Can You Afford to Retire Early and Are You Ready to Do So?
By: Garrett Wells, CFP®
After spending decades working long hours as an entrepreneur or executive, you may be dreaming of the day when you can enter a leisurely and relaxing retirement. You might even be thinking about retiring before what is generally considered to be the traditional retirement age in the U.S. of 65 years old.
But retiring early requires careful planning and diligent saving during the years leading up to your planned retirement date. Here are a few factors to consider if you have gotten the early retirement bug.
1. Are your financial resources adequate?
Not surprisingly, this is the biggest factor for most people. Simply put, have you saved enough money to finance the retirement lifestyle that you and your spouse desire?
There’s no magic formula or one-size-fits-all answer to this question — it will be different for every situation. For example, if you plan to be active and social, travel extensively and live a high-end lifestyle, you will probably need more money than if you’re content to stay close to home and live a simpler lifestyle. And if you live in a high-cost urban area, you’ll need more money than if you live in a rural area with a lower cost of living.
As you attempt to answer this question, be sure to include all of your retirement income sources in your calculations. This starts with your retirement savings accounts like IRAs and 401(k), but it might also include Social Security, a company pension plan, an inheritance or other sources of income.
If you want to crunch some numbers, start with what’s known as the 4% Rule, which states that your retirement savings are likely to last until you die if you withdraw no more than 4% of your assets each year. (Some experts have recently adjusted this to 4.5%). So, for example, if you believe that an income of $200,000 a year will support your desired retirement lifestyle, you could potentially retire with a $5 million portfolio (not counting other income sources). We also think that it’s best to build in some additional cushion so that you are prepared for any unexpected expenses like long-term care costs. It is also important to consider downsizing your home if you wish to have more leeway with spending.
2. Do you know how you’ll pay healthcare costs?
This is an easy detail to overlook, but you have to remember that Medicare eligibility doesn’t kick in until you reach age 65. So, you’ll need to plan for how you’ll pay for healthcare before you’re eligible for Medicare. First, check to see if your employer offers retiree healthcare benefits and what the cost and coverage options are if so.
If this isn’t an option, you can look into purchasing a private health insurance policy or a policy through the federal government’s healthcare exchange at HealthCare.gov. Keep in mind that these policies are relatively expensive for those who don’t qualify for a government subsidy. A health insurance broker can help you examine your potential options.
3. Are you emotionally prepared for retirement?
Some retirees discover that the retirement “grass” isn’t as green as they thought it would be. After spending decades working, they find the shift to full-time retirement to be drastic. Others become so closely defined by their jobs that they struggle with their identity after leaving the workforce, or have a hard time making new social connections outside of work.
These and other factors make it critical to think about and plan for the emotional aspects of retirement. In particular, how will you fill your time every day? According to research performed by personal finance author and radio host Wes Moss, the happiest and most fulfilled retirees have several different core pursuits that keep them busy. These can be hobbies, sports, volunteer activities or anything that you’re passionate about.
This is something that you and your spouse should discuss together before you enter retirement, regardless of when you retire. Some couples share the same core pursuits, while others have some together and some separate from one another. What matters most is that you both think ahead of time about how retirement will affect you emotionally and make a plan that will set you up for a happy and fulfilling life during retirement.
We frequently help our clients manage both the financial and emotional aspects of retiring early. This includes reviewing investment portfolios and other potential retirement income sources. If you think working with a Simon Quick advisor would benefit your situation give us a call to learn more at (973) 525-1000 or send an email to firstname.lastname@example.org.
Mr. Wells joined Simon Quick in December of 2017 and works from our Morristown, NJ office. He is currently an associate on the client advisory team. He is responsible for supporting the Partners and Client Advisors in assisting with financial planning for clients, implementing investment plans, preparing investment performance reports, and coordinating client communications. Garrett completed the Financial Planning Certificate Program at Fairleigh Dickinson University and became a CERTIFIED FINANCIAL PLANNER™ practitioner in October 2020. Learn more about Garrett on LinkedIn.
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