Financial Freedom Unveiled: Determining the Required Funds for Early Retirement

Financial Freedom Unveiled: Determining the Required Funds for Early Retirement

While many people dream of retiring early, younger generations are taking a more cynical view these days. Although it has become more difficult to save with rising inflation and cost of living, it is still attainable. If this is one of your financial goals, here’s what you need to know to determine the required funds for early retirement.

How Do You Determine the Required Funds for Early Retirement?

There are many reasons why people want to retire early. Whether you want more time with loved ones, opportunities to travel, or the chance to pursue your passion projects, you need to be financially independent to make it happen.

When planning for retirement, the general guideline is the rule of 25 – save 25 times your planned annual budget.  But the earlier your retire, the more you need to save.

However, the actual dollar amount is largely dependent on your lifestyle. Most advisors recommend a 75% replacement rate for your retirement income. Once you calculate your current budget, you can determine your annual expenses. Then, consider that this will be your minimum budget for the next 30-40 years if you retire early.

Keep in mind that you will also have to account for taxes, inflation, and healthcare. Therefore, we choose to pad the estimate to leave a little more cushion in our budget.

Can the FIRE Movement Help You Retire Sooner?

The goal of early retirement has caught a lot of momentum in recent years thanks to the FIRE movement. Many who want “Financial Independence, Retire Early” are saving more aggressively to realize their goal. In some cases, people are living on a bare-bones budget and investing up to 70% of their income for retirement.

While this will help you save more to help you retire sooner, you don’t have to go to these extremes to earn the required funds for early retirement. You can still adopt this strategy but finds more moderate ways to minimize your expenses. For example, you can keep your spending in check, increase your retirement contributions, and invest in new assets that will increase your net worth and generate more income.

Important Things to Consider for Early Retirement

With strategic planning and smart investing, it is possible to retire early. However, there are a few key considerations you need to factor in since they will affect your portfolio.

    • You are unable to access Social Security benefits before you turn 62. And, you have reduced benefits the sooner you take them.
    • You are also ineligible for Medicare before age 65.
    • Although you can access your funds, there is a 10% penalty for early withdrawals from IRAs and other retirement accounts. However, the rule of 55 may allow you to withdraw from employer-sponsored retirement accounts without penalty if you leave your position by age 55.

Although many accounts offer specific advantages when you retire, you must also invest for long-term growth. Therefore, it’s best to talk with your financial advisor and research the different types of financial vehicles available to you. Not only will this help you reach your financial goals sooner, but also ensure you have enough savings to last through your retirement years.

Read More

Leave a Comment