Six steps to retire early

What is early retirement?

Early retirement: a step-by-step guide

Will you be spending big on traveling when you retire? Or living frugally, enjoying your free time with minimal expenses? Will you need money to start your own business, or be living an active social life? These questions are key to planning your retirement, as they will give you a better idea of how much money you will need to live out your planned retirement.  

Alongside your general expenses, like food, bills and healthcare, there will also be other outgoings to consider: transport, recreation, and if you’re retiring while you are still responsible for your children, that will need to be factored in too.  

Your budget may well change when you’re retired, but if you can make an estimation, this will at least give you a good idea of the sort of retirement income you’ll require.

1. Figure out what sort of retirement you want 

Will you be spending big on traveling when you retire? Or living frugally, enjoying your free time with minimal expenses? Will you need money to start your own business, or be living an active social life? These questions are key to planning your retirement, as they will give you a better idea of how much money you will need to live out your planned retirement.  

Alongside your general expenses, like food, bills and healthcare, there will also be other outgoings to consider: transport, recreation, and if you’re retiring while you are still responsible for your children, that will need to be factored in too.  

Your budget may well change when you’re retired, but if you can make an estimation, this will at least give you a good idea of the sort of retirement income you’ll require.  

2. Pay off your debts and mortgage 

With an eye on saving for your future, you’ll first want to start paying off what you owe. In particular, any interest you owe on debts could outweigh the interest you make on savings, so it would be counterproductive to start saving while you’re still making monthly debt payments. Student loans, credit cards, you name it — if you can get those debts cleared first, then you can feel far more comfortable about kicking off your savings.  

Similarly, making overpayments on your mortgage will see you pay it off sooner. Stripping yourself of all debts, if you can, will offer you a clean saving slate. Just be sure to check with your mortgage broker that you won’t incur any penalty charges for early repayments.    

3. Work out where you’re at now 

Looking at your financial situation objectively, it’s worth taking stock and asking yourself: Where do I stand, and how feasible are my retirement goals? Is retiring at 50 realistic, when at 40 you only have a retirement savings balance of $20,000? Probably not. But if that balance is $500,000 and you need a balance of $900,000 to retire in a decade’s time, then you can be far more optimistic.

4. Do the math on your retirement income

Social Security won’t start paying out your retirement benefits until you’re 62. And the earlier you retire, the lower your benefits will be. But before and after you start receiving these benefits, you’ll need to look at where your other sources of income are going to come from. Will you be receiving money from other fixed sources, like pensions or annuities? If you’re going to need $50,000 per year as your retirement income, but you’ll immediately start receiving $3,000 per month from a pension, then this is a positive that should be considered in your planning.

5. Set a savings target

There are several rules of thumb for retirement savings that are widely advised for those seeking early retirement (though not to be treated as gospel).  

Firstly, the Rule of 25 recommends that anyone saving for early retirement should have 25 times their planned annual spending saved. You’ll have a rough idea of this number, since you’ve already done the math on the type of retirement you want. This amount that you have saved is assumed to be invested, so that it grows in line with inflation.  

The second rule of thumb, the 4 per cent rule, relates to your investments. This rule, which was developed in the 1990s, advises drawing out around 4 per cent of your invested savings in your first year of retirement, after which you can draw out that amount each year once it has been adjusted for inflation. That way, your spending will remain controlled and aligned with the growth of your investments.   

Depending on how much you need to save, you may need to rein in your outgoings in the lead up to retirement. If you can cut costs on non-essentials now, like a new car or an expensive vacation, you’ll be better placed to keep on track with your set savings target. Our free savings calculator can help you work out how to achieve this.

6. Invest sensibly, with growth in mind

Your savings should be treated with care, and only someone in a highly favorable position could confidently throw their retirement fund at more risky investments. But ultimately, if you’re looking to retire early, you have less time to grow your wealth. With that in mind, a balanced portfolio that is crafted with long-term growth as the goal is the best way to sustain your retirement savings and ensure your pot can keep you comfortable. Financial advisors, like those you can find with Unbiased, will help you to curate a portfolio that best suits your risk appetite and your retirement timelines, so that you are optimizing your retirement fund.  

Of course, as you approach the date of your retirement, you’ll want to switch some of those investments into safer havens. But you could be retired for a long time, so keeping a healthy portfolio is essential.  

Planning for retirement is a long, important process. With the help of a financial advisor, you can put yourself in the best possible position to retire on your terms. Find support with Unbiased today.