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RETIRE EARLY...The Basics.
The thought of early retirement has always been tempting for
workers, but it's all the more tempting now that our view of retirement
has changed from a few decades ago. We no longer see retirement
as a time when our productive life is over, when we spend our
remaining years reminiscing about the past. Now, retirement is
viewed as the time when we finally get to enjoy all the things
we would love to do, if only we didn't have to work.
Look before you leap
If you want to retire early -- before age 65 -- you're not alone.
In a survey of workers ages 30 to 50, more than half plan to retire
at 60 or younger and only 6% plan to work past 65.
The problem with early retirement is that it's often so appealing
that it becomes easy to make the decision before you really consider
the ramifications. And if you do leap before you look, you may
be leaping to an early financial death.
Will you run out of money?
Many experts estimate that a huge percentage of future retirees
will have to cut their expenses dramatically once they stop working
if they want to make sure they don't go broke. The real answer
to the question, "Can I retire early?" is: "Of
course you can, but you may run out of money."
If that happens, the best scenario would be running out of money
while you were still able to work, but chances are you would get
a mediocre job at best. The worst circumstance would be going
broke when you're no longer able to work, so your only options
are to live on whatever monthly benefits you have (such as Social
Security and a pension) or to turn to your children or other relatives
for help.
When thinking about retiring early, there are
two issues to consider:
Can I afford to retire early?
Do I really want to retire early?
Depending on how well your day went at work today, or how your
career is progressing in general, you might think the second question
is absurd. But if you look at how long you will be retired, you
might want to rethink that second question.
The reality is that if you retire early, you may be "retired"
for as long as you were in the working world. Based on actuarial
tables of how long Americans actually live, if you retire at age
55, you can expect to live to age 83. If you retire at 65, you
get another year's reprieve to age 84. And if you keep working
until age 70, you're expected to live to age 86. Couple that with
the fact that if you're married, one of you is likely to outlive
the other by four to six years or longer, and you can see how
early retirement requires serious financial planning.
Plan for how long you expect to live
To be practical and conservative in your financial planning, you
should probably tack three or four more years onto these "average"
death ages. If your relatives tend to live into their 90s, you
had better add on a few more years.
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Some of those later years may not be as active as the early ones,
but they will be just as expensive thanks to medical costs. The
only good news about living to 100 is that if you own a life insurance
policy, you're usually considered actuarially dead by that time.
That means you'll get the full death benefit while you're still
alive and kicking (although you might not be kicking very high).
If you assume you'll enjoy at least an average life span, taking
early retirement at age 55 or 60 means you have 30 years or so
of retirement ahead of you. That's a long time without a paycheck
or a structured schedule.
Now, don't think I'm trying to talk you out of your dreams. I'm
not. What I am trying to get you to do is to think about what
it will take and what it will mean.
Before you allow yourself the luxury of daydreaming about what
you would do with all those years of free time, look at the numbers
first and see whether you can afford to retire early.
There are three financial factors to consider:
How much do you expect to have in monthly retirement income?
This would include any money from a traditional pension plan,
Social Security or other sources. Many people don't realize that
even if they retire at 55 or 60, the earliest they can start receiving
Social Security is at 62. And if you start then, the benefits
are no more than 80% of what they would be if you waited until
"normal" retirement age (currently age 65 or older).
Many people choose to defer their Social Security benefits for
as long as possible to increase the monthly benefits. Before you
make this decision, ask your accountant or financial planner to
help you calculate whether to start taking benefits at age 62
or to defer. Usually you're better off starting at age 62 even
though the benefits are less. Why? You get extra payments that
you can invest in the interim.
How much in assets will you have accumulated by retirement? These
include retirement plans that don't have the fixed-income payout
of pension plans (such as 401(k) plans, profit-sharing plans,
Individual Retirement Accounts, etc.). You also may have other
sources, such as an inheritance or the profits from selling your
house for a less expensive one.
How much will you spend? Planners recommend that you estimate
your retirement expenses to be about 80% of those you incurred
before retirement, but many people want to keep the same standard
of living and replace work-related expenses with travel, entertainment
and other new costs.
The dreaded inflation factor
Don't forget about the effect of inflation as you consider your
days in the RV rolling down Highway 101 in California. What looks
like a hefty retirement income at age 55 or 60 may be near the
poverty line by the time you're 70 or 75. For example, let's assume
that inflation increases at 3% a year. If you retire today at
age 55 on a yearly income of $40,000, you'd need $72,000 by the
time you're 75 to maintain your standard of living. At age 80,
or 25 years after you retire, you'll need $83,800. And look at
the difference a mere 1 percentage point change in average inflation
makes: If that 3% inflation rate actually averages 4%, you'll
need $87,600 at age 75 and $106,000 at age 80.
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If you are still seriously considering early retirement, there
are some courses of action to start taking today:
First, when you estimate your expenses, put in a 5% fudge-factor.
In other words, assume that your expenses will be 5% more than
you anticipate.
Assume an inflation rate of at least 4%. Long-term, it has averaged
about 3% but over the last 20 years it has been closer to 6%.
Start planning now, which usually means slashing your budget
so that you can sock away every dollar you can. (This is good
advice anyway, whether you plan to retire early or not).
Remember that the earlier you retire, the longer your retirement
portfolio is going to have to work for you. So just because you're
planning to retire doesn't mean you need to move more money into
conservative, lower-yielding, fixed-income investments. (Remember
that all of your income doesn't need to be from dividends and
interest; it is perfectly acceptable to take some capital gains,
too.)
If you retire at 55 or 60, you will probably (hopefully!) need
a substantial part of that money in 20 to 30 years, so a good
portion of your funds should be invested in the stock market.
Finally, and this is critical, see a competent, experienced financial
planner every couple of years to run the numbers for you or to
double-check your own numbers. The planner can serve as a sounding
board to give you a second opinion about your retirement strategy
and investment allocations.
Now what do you do?
If, after doing this "number crunching," you find that
you can retire early, the burning issue becomes what will you
do with your time. When you're exhausted from work, the possibility
of day after day stretching by with no required attendance anywhere
sounds delightful, but this can get old very quickly. When you
start making a financial plan to retire early, start planning
what you're going to do with your time when that day comes. Even
the best made plans can change; many an early retiree has returned
to work because she cannot stand the thought of not working for
the rest of her life.
At a time when most people can't afford to retire and maintain
their standards of living, taking the chance of retiring early
is a big risk. However, if you start planning early in life, do
your homework and understand that you're likely to be around for
the next 20 to 40 years and your money needs to be, too, early
retirement may be for you. The only downside from a social perspective
is the envy of everyone else you know who would give anything
to be in your early retirement shoes.
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