Almost everyone wants to retire someday -- and the sooner, the better. Approximately 52% of Americans hope to exit the workforce before their 65th birthday, according to a recent survey by reverse-mortgage company American Advisors Group (AAG), and 23% hope to retire before they're 60. That's an ambitious goal when you consider that millions of Americans are struggling to set aside any money for retirement each month, but it's possible if you're motivated.
You shouldn't even try it without a financial plan, though. The same AAG study found that most Americans tend to underestimate the true costs of retirement, and this could trick you into thinking you're ready to retire early when you're not. Here are three steps you must take if you're serious about retiring early -- and comfortably.
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1. Create a personalized retirement plan
You won't know if retiring early is feasible until you estimate the costs. Start by subtracting your ideal retirement age from your estimated life expectancy. It's not unreasonable to think you could live past 90 if you're pretty healthy, which means you could be looking at 30 to 40 years in retirement.
Next, total up your estimated annual expenses in retirement. (Some expenses, like healthcare, will probably rise, while others, like child care, will decrease or disappear entirely.) Multiply this amount by the number of years of your retirement, but don't forget about inflation. An average of 3% per year is a good estimate, and a retirement calculator can factor this in for you. It'll also calculate how much your savings could grow based on your investment rate of return. Choose a 5% or 6% annual rate to be conservative. Once you've filled all this out, your calculator should tell you the total amount you need to save and how much you must save per month to hit your goal.
From this, subtract any money you expect from Social Security, a pension, or a 401(k) match to figure out the amount you need to save on your own. You can estimate your Social Security benefit by creating a my Social Security account. Keep in mind you aren't eligible to claim Social Security benefits until you reach age 62.
2. Save as early and as much as possible
Try to save as much as your retirement calculator recommends per month. This is easier if you start while you're younger because your earlier contributions have more time to grow and benefit from compouding before you need to begin drawing upon them.
Consider a $10,000 contribution made in a single year. It would be worth almost $38,700 after 20 years, with a 7% annual rate of return. After 30 years, that $10,000 contribution would be worth over $76,000; after 40 years, nearly $150,000. Later contributions don't have as much time to gain value before you have to begin drawing upon them, so if you start later, you must save comparatively more each month than someone who began saving for retirement immediately upon entering the workforce.
You can save up to $19,000 in a 401(k) in 2019, or $25,000 if you're 50 or older; and $6,000 in an IRA, or $7,000 if you're 50 or older. You can save more if you're able to and think you might like to retire even earlier than your original plan.
Take advantage of any 401(k) match you're offered, but be mindful of its vesting schedule, which determines when employer-matched funds are yours to keep. If you leave the company before you're fully vested, you could lose some or all of your 401(k) match.
3. Adjust your plan as needed
After creating your retirement plan, you might find that you can't save enough each month to make that happen. There are a few ways to correct this. The easiest is just to delay your retirement by a few months or years. This gives you additional time to save while also reducing the total cost of your retirement.
But if you're determined to retire early, consider reducing your expenses both now and in retirement. Look for ways to cut spending, like dining out less or canceling subscriptions you don't use. You could also reconsider your estimated retirement expenses and scale back your travel plans. Play around with different scenarios in your retirement calculator until you find one that will work for you.
Another option is to seek out ways to boost your income, like working overtime, starting a side gig, pursuing a promotion, or switching companies or careers.
Reevaluate your retirement plan at least once per year. If your goals have changed or you realize you miscalculated your expenses, it's easier to fix that with more frequent, gradual changes than it is to try to come up with tens or hundreds of thousands of additional dollars once you're retired.
