Are you really ready for early retirement?

Do you dream of early retirement? If so, you’re not alone. It’s tantalizing to think of ditching the rat race early to enjoy more of your life.

How much do you need to retire early?

First, take a step back to figure out whether you can actually afford to retire early. The earlier you retire, the larger your initial financial base needs to be. If you retire at age 50 versus age 65, your nest egg will need to last that much longer.

Retirement planning should start with a baseline, such as the 4% rule, which says that if you draw no more than 4% per year from your current principal, there’s a 90% likelihood the money should last for 30 years. If you retire early, you’ll either need a larger starting pile, or you’ll need to dial back your spending. Considerations:

• How much do you have now? When deciding on an early retirement age, start with how much you’ve amassed in your retirement portfolio. Will it provide a good base to start from? Or do you need to accumulate more?
• Can you access your 401(k) early? If you’ve been setting money aside in your 401(k), you might need alternatives. In general, you need to wait until age 59 1/2 to access your nest egg (or face heavy tax penalties). The good news is that if you leave a job at age 55 or older, you can withdraw from that job’s 401(k) right away under the “Rule of 55.”
• What about other accounts? If you have a Health Savings Account (HSA), that can help pay for healthcare costs in early retirement. If you planned ahead and opened a Roth IRA, you can withdraw those contributions at any time without penalty (just leave your earnings alone until you’re at least 59 1/2). You might also have taxable investment accounts to draw from.
• Do you have other income streams? Additional revenue streams such as a side business or rental income can help supplement your needs. If you have alternative income, you’re more likely to successfully retire early, even if you need to wait to access your tax-advantaged accounts.
• When will you take Social Security? Look ahead to when you qualify for Social Security. Early retirement and Social Security don’t often mix, because you must be at least 62 to begin drawing on your regular benefits. However, your monthly payments at age 62 will be lower than if you were to wait until “full retirement age,” typically 67. And by waiting until age 72, you can get an even higher monthly benefit. Weigh Social Security with your early retirement age and how long you can go before you need that help.

Retirement lifestyle planning

Early retirement isn’t just about the size of your nest egg. Don’t forget to consider your desired lifestyle. How much money you need—and whether you can remain retired—depends on a number of factors:

• Location. Where will you live? If you retire to an expensive area, you’ll deplete your nest egg faster. Do you have a plan that considers cost of living, taxes, and other factors? Retirement location is a big factor in remaining retired after you leave your job.
• Desired activities. Some retirement hobbies are more expensive than others. World travel costs more than puttering around in the garden. Figure out what you hope to do during retirement and factor that into your planning.
• Working while retired. Getting a retirement job can help you stretch your nest egg. Consider a part-time job or start an interesting side gig. You’ll stay active with your mind and body while earning a little extra money. It’s even possible to start a completely new career. Your retirement second act might be more fulfilling than your first act.
• Volunteering. Staying active can help improve your mental health and overall well-being. Even if you don’t receive payment, volunteering can be a good part of early retirement. You give back to your community and reap the intangible rewards. Plus, depending on your situation, you might be able to benefit financially. For example, there are travel programs that allow volunteers to reduce their travel costs in exchange for helping out.

As you decide whether to retire early, consider whether it fits your lifestyle goals and values. You don’t want to engage in early retirement only to find yourself bored and running out of money.