If you’re eager to quit working as soon as possible, you’ll need to make sure you have all your ducks in a row when it comes time to examine your finances. Early retirement enables you to enjoy freedom for longer and indulge in the hobbies you’ve always wished you had time for, but only if you have the money to do it. Otherwise, you could find yourself coping with a lot of financial stress late in life.
So are you on track to retire ahead of schedule? These four signs suggest that early retirement just may be in the cards for you.
1. You’re saving more than 15% of your income
The standard rule of thumb that you should save 10% of your income is outdated, even if you aren’t planning to retire early. With lower projected rates of return going forward and longer life spans, most people need to save at least 15% to maximize the chances of a comfortable retirement.
If you’re planning to retire early, you need to do even better. After all, you’ll have less time to invest for the future, and you’ll need your savings to support you for a longer period of time. Saving closer to 20% of your income — or more — may be called for depending on just how soon you want to retire.
2. You’re not planning on counting on Social Security
Social Security retirement benefits don’t become available until you’re 62, so if you’re planning on using them as a source of income, you won’t be able to retire before then. And you may not want to start your benefits even that early, because the sooner you get your checks, the smaller they’ll be.
In fact, if you claim Social Security at 62 and your full retirement age (FRA) is 67, you’d shrink your benefit by 30% compared to your primary insurance amount. If you don’t want to consign yourself to a lifetime of smaller monthly checks, you’ll need to wait until at least full retirement age. And, for most people, claiming at 70 is actually the best financial move because this enables you to earn delayed retirement credits that max out your monthly check amount.
If you’re going to wait until FRA (which is between 66 and 67) or age 70 to start getting checks but you want to retire early, you’ll need to go a long time without any help from Social Security to support yourself.
3. You’re avoiding debt
Going into debt is one of the fastest ways to make early retirement an impossibility.
Taking on high-interest consumer debt can interfere with your retirement dreams for two big reasons. First, the monthly payments — including interest costs — reduce the amount of spare cash you have to save. Second, if you don’t pay off that debt, it’ll be a monthly obligation you’ll need income to cover. That’ll raise the amount of money you need to pay your monthly bills after quitting work — which just makes it harder to retire early.
If you want to retire ahead of schedule, pay off any debt you have right now ASAP and commit to avoiding most types of debt in the future (with the exception of an affordable mortgage loan you can pay off before your retirement date).
4. You’re investing to cover healthcare expenses
Retiring early usually means leaving the workforce — and giving up employer-provided health insurance — well before you become Medicare-eligible. That leaves you on the hook for covering insurance premiums and medical care costs, which can be quite expensive. And that’s on top of the money you’ll normally need to cover healthcare as a retiree, which can add up to hundreds of thousands of dollars. If you’re serious about early retirement, you’ll have dedicated money set aside to cover the insurance and care costs you’ll need both before and after Medicare kicks in.
As you can see, retiring early requires you to be fiscally responsible in all areas of living, from living on a budget so you can save more for your future to making sure you aren’t charging up your credit cards. If leaving the workforce ahead of schedule is really important to you, you’re probably already making these sacrifices — or should start doing so ASAP so early retirement will be in the cards.