The short answer to this question is: it depends on your individual circumstances.
To determine if the ambitious goal of an early retirement is feasible, you need to confront a few crucial questions. Thoughtful and honest answers to these vital questions will determine if you can comfortably hand in your resignation and maintain the lifestyle you desire.
Question #1: How much money do you have?
It would be very difficult to retire with no money, so it’s no secret that you will need substantial assets to support yourself during retirement. Fortunately, you can get a good idea of your wealth by calculating your net worth.
Put simply, net worth is your assets less your debts. If this number is low or negative, you probably have a long way to go before you can achieve a comfortable retirement. On the other hand, if your net worth is substantial, you could already be set for retirement.
If you are one of the lucky ones with lots of assets, it’s time to look deeper. Many assets, such as rental properties, stocks and bonds can generate more income over time. This income is crucial to maintaining enough cashflow to fund your retirement lifestyle.
Question #2: What will your retirement lifestyle look like?
The other side of the coin you’ll need to consider is the lifestyle you want in retirement. Do you plan to maintain your current lifestyle or change your habits? Are you planning to travel or maybe improve your golf game? These things all cost money and that needs to be factored into your calculations.
Put simply, your ‘lifestyle’ is the way in which you plan to spend your time and money. If you plan to continue your current standard of living, estimating your expenses should be fairly straightforward, but where will you spend the extra time? Alternatively, if you plan to drastically change how you live, you will need to put in more effort to craft an estimated budget to meet these new expenditures.
How will you spend your time?
Retirement is about more than finances, it’s about fulfillment. Studies have shown that boredom can have negative consequences for your health – and it certainly has a devastating impact on your emotional wellbeing. Before you commit to early retirement, envision how you will find fulfillment outside of work.
If you plan to find satisfaction with new hobbies or travel, be sure to include the cost of those activities in your estimated expenses. Additionally, if you plan to work part-time or consult in your previous field, consider the impact of that additional income on your financial plan and your Social Security benefits due to the earnings test.
How will you spend your money?
Life costs money, whether you’re retired or working. Some of the most substantial costs you’ll need to consider are housing, food, transportation, and health care. Accurate estimates for these essentials are vital to understanding how much your retirement will cost, and whether you can afford it.
Other expenses to consider are family responsibilities that might make early retirement more difficult. Depending on your intended retirement date, you could have childcare costs to consider or education to fund. Additionally, your parents could require financial support as they age, so be sure to consider your ability to meet this need. Finally, consider health care for your family. If your job provides health insurance for your spouse or children, have a plan to replace this coverage.
Question #3: When can you retire?
Once you understand your financial situation and how you will spend your retirement, the final question to ask is: when can you retire? You’re likely hoping for an answer of “right now,” but the reality is highly subjective and depends on your responses to the first two questions.
Your planned retirement date impacts three important areas of your financial plan – the ability to access retirement benefits, the amount of time available to save, and the length of time your savings need to stretch. Consider the impact of early retirement on each of these areas before drafting your two weeks’ notice.
Access To Retirement Benefits
If you retire early, you may find it difficult to access accounts or income streams that build the foundation of most retirement plans. Qualified retirement accounts – including 401(k)s and IRAs – are accessible after age 59 ½, though there is an exception for 401(k)s that allows you to access the funds at age 55 after leaving your job. If you need to access your funds in a qualified retirement account before these dates, you could owe a 10% early withdrawal penalty. The additional cost of accessing these funds early could prematurely drain your account balances.
Further, income from Social Security is available beginning at age 62, though your benefit amount is reduced if you claim before reaching Full Retirement Age. Finally, Medicare is available at age 65 for most Americans. If you retire before reaching these key milestones, you need access to other funds or income streams to cover your expenses.
Time Available to Save
Most retirement planning guidance assumes that you will work from your twenties to your sixties – and add to your savings throughout that time. If you end your career in the middle of this timeframe, you lose the ability to add to your retirement savings.
Length of Time Savings Must Stretch
Similarly, traditional retirement planning techniques assume that your assets need to generate enough income to cover your expenses from your sixties through the end of your life. An early retirement generally means that your income needs to stretch over a longer period of time than if you’d retired at the standard age.
However, no one can accurately predict how long your life will be. This uncertainty makes it critical to consult an experienced financial advisor before handing in your resignation. The right advisor will help you estimate whether your assets will generate enough income to cover your expenses throughout the rest of your life – and whether you are financially able to turn your dream of early retirement into a reality.
Plan For Early Retirement with Meld Financial
At Meld Financial, our mission is simple – help clients achieve their retirement dreams, including early retirement. This process starts with understanding your financial situation and creating a plan designed to help you succeed.
Our retirement planning process centers around a proprietary wealth management plan called Financial Fingerprint®. This nimble plan brings together the most important pieces of your financial life into one easy-to-understand plan that changes with your situation.
To learn more about Financial Fingerprint® and get started, contact us today.
