How to Plan Your Finances for an Early Retirement

Early retirement is a dream that many Americans have. Who wouldn't want to hang up their career suit at fifty, head off to the beach and spend the rest of their lives relaxing and spending time with their family? The reality is that early retirement planning takes great care and might not be a possibility for everyone. You have to make sure that you're debt free and that you can cover all of your expenses with retirement income. If full retirement isn't realistic for you, there is also partial retirement.

Determine Your Cost of Living

One of the most important things to consider about life after retirement is your cost of living. Knowing your expenses will help you determine whether or not you will have enough money coming in to live comfortably. Your retirement cost of living might actually be slightly lower than your current cost of living for a few reasons. If you are a commuter, you'll be driving less and spending less on fuel. Those hour-long commutes five days a week add up to around 250 trips to and from work, which could cost several thousand dollars per year. If you own a home, depending on the time you took out mortgage, you could see a drastic drop in your cost of living as your mortgage is paid off. Other expenses, like food, could be cut down sharply as you will be home more often and can save money by cooking for yourself.

Expenses Versus Income

Once you have an idea of your cost of living after retirement, you need to do a little math to see if your retirement investments will cover all your bases. If you have a retirement savings plan set up at work, you probably have a 401k or Roth IRA that you're making regular contributions to every week. Think about how long you will be retired for - if you want to retire at 50, you might need to plan for 30 or 40 years of retired life. 40 years of retirement means you'll be taking 2.5% out of your retirement investments per year - which is $25,000 if you have a million dollar retirement portfolio. The less years you plan on being retired, the more you can withdraw each year.

Take Care of Any Debt

If it seems like your expenses are going to be too high for early retirement, perhaps you have some debt that can be taken care of before retirement. Credit card and loan debts should all be cleared up before you even think about early retirement. Make sure you look at your credit reports on a frequent basis and work on keeping your credit score healthy. The better credit you have, the better rates on loans you'll get which means more money in your pocket down the road when it matters. Find a good place to order your credit report and score and make intelligent decisions on borrowing and charging. Being debt free when you approach retirement will save you money and stress.

Think About Work After Work

For many people full retirement won't be a possibility, at least in the beginning. Taking on a part time job can supplement your retirement income and give you more financial comfort. Some might view this in a negative light and not consider it "real" retirement, but you can see it as an opportunity to pursue a line of work that appeals to your interests instead of your bank account. If you love animals, you could get a part-time job at a zoo or wildlife sanctuary. If you've always wanted to make pizzas, work a few nights or days at a pizzeria. Since a large portion of your income will be from your retirement portfolio, lower wages doing interesting work won't hurt you.

Before you start making plans for living the retired life in your fifties, take some time to carefully review your situation. Think about what you can do today to make things easier for yourself in the future. Carefully manage your finances, keep your credit and investments healthy, and keep heading toward the finish line.

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