How to Calculate Early Retirement

Early retirement planning requires careful research.
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Calculating how and when you can retire before traditional age cutoffs requires determining when you want to stop working, what type of lifestyle you want after you retire and how much annual income that lifestyle will require. You also have to research the effects of drawing on retirement accounts before your normal retirement age. Because of the complex math involved for part of this planning, you’ll need to work with a financial adviser or use an online retirement calculator.

Determine Your Desired Retirement Age

The obvious first step in calculating how much money you’ll need for early retirement is to decide when you want to retire. You can choose an age that satisfies your personal desires, or let your investment accounts and tax laws guide you. Retiring before certain ages can trigger smaller retirement account benefits or incur penalties. For example, you can’t collect Social Security payments until you are 62, with full benefits starting at your full retirement age. Anyone born after 1959 won’t be eligible for full Social Security benefits until age 67; drawing benefits before then reduces the amount you receive during your initial years of taking benefits. Individual retirement accounts, pensions and other retirement products also have age requirements.

Calculate Your Retirement Income Needs

Once you know the year in which you wish to retire, calculate how much annual income you’ll want each year. Pick an income that takes different expenses into account; for example, you might have no mortgage costs, your health-care expenses might increase as you age and you might want to spend more money on travel. Pick an annual income in today’s dollars that you feel will be adequate for your retirement, then use an online calculator to help you determine what that amount, adjusted for inflation, will be in the years after you retire. The calculator will ask for your age, current savings, expected annual contributions until retirement and other data, in addition to your desired annual retirement income. Using this information, the program will calculate your potential interest on investments and Social Security benefits, letting you know how much you need to earn and save between now and your desired retirement age to achieve your goals.

Review Your Retirement Accounts

Research your retirement income sources -- including Social Security, pensions, IRAs, annuities and life insurance policies -- to determine which, if any, restrict when you can retire without penalty. Calculate the effect of retiring early to determine how this will affect your savings goals. For example, retiring before age 67 reduces your Social Security benefit by 30 percent per year on the money you draw before you reach 67, and it reduces your spouse’s benefit. Your benefits will increase as you age, however, so that retiring early or late will produce the same net lifetime benefit, depending on how long you live, according to the U.S. Social Security Administration.

Consider Earnings

If you plan to continue doing some income-producing work after you retire, that will affect your taxes, and depending on how much you earn, what you will receive from Social Security. By the time you retire decades from now, your opportunities to earn income and the effects of new laws on those earnings will most likely change, so you might want to consider post-retirement earnings a small bonus rather than a necessary part of your annual income.

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