Should You Retire Early?

5 financial musts to consider before you think about quitting your job for good.

By Daisy Chan

You’ve had enough of the crazy commute, lots of hours and the endless to-dos, and dream of an early retirement? We hear you. But while stories of people retiring years ahead of 65 make it seem easy, it’s a decision that really requires lots of financial forethought and planning. 

So how can you tell if retiring early makes sense for you? We spoke to Paul Merritt, principal and founder of NTrust Wealth Management in Virginia Beach, Virginia, and Eleanor Blayney, consumer advocate for the Certified Financial Planners Board of Standards, to find out when it’s doable. See if you meet these basic parameters, and go from there. Good luck!

1. You will have enough income in retirement to equal 70%-80% of what you’re making now.

That’s how much most people need to maintain the lifestyle they’re used to. But to get a good idea of what you’ll really need, write down everything you spend money on now for six months, then tick off the ones that you’ll likely still have in retirement and add any additional expenses. “This is an extremely important step,” says Merritt. “For younger retirees, travel, entertainment, dining out, and gifts are not likely to diminish in early retirement, so be as realistic as possible concerning your projected lifestyle expenses.” Blayney says research shows retirement spending tends to resemble a smile, with higher spending at the beginning when retirees are active, a dip in the middle, and higher spending towards the end, mainly due to medical expenses. 

Tally up funds from all your retirement accounts, pensions, social security benefits, and any inheritance, trusts or other sources of income, and see what your annual income might be. You’ll want to have enough  money to last until you’re 85 at least, and even up to 100 years old (to calculate your life expectancy, go here.) For investment income, ideally you will live on the interest without dipping into the principal, so you can keep the principal working for you. Of course there’s no way to know what the stock market will do, but figure a historical return rate of 5% to 7% and take out 3% for inflation to get an idea of how much money you’ll have. For your expected social security income, check the social security web site, but note that the "Quick Calculator" is not always accurate. To get a more accurate assessment, try their Retirement Estimator.

2. You don’t mind getting reduced social security benefits.

If social security will be a major source of your retirement income, remember that the earlier you receive benefits, the less you get. In fact, starting benefits at 62 will seriously reduce your income by 25% over waiting until your full retirement age of 66 or older, depending on your birth date. "And if you wait to claim your retirment benefits until age 70, your benefits will be 76% higher than those starting at age 62," says Boston University economics professor Laurence Kotlikoff, coauthor of Get What's Yours: The Secrets to Maxing Out Your Social Security.

3. You will be able to cover your medical expenses, since you will not qualify for Medicare until your full retirement age.

Unless you have an employer sponsored health insurance plan that you can keep into retirement, you will need to purchase private insurance, at least for the years until you qualify for Medicare (generally age 65). Merritt says in his area, costs can be $350 to $500 a month for premiums alone, but be sure to check the policies of providers in your area as costs vary widely, and factor that into your expenses. 

4. You have a career that will allow you to transition into part-time work if needed.

“For most retirees, working part time in retirement will take an enormous burden off your investment income needs,” says Merritt. Do some research into how easy it will be for you to find part-time work you enjoy, whether in your current industry or a new one. Could you go part-time at your company or be a consultant? Will you need additional training? Also keep in mind that the additional income could reduce your social security benefits, although income from your other sources such as 401(k)s and IRAs will not be affected.

5. You are prepared to downsize your home if your budget requires it.

Even if you can afford your mortgage, what about the upkeep and utilities associated with owning a home? You may be surprised to find that such expenses can amount to nearly as much as your mortgage payment. Again, be thorough when you’re assessing your expenses, and understand that in order to retire early, it might make sense to move to a cheaper home.

Of course, everyone’s situation is different, and you’ll want to spend the time to really crunch the numbers before deciding to retire early. Too daunting? A financial planner can go over all your numbers and do the calculations to give a good picture of where you stand if you were to retire now and what your retirement years will look like. Ask friends to recommend a planner or go to the web site of the Certified Financial Planner Board to find a certified planner near you.

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