social Life

Early retirement is great in theory. You have so much time on your hands that you can do whatever you want. The world is in the palm of your hand. There are some disadvantages though. Many, or most likely, all your peers will still be working full-time jobs. This means they will have less time to explore with you.

There are many ways you can off set this disadvantage. For example, you can meet new people through volunteering, new activities, and while traveling.

Yes, your social life will be much different than when you were still working. The bonds you created with coworkers can now be replaced with new relationships. This can be nerve racking at times, but once you get into the swing of things, meeting new people can be fun and exciting.

Always Have a Plan B

As we all know, life happens quickly. Things can change at the blink of an eye, and it is always best to be on your toes. Whether that be your kids going to school and needing help, surprise medical bills, and many more surprise expenses.

Not only that, what if your significant other becomes ill, or worse, passes away. This will put a heavy burden on the other partner. These are all unplanned expenses that you want to account for when retiring early. You will want to give your financials a little cushion just in case. You never want to put all your eggs in one basket.

When it comes to your own personal roadmap, it will always need a bit of flexibility. Changing course can happen multiple times and you should always be ready. These ten steps can give you an idea of what you will need to retire early, but it is up to you to make it unique to your personal situation. If the first plan you make isn’t quite going to work for you, then its up to you to scrap it, and start over again until it suits your needs. A flexible plan is a plan that will get you through early retirement and living your best life. Its time to make you dreams reality.

Please contact us if you have any questions. 

CAPATA is a full-service accounting firm located in Laguna Niguel in southern California.