Sure, you can retire early
Just have plenty of cash, Robert Powell says.
As goals go, it’s a universal one. Most people, when asked (and even when not asked), want to retire early.
Often, however, they don’t know whether it’s possible, whether they can call it quits and go do what they’ve always wanted to do — without worry. But financial planners say there is a way to determine whether you can retire early.
❚ Planning to retire early is no different than planning for any other retirement. “The dynamics are the same, but they tilt in opposite directions,” says Michael Lonier, a financial planner with Lonier Financial Advisory.
Early retirement, according to Lonier, means less time working, saving, building Social Security and pension credits, and growing a portfolio that needs to last longer than a later retirement. “Delaying retirement pushes all these levers the other way — more time to save, higher Social Security and pension credits, a longer period for a portfolio to grow before withdrawals begin, and a shorter post-retirement period of expenses that savings needs to over,” he says. ❚ Match expenses against income. To determine whether you can retire early, Lonier says “you have to match your expenses against your income and your ability to generate income from your savings over the full retirement period.” That might be, for instance, 30 years for someone retiring at 65, or 40 or 50 years for someone retiring at 55 or 45.
To be sure, you’ll factor other sources of income — Social Security, pensions, rental income and the like — into your early retirement plan. But, you’ll likely rely on your savings for income during the early years of your retirement.
❚ The nest egg. How much you’ll need in your nest egg to pay for your expenses over the course of your retirement depends in large part on your desired standard of living. “There is no magic number,” Lonier says. If you have a frugal lifestyle, you might not need all that much. But if you desire a lavish retirement, you’ll need a sizeable nest egg.
In general, experts say retirees should be able to withdraw 2% to 4% from their portfolios and have it last for
30 years. Thus, a person with a
$500,000 portfolio could withdraw anywhere from $10,000 to $20,000 per year over the course of 30 years. Of course, if the amount you can withdraw safely from your nest egg isn’t sufficient to fund your desired standard of living, you might have to lower your expenses or make other adjustments to your plan.
❚ Plan for risks. For his part, Dirk Cotton, a financial planner and author of The Retirement Café blog, says those who want to retire early will need quite a bit of money, if only to mitigate and manage the risks they may face in retirement.
Some of those risks, for instance, include inflation, interest rates, public policy, unexpected health care needs and costs, a change in housing needs, the loss of your ability to live independently, the death of a spouse or other marital changes and bad advice or fraud.
“Unless you have accumulated several million dollars for retirement, probably at least $3 million per spouse and hopefully much more, you are going to have some exposure to the risks of losing your standard of living or returning to work,” says Cotton, who retired from his first career in corporate America to become a financial planner and blogger.
For the record, Cotton retired early, largely for non-financial reasons, and despite having studied the prospects for years, he readily admits to “greatly underestimating” the risks.
“Unless you’re willing to dismiss your responsibilities and move to Costa Rica or you have a boatload of money saved, early retirement is incredibly fraught,” he says.
The bottom line? “Ultimately,” Lonier says, “we get the retirement we can afford no matter when we retire.”