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Early retirement planning: Helpful tips

Updated on July 4, 2011
Proper planning is a prerequisite for early retirement.
Proper planning is a prerequisite for early retirement.

Ending full-time employment before the full retirement age is a mixed bag. The major benefit is that the liberty, but with that comes a higher longevity risk.

Living for a longer period without full-time employment creates certain challenges that can be dealt with through proper planning.

Early retirement planning also gives individuals an opportunity to attain financial independence earlier. The following planning tips can help with that goal.

Quick debt elimination or reduction

Before you can accumulate wealth, you must ensure that you are not in the red. Early retirement suggests that should eliminate or reduce debt at a faster rate. Often, completely eliminating debt before retirement is unlikely. However, debt can be a burden which can jeopardize your dreams of retiring early or make you suffer financially because of that decision.

Do a robust retirement calculation to estimate your needs

Regardless of how early or late you plan to retire; you should undertake a retirement calculation. This needs assessment should tell you how much you need to save now; how much you should spend in retirement; and the impact of inflation on your retirement fund. Conducting a post-retirement analysis to determine how long your money would last can also help you to evaluate/re-evaluate your goals.

Obtain lifetime medical coverage

Medical or health coverage is necessary to protect your life savings from unforeseen medical expenses. It also affords you far better coverage than you may have been able to afford on your own. When planning to retire early, your life savings are more vulnerable since early retirees spend longer periods of their lives in retirement. In addition, as you get older, more health ailments are common. Protection products – especially health coverage – are even more critical in an early retirement plan.

Place emphasis on capital growth

The dream of any retiree is to have a retirement fund that is impervious to the depleting effect of poor spending, hefty medical bills or inflated living expenses. Saving alone cannot help you to accumulate a fund adequate enough to do all of that; capital growth is mandatory. Investing in growth options not only ensures better accumulation before retirement, but also protects the real value of your initial investment.

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Allow pension plans/ annuities to mature beyond your retirement age

Withdrawing from annuities and individual pension plans at the time of early retirement may be a bad idea. This is because shorter accumulation periods do not help with compounded interest. In addition, annuities have lower annuitization rates at earlier ages. It is usually more advantageous to annuitize pension plans in stages or until you really need them.

Early retirement planning merely increases the importance of proper financial planning. Other tips for retiring early include the basics for sound retirement planning:

a) Maximize employer's pension/ savings plan – this would give individuals increased returns on contributions, since contributions are normally matched by employers.

b) Diversify your income – this involves having money work for you and creating multiple retirement income streams.

c) Incorporate prudent financial management tools and concepts – these include, but are not limited to, budgeting, financial goals and portfolio diversification.

Those who plan to retire early should be more deliberate, meticulous and disciplined. Strict adherence to financial and retirement plans are crucial in overcoming several disadvantages of early retirement.

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  • dai losinski profile image

    dai losinski 6 years ago from Surrey, UK


    Good ideas about pension funds and annuity plans. It's amazing what a difference a few extra years of compound interest can make. The part about diversifying your income is particularly important. Read my hub on being a single parent for more diversification!