Subscribe Sign In Forbes Money TeamForbes Staff Money By Robert Berger Covid-19 ushered in a wave of early retirements, with an estimated three million more older workers leaving the labor force than otherwise would have. Some of those exits were no doubt due to fear or layoffs. But others happily retired because, with the value of stocks and homes soaring, they could. These Covid-19 retirees join a growing group of people. Motivated by stories from the FIRE (Financial Independence Retire Early) movement, some younger workers are aiming to retire decades before they reach 65. Is retiring early realistic? Here’s information on what it takes, as well as a discussion of some financial tools to help you navigate the road to retirement and be secure once you get there—whether that retirement is early or not. Within the FIRE movement, the 4% rule reigns supreme. That rule, developed by financial planner William Bengen in the early 1990s, posits that, with a portfolio invested 60% in stocks and 40% in bonds, a retiree can spend 4% of their nest egg in the first year of retirement and increase their annual withdrawals by the rate of inflation with confidence that their money will last at least 30 years. Put another way, the 4% rule requires you to save 25 times your annual expenses before retirement. So for a $50,000 annual budget, you’d need to have $1.25 million saved; for $100,000 in spending, you’d need $2.5 million. Using retirement calculator Networthify, you can estimate how long it will take to save 25 times annual expenses. At a 20% savings rate and assuming a 5% after-inflation rate of return for your portfolio, it would take about 37 years; save 25% and the time drops to 31 years. Bengen’s original rule was based on historical market and inflation data and on his back-testing of 30-year retirements from 1926 to 1976. Stretch retirement out to 40 or 50 years, as some early retirees do, and the 4% rule breaks down. For retirements to last 50 years, Bengen concluded, the initial withdrawal rate could not be more than about 3%—a finding with significant implications that some FIRE devotees gloss over. At a 3% withdrawal rate and a 20% savings rate, it would take you 41 years to save enough. By then, it would be too late to retire early. But don’t lose hope. Bengen tested withdrawal rates in increments of one percentage point. More recent research shows that with a traditional 60/40 portfolio, a 3.5% withdrawal rate should last 50 years or more. At that rate and by boosting the savings rate up to 25%, it takes about 34 years to accumulate enough to retire; with a 30% savings rate, it takes just 30 years. Factoring in Social Security, pensions and other retirement income (say, freelance work) would lower the assets needed further. Managing money in early retirement ushers in a host of issues, beginning with the smartest way to manage and draw down the money one has saved. Financial advisors have created countless ways to generate a paycheck from retirement savings. One of the more popular approaches is the Bucket Strategy, which in theory sounds simple. Typically, you divide your retirement savings into three buckets. The first bucket holds cash equal to two years of living expenses. Bucket two consists of five years of living expenses in fixed income investments. And the third bucket invests what’s left in stocks. The idea is to give retirees the emotional comfort of knowing they have some years covered with cash and fixed income investments in the event the stock market crashes. That way, they’re less tempted to panic and sell stocks when the market is down. But the bucket strategy is not so simple to implement. Retirees must decide when and how much to transfer from one bucket to the next. The strategy also fails to consider the overall asset allocation, an important consideration when it comes to sustaining an investment portfolio for five decades or more. Perhaps the simplest approach is the best. As Bengen did in his 4% research, a retiree can withdraw money once a year for living expenses and at the same time rebalance their portfolio, returning it to the planned allocation regardless of which assets are used to fund living expenses. This approach keeps you from selling at the bottom. During a bear market, you sell fixed income to fund annual withdrawals—in effect, rebalancing to stocks. When stocks are high, they get sold, keeping equities in check as a percentage of your portfolio. Early retirement brings both tax challenges and opportunities. One challenge is withdrawing money from retirement accounts without triggering a 10% early withdrawal penalty, which generally applies to money taken before age 59.5. Fortunately, there are ways to avoid the penalty, including taking “substantially equal periodic payments” from an IRA; taking distributions from a 401(k) after retiring at age 55 or older; and withdrawing contributions made to a Roth IRA. Even if you can avoid the 10% penalty, however, taking money from retirement accounts early isn’t necessarily the smartest move—at least not if you want to minimize taxes. It’s crucial to spend the right money first in early retirement. While there is no one right order of withdrawals for every situation, here’s a good rule of thumb: Take interest and dividends from taxable accounts first, as they represent taxable income whether they are spent or not, then take principal from taxable accounts, then tap traditional retirement accounts and finally tap Roth retirement accounts, which can continue to grow tax-free for decades. There are loads of exceptions to that rule—for example, you may want to take out money from a regular IRA for a Roth conversion. With a conversion, you transfer funds from a traditional IRA to a Roth IRA and the amount converted is taxed as ordinary income (in most cases). Once in the Roth IRA, the money grows tax-free. Roth conversions can be ideal for some early retirees who aren’t yet drawing Social Security and find themselves in low tax brackets with little taxable income. Tools for managing retirement have proliferated. Here are three that can help you plan. NewRetirement is, as its name suggests, designed specifically for retirement. You connect your investment accounts, both retirement and taxable, as well as your bank accounts, and the tool then walks you through an extensive interview process on aspects of your planned retirement. It then models your money throughout retirement, including the likelihood that it will last as long as you do. Features include a Roth conversion calculator, tax analysis and retirement plan withdrawal strategies. OnTrajectory is similar to NewRetirement, but with a much different user interface. You add information about your income, expenses and debt and also link financial accounts or add them manually. From this data, OnTrajectory projects your lifetime income, expenses and net worth and calculates a “Chance of Success” score for your retirement plans. Among many other features, it also determines the best account order of withdrawals during retirement. Personal Capital offers a free financial dashboard to track all aspects of your finances. While it’s not designed just for retirement, it offers a number of useful tools, including a robust retirement planner, a retirement fee analyzer, an asset allocation analyzer and an investment checkup tool that evaluates a portfolio based on your risk tolerance. 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