Basics

Retiring early is possible only if you're willing to change your spending habits. You absolutely must commit to spending less than you earn. Cutting spending, saving as much as possible, and maximizing your investments will help put you on target to retiring before 65. If you have a 401K or IRA you'll want to contribute the maximum during your working years. Currently, there are People are living longer than ever, so you'll need savings and investments to last you anywhere from 25 to 30 years after you retire. It's better to have more money than you need than to run out of cash when you can no longer work.

Pension

For those lucky enough to have a pension from their working years, these payments can cover a large portion of retirement costs. Yet, you will need to carefully consider how you will manage these payouts.

Most pension plans offer two options for payment plans: you can take the money in one big chunk or absorb the pension through smaller regular payments. This is a complicated decision, so you might want to consult an accountant or financial advisor to figure out which option is best for you.

Each style of payment has its benefits and drawbacks. Smaller monthly payments are steady, much like a paycheck, and they can help you budget your pension for the duration of your retirement. This type of payout can differ in that some plans end when you die and some can continue to be paid at a lesser rate to your surviving spouse. One drawback to smaller payments, however, is that in the case of an emergency you will not have access to all your funds at once and could be saddled with a large bill that you would be unable to pay.

Lump sum payouts put you in charge of all your money at once, but you'll need to make sure that you manage this lump sum well and don't take up shopping as a hobby. Sometimes taking all the money up front can sever other benefits offered by your pension plan such as health care and insurance, so you'll need to decide if taking a lump sum is worth the potential loss of those benefits. Lump sum payments will also generally need to be rolled into an IRA as they can often be subject to heavy withholding fees (sometimes in the neighborhood of 20%). While IRAs generally stipulate that money can't be withdrawn until you are at least 59 and a half, in the case of medical expenses, home purchases, or funding education withdrawals can be made before your required age stipulation.

Managed well, a pension plan should take care of a large portion of your retirement expenses. You'll just need to consider how to make the most of it before you leave the workforce.

Social Security

Retiring early can have a big impact on your social security payments, so you'll need to weigh your options before taking early retirement. Social security payments are based on the average of your best 30 years of work. If you retire too early - before you've been in the workforce for 30 years, for instance - some of these years can count as "zeros." This lack of funds can have a very significant impact on your social security checks, so be sure you can take this kind of hit before you retire.

While social security benefits start at age 65, it is possible to receive payments as early as 62. You will be docked a small percentage until you turn age 65 if you take early payments. Depending on your circumstances, this might be an option for a little extra cash each month, even before you turn 65.

Inflation

When planning for your retirement you'll need to make allowances for inflation. What seems like a lot of money today probably won't seem like nearly as much when you reach retirement age. In general, you should plan for at least a 3% increase per year for inflation when you put your money into a savings account or into an investment.

Mortgage

As debts go, a mortgage is one of the best kind to have because the interest you pay is tax deductible. But when considering retiring early is it necessary to pay off your mortgage? It depends your other debts, as well as your personal comfort level.

If you have thousands of dollars in credit card debt or a high interest car loan it makes sense to pay these more expensive debts off first rather than to worry about your mortgage. Even if you don't, you may want to consider putting more into your investments than towards paying off your mortgage. If you're earning more interest on an investment than you are paying on your home then you might be better off maximizing those investments instead. Of course, if the interest on your house is outpacing your returns then you'll want to keep paying into your mortgage.

Also, your retirement plans shouldn't necessarily include your home as an investment. While you can always sell if needed, your home should be a part of your retirement's net worth. If your early retirement plans require that you sell your home you might want to stay in the workforce for some additional years.

Little Things

Like most things in life, some of the stress of early retirement comes from ironing out all the little details. You'll need to figure out how much you'll need to spend each month for living expenses. Don't forget to add entertainment and travel costs into this budget, because gas for your Winnebago and golf greens fees don't pay for themselves. In some respects you may save more money by remaining home, as you'll be able to cook at home more and you may not be tempted to make that Starbucks run every morning. But, since you'll have much more free time, other expenses will likely rise. Try to take this into account when budgeting.

You'll also want to make sure that your car and home are in good repair before you retire. It's much easier to pay for a costly new roof while still in the workforce than try to work it into your retirement budget. There are many of these things you simply won't be able to predict and you'll need to make sure that you have a substantial amount saved to act as an emergency fund.

One of the largest costs you'll face in retirement is health care. Some employers may provide health insurance or benefits as part of a pension plan, but most retirees will be paying for this kind of care out of pocket. Not having long term care insurance and health coverage might save up front, but it can be financially devastating in the long run if something were to happen to you or your spouse.

Many people dream of retiring early, and for some this dream can become a reality. It just takes some careful long-term planning and smart choices today that will work for you tomorrow. Retirement should be about relaxing and hobbies, not about worrying about when the money will run out. Make sure before you leave the workforce that you've got enough squirreled away to last you for the rest of your long and healthy life.