Investing

Thinking about early retirement? | Vanguard

Stay in control of your finances

Whether or not you can retire early often comes down to dollars and cents: how much you have now, what you’ll have if you stay on course, and how much you’ll need to get you through (what could be) several decades of retirement.
 

Budget (now)

You can’t project your future expenses without knowing your current expenses. Even if you’ve made it this far without budgeting, early retirement is an ambitious goal.

Our retirement expenses worksheet can help you visualize where your money goes. Fill it out now as a pre-retiree, and then estimate what your financial situation may look like once you’re retired. Plan to replace 85% to 100% of your pre-retirement income in retirement. (It’s better to overestimate—not underestimate—your spending needs, especially during the first few years of retirement.)

Estimate your retirement expenses

Once you’ve estimated your monthly expenses in retirement, use our retirement income worksheet to see if your retirement income (less taxes and expenses) will be enough to sustain your lifestyle. Start with a monthly calculation and go from there.

Calculate your retirement income

Factor in debt

Being entirely debt-free when you retire may not be realistic for everyone, especially those who retire early. That said, I strongly encourage you to pay off debt with high interest rates and few potential tax benefits―such as personal loans, credit cards, and auto loans—before retiring early.

Other debt, like your mortgage, can be factored into your monthly, quarterly, or yearly expenses. Just keep in mind, the more nondiscretionary expenses you have, the more income you need.

Have a cash cushion

My wife and I are pre-retirees, and we aim to have enough cash savings to cover daily living expenses for 3 to 6 months. I encourage my clients to do the same. It provides protection from an income shock, such as an unexpected job loss.

Many clients are surprised to learn that income shock can still be a concern for retirees. You need to cover your daily expenses if you earn below-average investment returns or encounter an unexpected rise in monthly expenses. For example, some retirees end up caring for a relative, a parent, or an adult child. Although it may be difficult, confront the possibility of facing these unanticipated financial obligations realistically and honestly.

It’s important to have enough cash on hand (both now and in retirement) to cover other financial shocks, such as a large medical expense or a home or car repair. A reserve of about $2,000 is a good place to start. (See Vanguard’s research about emergency savings for more information.)

Plan for future health insurance costs

The cost of health care is often one of the biggest impediments to early retirement. Before you reach age 65 (when Medicare becomes available), you have limited options.

If you have an advisor, they can generate a personalized annual health care estimate. If you’d like to come up with your own estimate, our research shows these 6 factors can help you determine whether your future costs will be higher or lower than average.

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