Early Retirement Strategy: How to Retire on Less Money


Planning for early retirement can be intimating. The available information online varies widely on how much money you will need to retire. Some of the available data can be downright discouraging, suggesting you may require millions of dollars to retire early.

The easy answer to how much you should save for retirement is “as much as possible.” In a perfect world, we would all work great jobs, have the foresight to save massive amounts of our earnings, and hit financial independence as quickly as possible.

However, life doesn’t always work out as planned. Many families find that find they may have started saving for retirement late or even must start over saving due to medical issues, divorce, of business failings. Savers that have been thrown a few curveballs may think they will have to work for forever and that retirement is just a pipe dream.

If you find yourself staring down a life’s sentence of work, there is hope that you can retire and likely on less money than what everyone suggests. However, to retire earlier and with less money, you must be creative, think outside the box, live differently and tread carefully around those money gurus.

How Much Do You Need to Save For Retirement?

How much you will need for retirement depends on what your retirement spending will look like.

You should ask yourself how much money you plan to spend each year in retirement? Forecast a budget and included all the items you routinely purchase today, such as gas, food, utilities, etc. Additionally, include any expenses you expect to incur in retirement, such as travel, vacations, health insurances, and hobbies.

Note: Make sure that you are honest, it can be tempting to use a figure that is too low to make the numbers work, doing so only robs your future self.

Once you have a reasonable sense of what your anticipated spending will look like, then you need to take an inventory of your expected sources of income post retirement. Add up all your income sources such as Social Security, pension, business income, and post-retirement employment, and subtract this figure from how much you plan to spend in retirement.

The difference between these two numbers is what you with must produce with your retirement savings.

For example: if you plan to spend 50k a year in retirement, and you have 20k in pension and/or Social Security income, then you will need to produce 30K a year.

Using the 4% Rule, we can calculate how much you will need to save to produce 30K a year by multiplying 30k by 25. The result is $750k, intimidating right?

$750k just to generate $30k a year, and the worst part is many experts think a 4% withdraw rate may even be too high.

Let’s look at some strategies to retire with less.

Early Retirement Strategies

Develop a Tax Plan

Taxes are your most significant hurdle to saving more money and spending money in retirement. Each year families miss out on thousands of dollars of tax credits designed to help them retire quicker because of the neglect tax planning.

The biggest mistake savers make waiting until tax season, mid-Jan to April 15th to do any tax planning. Tax planning should be done early in the year and reviewed periodically throughout the year as part of the household budget.

You also should develop a tax plan for retirement to maximize how much you can spend. Each dollar of taxes you can avoid in retirement is a dollar you do not need to produce.

Additionally, the amount of your taxable income in retirement may determine how much you pay for health insurance and if your social security benefits will be taxable.
Avoiding paying taxes on your Social Security benefits could save you several thousand dollars a year in retirement.

Build Multiple Sources of Income

The biggest challenge with conventional retirement planning is it is remarkably inefficient and generating income. If you subscribe to the 4% rule, then you would need $100K saved just to produce $4k a year of income.

To reduce the amount of money you will need to save consider starting a side hustle or hobby business. The internet has made it easier than ever to make money on the side. If you build a small side hustle and manage to make just $8k a year, it’s is roughly equivalent to having $200K saved.

It is not an apple to apple comparison, because having the money saved is much more passive, and the side hustle will require some labor. However, with side to the side hustle is you can make money on your terms and often doing what you love.

As part of your retirement planning you should ask yourself, would you instead keep working to save more money, or would you rather pursue a hobby business?

Familiarize yourself with the risks and benefits of each option and determine what is best for you and your family.

Become Self-Sufficient

Making money in retirement is hard, you either must save up enough money to produce a passive income, or you have to work for an employer or your own business. One of the most overlook ways to reduce how much money you need to retire is self-sufficiency.

Every expense that you can eliminate or reduce before retirement represents money that you do not have to earn or produce. Investing in self-sufficiency often has a much better return on investment than what is commercially available.

If your current home is your forever home, consider having an energy audit done. Many times, a small investment in making your home energy efficient can sizable dividends over time. Consider going solar, a modest investment in installing renewable energy could save you one hundred to two hundred dollars a month. Saving 200 dollars a month may not seem like a lot until you consider that represents 60K that you no longer must save for retirement.

Consider growing your own food, the hobby farm is the ultimate retire early side hustle. With minimal investment, and just a few hours a day of work you can grow most of your own food, significantly reducing your food budget. Additionally, selling your extra produce and products can be an excellent source of retirement income.

The best part of a hobby farm side hustle is the work can be seasonal, unlike traditional online side hustles like blogging. You can grow crops in the spring and summer, then take the winter off to travel hack your way across South America.

Think Outside the Box

Occasionally an imperfect situation calls for an imperfect solution, and you retiring with less than an idea amount saved may require some creativity.

Downsize or Relocate

Consider downsizing to a smaller home to save money and possibly turn some equity into retirement savings. Downsizing could not only put a few dollars in your pocket, but it can also save you money each year in property taxes, insurance costs, upkeep, and even energy.

If possible, consider relocating to a lower cost area with a cheaper cost of living or better amenities. Look for a location with better public transportation, or where stores and shops are within walking or biking distance. Both your health and wallet will thank you for it.

Consider a Reverse Mortgage

What is relocating or downsizing isn’t an option? You may already live in a low-cost area or moving may not be an option. Then you may want to consider a reverse mortgage as part of your retirement income options.

Typically, you need to be age 62. However, even younger retirees may want to familiarize themselves with how the programs work. A reverse mortgage allows the borrower to turn a portion of the equity in their home into a series monthly payment. The loan it’s then repaid upon the death of the borrowers, by selling the house.

Reverse Mortgages typically have high fees and can complicate matters is the borrowers decide to sell the home while alive. However, even with the drawbacks of the reverse mortgage, it beats working until your 85.

It is an option worth considering and learning about, just make sure you get 2nd and 3rd opinions and work with advisors who are familiar with how these programs work.

Purchase an Annuity

Annuities often get a bad rap in the financial media, there are often misunderstood, and often oversold by some advisors. Making matters worse, there are at least 4 different types of annuities, each with their own benefits and drawbacks.

Additionally, each company offering annuities has its own way of doing things and terminology that they use. Navigating the annuity landscape can be tricking at best. However, the annuity may be the overlooked tool you have been searching for.

Annuities typical all have one thing in common, they guarantee lifetime income that you cannot outlive. Several annuities guarantee that you can withdraw, 5%, 6%, or even more of the beginning account balance for life. The ability to withdraw 5% or 6% instead of 4% or less under traditional planning models, is like having 25% to 30% more money saved for retirement.

There are some downsides to annuities of course, and you will need to do your homework and speak with several advisors. However, when you are trying to make every dollar count anything that allows the Potential for 25% more income is worth considering.

Retiring with Less is Possible

It is possible to retire with less than what the experts suggest. However, to do so, you need to be mindful of each dollar you will spend and look for ways to reduce significant expenses like taxes and health insurance.

Building some sources of even modest income post retirement will reduce how much money you will need to save.

Ultimately, retiring while maintaining a decent standard of income may require some out of the box thinking and revisiting some less popular tools to maximize your income.

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