An early retirement is a dream for most active adult workers. Stories of entrepreneurs retiring in their 40s have us all thinking: “Is it possible for me?” Although retiring that early is not possible for everyone, what about clocking out for the last time at 55 or 60? Is an even earlier retirement possible?
Here we take a look at what questions you should ask yourself before retiring early.
How much money will I need?
The target for most retirees is to have an average of 25-40 years of dependable income. To figure out if this is a possibility in the near future, you’ll need to crunch some numbers. How much income would you need annually to live on in retirement? Many conclude that 70% of your annual salary is needed to retire comfortably.
Does your current retirement portfolio allow that to happen? What do you currently have in your 401(k), IRAs, and what is your expected Social Security payout? It is assumed that if you can live off of a 4% withdrawal rate from your retirement accounts, your portfolio will never run out (given that your annual rate of return is somewhere between 6% and 10%).
For most of us, the right answers to those questions would require us to work until at least 65. But there are ways to lower this age with some dramatic action. For instance, with an aggressively frugal lifestyle, would you be able to save three dollars for every four that you make? That would give you three years of living for every year of saving, although requiring incredible discipline.
Do I have debt or am I anticipating future debt?
There are no retirement dream destroyers like debt. In fact any reduction in cash flow is to be avoided at all costs. A mortgage payment, credit card debt, and lingering school debt should be tackled before considering an early retirement. If you have become comfortable with the debt in your life, now would be a good time to take it head on. If you carry this debt into retirement, your cost of living can be exponentially higher, potentially destroying any romantic notions you have of sipping martinis on a boat all day when you’re 45.
A simple rule to get rid of debt is to start with the highest interest balances first. Then, once that is paid off, take the money you were using to pay off that debt and apply it to the remaining balances. And, of course, don’t spend more than you make in any given month. Making just the minimum payments on your debt (especially credit cards) makes compound interest work against you, when that money could be placed into a retirement account.
Before entering an early retirement, all consumer debt should be paid off. The earlier it’s paid off, the earlier that money can be redirected to an interest-bearing retirement account.
How important is work to me?
Many retirees are so enthralled with the notion of a permanent vacation that they don’t stop to think if they should. Many Baby Boomers are finding that hitting the golf course everyday, while fun for a little while, eventually gives way to feelings of boredom and that they could be doing more.
Baby Boomers are redefining what retirement means. Instead of it entailing a life of leisure, pleasure, and long-delayed dreams being realized, they are now entering the workforce again, finding fulfillment in work they are passionate about.
This isn’t unusual. In fact, a recent study concluded that more than 4.5 million people between the ages of 50 and 70 are involved in “encore careers.” Although the additional income is surely an incentive, many retirees find fulfillment in contributing to the modern economy, donating their time to a cause they care about, or taking their skill set and applying it to something completely new.
How do you feel about your career? Do you find fulfillment in it on its own terms, or is it simply a paycheck?
The answer to that question will not determine if you can retire early, but if you should.