Understand the impact of rising costs and inflation
Once you've approximated your annual spending, you need to assume that inflation will drive those costs higher over time. Inflation rates vary over time, but according to the U.S. Labor Department's Consumer Price Index (CPI), the 12-month change was 2.4% in July 2018. Because inflation rates typically outpace the interest rates offered on savings accounts, the bulk of your retirement assets should be invested in a diversified portfolio based on your risk tolerance, not stashed in a savings account.
Factor in health care costs
Future healthcare costs are one of the biggest unknowns for early retirees, because it's nearly impossible to predict what your future medical needs might be and what might happen to insurance costs in the future. However, if you already have ongoing medical needs or a chronic health condition, you'll want to budget accordingly and anticipate that insurance premiums, co-pays and prescription drug costs are likely to rise over time.
The future of the Affordable Care Act has yet to be determined, but, at least for now, you can use this HealthCare.gov calculator Opens in new window to see if your income qualifies you for subsidies on your insurance premiums. Medicare eligibility starts at age 65 and COBRA plans through an employer tend to be expensive, so many early retirees purchase health insurance through exchanges.
Know your withdrawal metric
How much money do you need? That depends on whom you ask and how much you plan to withdraw each year.
Some experts recommend using the 4% rule, which states you can withdraw 4% of your retirement savings each year and avoid running out of money because investment returns will hopefully offset withdrawals.
Other experts argue that the 4% rule was created in a time of higher market returns and does not apply to early retirees, who may need their money to last four or five decades instead of the traditional three. Instead, some early retirees use a more conservative withdrawal metric, such as the 10-year Treasury bond yield, which as of this writing was 2.87%.
Keep in mind that research shows the real returns of your portfolio over your first decade of retirement are a key indicator of whether it will be able to sustain you over your entire retirement. This is called sequence of return risk. The reason for this risk is that, with poor returns over the first 10 years, there's less money to compound and grow over the remainder of retirement.