For many workers, retirement can't come soon enough. You may be yearning for the day you can stop setting the alarm clock and start spending your time however you please, and early retirement may sound like a dream come true.
But that dream can quickly turn into a nightmare if you're not prepared because there's a lot of work that goes into retiring early. It's also not going to be feasible for everyone -- in fact, although half of Americans say they want to retire by age 60, only a third realistically think they can do so, according to a survey from TD Ameritrade.
While retiring early isn't easy, that doesn't mean it's impossible. By following these three steps, you'll be well on your way to ditching that alarm clock forever.
1. Set a savings goal
One of the biggest challenges of early retirement is that you'll need to save more to ensure you have enough cash to last the rest of your life, but you also have less time to build a robust retirement fund. That's why it's crucial to set a savings goal as early as possible to give yourself plenty of time to reach your goal.
How much you need to save will depend on a variety of factors. A few of the most important things to consider, though, are the age you plan to retire, how many years you estimate you'll live in retirement, and the amount you expect to spend each year. Be honest with yourself as you're thinking about the answers to these questions. If you underestimate the amount you'll be spending every year, for example, you may not save enough, and your retirement might be less enjoyable than you'd hoped. Or, if you end up living much longer than you anticipated, you may run out of money long before retirement is over.
Of course, you can't always answer these questions with 100% accuracy. Unexpected expenses will inevitably pop up, and nobody knows exactly how long they'll live. But do your best to come up with as accurate an estimate as possible, because the more thought you put into these questions, the more prepared you'll be.
Once you have all these answers, plug your information into a retirement calculator to see how much you should be trying to save by retirement age. This will be your savings goal.
2. Adjust your budget to save more
Your results from the calculator will not only give you an idea of how much you should save by the time you retire, but also what you need to save every month to achieve that goal. From there, you may need to adjust your budget to find more cash to put toward your retirement fund.
This is often the trickiest part of saving for retirement, and it's even more challenging if you aim to retire early. Depending on how much you have to squirrel away each month, you may need to make some drastic budget cuts. Although that can be overwhelming, try to take it one step at a time.
Begin by tracking your spending so you know exactly where all your money is going. Next, categorize those expenses into different buckets to differentiate the essential costs from the nice-to-have expenses. Try to be as specific as you can, too. For example, rather than lumping all your food costs into one category, break them up into "groceries," "fast food," and "date-night dinners out." You may not be able to slash your spending on groceries, and you might not want to totally eliminate those date-night dinners. But you might be able to avoid fast food, which could save you a good chunk of change.
Comb through each area of your budget to see if you can cut back at least a little in every category. Also, although it may seem counterintuitive, it may be a good idea to continue to splurge on some of your guilty pleasures. Yes, buying that latte every day may not be the best for your wallet. But if it's something you truly enjoy, continuing to spend on the things you love (while still cutting back in other areas) can help you stick to your budget long-term.
3. Don't forget about how early retirement will affect Medicare and Social Security
Medicare and Social Security are designed for workers who retire at the traditional retirement age, which means that if you retire early, you may not be able to take advantage of these services right away.
You won't be eligible to enroll in Medicare until age 65, so if you choose to retire before that, you'll need to find another source of health insurance in the meantime. You may end up needing to buy insurance on your own, which could potentially get very expensive very quickly -- especially if you're enrolling in family coverage. Because you could end up paying far more for insurance in retirement than you did while you were working, it's extra important to make sure you're budgeting for this expense.
You also cannot begin claiming Social Security benefits until at least age 62, so early retirees will need to survive at least a few years making ends meet without help from those monthly checks. In addition, if you file for benefits as soon as you can at age 62, you'll receive smaller checks compared to if you'd waited until your full retirement age (FRA) to claim. In fact, if you have a FRA of 67 and you claim at 62, your checks will be reduced by 30% for the rest of your life. If you plan to retire early, consider how much you'll be relying on Social Security to decide whether you should claim as early as possible or hold off a few more years to earn bigger checks.
Retiring early may be one of the best decisions you ever make, but it's important to do your research and create a plan. The more prepared you are going into retirement, the more enjoyable your senior years will be.