Is Early Retirement Right For You?

September 22, 2020

Topics: Budgeting | Early Retirement | Cash Investments | Building an Emergency Fund | Health Care

Media type: Article, Podcast

Is Early Retirement Right For You?

4.7 minute read • 

September 22, 2020

I love my work. I love the team members I work with at the Vanguard Arizona campus and enjoy developing personal relationships with customers. But the best part of me as a financial advisor is telling clients they can retire earlier.

In the United States, the average retirement age is 63 for women and 65 for men. *But since the outbreak of COVID-19, many people are facing early retirement and wondering if it’s the best option for them.

If you find yourself in this situation, your first step should be to determine if early retirement is a realistic option. Here are some things to consider.

identify your goals

A financial advisor can analyze your portfolio and use cash flow modeling tools to help you determine if you can retire early. But if you don’t have an advisor, our retirement income calculator can help you figure out where you stand.

try our calculator

Use these preliminary calculations to compare what you have now to what you might need when you retire at a certain age. Then start thinking about how you can change that, in other words, find ways to save more for retirement. Can you throw away the cable? Reduce the number of times you order takeout each month?

Consider these “sacrifices” in terms of net benefits:

Weigh the financial benefits against the social or emotional costs. If you’re not ready to compromise on a particular lifestyle choice, accept that you’re going to have to cut back on other things.

I’ve seen clients commit to saving most of their 6-figure paychecks to live on $4,000 a month. I’ve also seen clients decide to offer an alternative (and less aggressive) retirement goal. Be flexible and consider your options. remember:

The most achievable goals are those that are realistic and achievable.

Are you considering early retirement? Our advisors are always at your service. Take control of your finances

The ability to retire early often comes down to dollars and cents:

How much do you have now, how much will you have if you stay on track, and how much will you need to survive (eventually) decades into retirement.

budget (now)

You cannot predict future costs without knowing your current costs. Even if you do it without a budget, early retirement is an ambitious goal.

Our retirement expense spreadsheet can help you visualize where your money is going. Complete it now as a pre-retirement estimate, then assess your financial situation in retirement. Plan to replace 85% to 100% of your pre-retirement income in retirement. (It’s best to overestimate — not underestimate — your spending needs, especially in the early years of retirement.)

Estimate your retirement expenses

Once you’ve estimated your monthly expenses in retirement, use our retirement income worksheet to see if your retirement income (less taxes and fees) is enough to support your lifestyle. Start with a monthly calculation and go from there.

Calculate your retirement income

leverage factor

Retiring completely debt-free may not be realistic for everyone, especially those retiring early. That said, I strongly recommend paying off debt with high interest rates and few potential tax advantages, such as personal loans, credit cards, and car loans, before retiring early. Other debts, like your mortgage, can add to your monthly, quarterly or annual expenses. Remember that the larger your non-discretionary expenses, the more income you will need.

preserve the cash reserve

My wife and I are nearing retirement and our goal is to save enough money to cover 3-6 months of daily expenses. I encourage my clients to do the same. This protects against income shocks, such as unexpected job losses. Many clients are surprised to learn that income shocks are still a concern for retirees. If your investment returns are below average or your monthly expenses increase unexpectedly, you will need to cover day-to-day expenses. For example, some retirees end up caring for family members, parents or adult children. As difficult as it may be, be realistic and honest about these unexpected financial obligations.

It’s important to have enough cash on hand (now and in retirement) to cover other financial shocks, such as large medical bills or home or car repairs. A nest egg of around $2,000 is a good starting point. (For more information, see Vanguard’s study on emergency savings.)

Planning future health insurance expenses

Health care costs are often one of the biggest barriers to early retirement. Before you turn 65 (when health insurance is available), your options are limited.

If you have a consultant, they can generate a personalized annual health care estimate. If you want to estimate for yourself, our research shows that these 6 factors can help you determine whether your future costs will be above or below average. consider the big picture

Retiring early isn’t just about finances. It’s also important to consider your emotional health.

If you took early retirement, what would you do with your time? There is no right or wrong answer to this question, but it is an important question to ponder. Transitioning from work to non-work can be a challenge. The satisfaction and happiness of retirement can quickly vanish if you don’t have a plan for how to use your free time.

understand the logistics

If you’re ready to retire early, start thinking about the fact that you can’t work full time. Are vacations an option? How about reduced hours or consultations? This can give you the opportunity to “try out” early retirement before you officially retire. Discuss your options with your employer to see what is available.

The prospect of early retirement can be exciting, scary and even daunting. But with a little forethought and planning, it can be a realistic possibility and we can help you achieve it with confidence.