Are you thinking about ditching the 9-5 grind for early retirement? Whether you’re aiming to kick back way before turning 65 or unexpected twists have you thinking about it sooner, here is an essential guide on early retirement planning.

The Basics to Early Retirement

Many people aim to retire early in their 40s or 50s to pursue passion projects, travel, or take a breather. That is the gist of the FIRE movement; it stands for "financial independence, retire early.” It is not just about quitting work but about having the financial freedom to pursue your interests. However, early retirement requires considerable financial resources. Claiming Social Security earlier than your full retirement age means a potential 30% reduction in benefits.

FIRE Movements to Manage Income

You’ll likely need to revamp how you earn and spend. Consider an early retirement plan to live on 50% (or less) of your income, saving the rest away.

It is crucial to eliminate all types of debt, including mortgages. You will also want to be savvy about the costs associated with transportation, utilities, groceries, and housing. To cut costs, some people opt for biking as their means of transportation.

It is also about earning extra cash for the early retirement fund. There are different FIRE movements:

• the lean FIRE or living as minimally as possible.

• the fat FIRE or focusing on upping earnings through investments or side jobs for a cushier retirement.

• the barista FIRE or aiming to save enough to retire and have the flexibility to work still when and how you want.

Calculating Retirement Spending

Check your current expenses, estimate your retirement, and add 15% to 20% for unexpected costs. You could use this calculator on Networthify to estimate your retirement.

Healthcare can throw a wrench in early retirement dreams. You could tag onto your partner’s plan if they’re still working or check out private insurance on Healthcare.gov. Consider obtaining a part-time gig offering health coverage. 

The aim is to keep the taxes low. Plan out how and when you will pull income from your investments, especially with retirement accounts such as 401(k)s and IRAs, with rules to avoid penalties. Most of these retirement accounts need you to be around 59½ to avoid taxes and penalties.

Rules to Live by as a Retiree

Rule number one is the 25x rule. Have 25 times your annual spending saved up before you retire early. This rule assumes that your retirement fund keeps growing to keep up with inflation.

Rule number two is the 4% rule. This rule allows you to withdraw 4% of your savings in the first year of retirement by adjusting for inflation yearly. Your approach might require tweaking based on your investments, risk tolerance, and the market when you retire.

Remember that with a brokerage account, you can withdraw money penalty-free anytime.

Living Off Your Investments

Investment returns will help you save more in less time while making your savings last longer. Aim for a balanced portfolio focused on long-term growth: low-cost index funds with a stock-heavy allocation.

As retirement nears, shift a small chunk of savings into safer, more easily accessible options for short-term expenses, such as a year or two’s worth. Keep the remainder invested, gradually transitioning to cash as needed. In this way, money can grow and sustain a 4% distribution rate.