Maybe it was an exceptionally stressful week at the office; maybe your kids have just announced that they’re moving to Tahiti—and taking your grandkids with them. Or maybe, over the past few years, you’ve been looking at the numbers and wondering if you could feasibly bid farewell to the “daily grind” and start spending more time doing what you want to do, instead of what you have to do.
For whatever the reason, early retirement is an option that may become appealing. But can you afford it, without taking a major hit to your desired lifestyle? If you “walk away from it all” before full retirement age, will you still be able to do the things that are most important to you and fulfill your core responsibilities?
Depending on your circumstances and prior preparations, you may be able to shave a few years off your retirement date, but you shouldn’t schedule your retirement party until you’ve done some careful analysis. Here are some benchmarks to consider if you’re thinking about an early retirement.
- How’s your debt? The number-one constraint most people face, both before and during retirement, is debt. If your mortgage is paid off or nearly so and you don’t have big personal loans or credit card balances soaking up a majority of your monthly cash flow, you’ve taken a big step toward being able to retire early. If the above conditions are not met, then you need to form a plan for knocking out most or all of your debt before you start planning your exit from the workplace.
- The “B” word. Most retirees, including those with adequate savings, will take a reduction in monthly income as compared to their peak earnings during their active careers. Figure out what your monthly income will be in your projected retirement, and try living on that amount for a month or two. If your spending exceeds that budget, you may need to make some changes—either in your available retirement income or your monthly expenditures—in order to retire early.
- What about healthcare? Those who retire at or after age 65 will typically sign up for Medicare, coupled with a cost-effective supplement, to provide for most healthcare costs. But if you plan to retire early, Medicare isn’t an option. Can you get coverage on your spouse’s plan? What is the cost for COBRA from your current employer plan? (It’s probably significantly higher than your current monthly contributions). Is there a healthcare marketplace plan that would fit your post-retirement budget? Make sure you’ve got a good alternative in place to bridge the gap from your retirement until you become Medicare eligible.
- Check the nest egg. Have you been systematic and diligent about putting away money in retirement accounts or taxable investments to provide income for when you stop working? One useful rule of thumb is the “Rule of 25”: you should aim to have 25 times your anticipated annual expenses in savings. So, if your expected retirement lifestyle is going to cost you $75,000 per year, you need about $1.88 million in savings. If you get an average return of 4% on your savings, you can fund your $75,000 lifestyle for as long as you’re likely to live. “But,” you ask, “what about inflation?” Great question. For most persons, the retirement nest egg should include a portion of assets designed to keep pace or run slightly ahead of inflation, over time. This is where a professional, fiduciary financial advisor can be of tremendous assistance in helping you put together a financial strategy that is viable for the long haul.
- Access to funds. If most of your assets earmarked for retirement are illiquid or inaccessible, that could be a problem. For example, if you were counting on the sale of appreciated investment property to fund your retirement, you probably shouldn’t depend on the proceeds to pay for next month’s groceries. Or if the majority of the assets are in retirement accounts or annuities that carry a withdrawal penalty until age 59 ½—and you’re 52—you could be facing unpleasant tax penalties, cash flow problems, or both.
- You can only play so much golf. Finally—but certainly not least important—what do you plan to do with yourself? Make sure that you’re not just “retiring from” but also “retiring to.” For example, don’t allow short-term frustration with your work to persuade you that you need to leave—right now—unless you already have a good idea of what will occupy your days and give them meaning after you leave the office. Too many people only think about the “leaving work” part and forget about the “living life” part. Meaning and purpose are just as important—if not more so—during retirement as they are during your working career. Is there a cause that’s important enough to you that you want to become a regular volunteer? Are you planning to start a side hustle as a consultant? Is there a hobby you’ve been itching to make your full-time obsession? Are you eager to spend more unstructured time with friends and family? Whatever it is, make sure you’ve included it in your plans. Continuing to have goals, dreams, and plans for the future is the best way to enjoy a satisfying and fulfilling retirement.
Aspen Wealth Management, a fiduciary financial advisor, specializes in helping clients plan for successful, meaningful retirements. To learn more, visit our website to read our article, “Do You Really Need Insurance in Retirement? It Depends.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.
