Early retirement requires careful planning to ensure your savings last 40-50 years without regular income. This guide walks through a practical framework to assess your readiness using the 4% rule, expense tracking, and healthcare cost projections. You'll learn how to calculate your Financial Independence number and test it against different early retirement scenarios.
The 4-Step Early Retirement Test
1) Calculate annual expenses: Current $60,000/year × 1.25 (more leisure time) = $75,000. 2) Apply 4% rule: $75,000 × 25 = $1.875 million target. 3) Add healthcare buffer: $200,000 extra = $2.075 million total. 4) Stress test: Can portfolio sustain 5% withdrawal during market downturns? Example: At 45 with $1.2 million saved, you're 58% to goal. Need to save $5,000/month at 7% return to reach $2.075M in 10 years.
Critical Early Retirement Factors
Healthcare costs average $12,000/year for early retirees (before Medicare). The sequence of returns risk is magnified - a market crash in first 5 years can permanently reduce portfolio longevity. Many underestimate leisure/travel costs by 30-40%. Practical solution: Try a 'practice retirement' living on 4% withdrawals for 6 months while still working. This reveals hidden expenses and emotional readiness.
Bridge Strategies
1) Roth conversion ladder: Convert $40K/year from 401(k) to access funds before 59.5. 2) Taxable brokerage accounts: First 5 years' living expenses. 3) Real estate: $2,000/month rental income reduces needed portfolio by $600,000. 4) Part-time work: Earning $1,500/month allows 2% lower withdrawal rate. 5) Geographic arbitrage: Living abroad can reduce costs 30-50%.
Key Takeaways
Early retirement becomes achievable when you combine disciplined savings (50%+ income rate), flexible spending, and multiple income streams. The key is testing your plan against worst-case scenarios - if your portfolio can survive a 30% market drop in year three while maintaining withdrawals, you're likely ready.