Ways to Retire Early

Early retirement can set you free to enjoy hobbies.

Retired senior man fishing in golden sunset image by Pezography from Fotolia.com

Early retirement is a goal that poses many challenges. Company pensions are generally not available before a certain number of years of service and full Social Security benefits don't kick in until your 60s. In a sense, every year earlier that you retire costs you two years -- one less year to save and one more year to live on your savings. Nevertheless, careful planning may be able to allow you to retire before you otherwise would have.

The "Nest Egg" Approach

The most obvious way to retire early is to save a lot of money quickly. You can estimate the total amount you'll need by multiplying the annual amount of money you're willing to live on by the number of years you expect to live after you retire. As long as you invest your savings and your return on investment exceeds the inflation rate, however, you won't need this much by the time you retire -- you can afford to wait for your investments to mature. Nevertheless, you will need to put a lot of money away. CNN Money recommends saving at least 10 year's worth of income to retire at 60.

The "Downsize" Approach

One way to reduce the amount you'll need to save to retire early is to live more frugally after you retire. This might not result in a drop in your real standard of living. For example, as a retiree you might need far less space than you did when you were still raising children. Consider selling your home, moving into something smaller and pocketing some of your home equity. In addition, moving to a pleasant, slow-paced location such as a balmy coastal area may reduce your travel and entertainment expenses. Since healthcare expenses will be difficult to downsize, however, shop around for a worthwhile health insurance plan.

The Working Retirement

A life devoted solely to leisure may turn out to be maddening, especially if you are still relatively young when you retire. A working retirement, by contrast, can keep you busy part-time without the stress of a fast-paced career, and it can add to your income as long as you remain healthy enough to work. Be careful, however, about building an early retirement plan based on earning "passive income" from, for example, a blog or a popular website. Conditions keep changing, and you are likely to have to continue putting time into your venture to keep up with the competition.

Retiring Abroad

One way to double your spending power is to move to a place where the cost of living is half as high. The greater your spending power, the less money you will need to retire and the earlier you can retire. Many locations abroad offer a low cost of living, balmy weather and tax breaks for retirees. Keep in mind, however, that Medicare will not cover you while you are overseas. You might also consider the possibility of future adverse changes in laws and immigration policies in your country of choice.