How many times have you dreamed about an early retirement? It’s a common daydream, right? Maybe you are in your mid 40s and realize you have more than half your working years behind you and wonder if you can grind out the rest of the ride. Maybe you are 10 years or less to retirement and trying to figure out how to make it more like…5 years (so you can spend more time on Cape Cod or Florida!). Maybe you are a business owner trying to figure out how to move on to your next thing or recapture more time with family.
Regardless of your personal goals and desires, our clients often ask us the same thing: “What would it take for us to retire earlier?”
The retire-early lifestyle is part of the “financial independence, retire early” movement. It’s all about redefining the concept of retirement and making retirement more about having the financial independence to work less and spend more time doing things you love post-retirement.
How can you plan ahead and save up to retire early? Here are a few things to consider when planning for an early retirement.
How to retire early
If you’re serious about an early retirement, you have to plan ahead – as early as you can. Retiring early isn’t just about financial independence. It comes down to knowing yourself and being realistic about what you can and can’t do. A lot of people think they have ten to fifteen years left in their tank, but then they get tired, burned out, and/or their priorities change.
There’s a reason most people work into their 60s or 70s. Retiring early involves a lot of planning. With proper resolve and solid strategies, early retirement can become a reality.
- What does “Retirement” actually mean to YOU?
Prior to calculating your retirement budget, you need to figure out what exactly you want to do during retirement. Does retirement actually mean not working? Or does “retirement” actually mean not doing what you are currently doing for work 40+ hours per week? In 20 years of retirement planning, I’ve been amazed to see the reinvention of people as they move away from their long-term, full-time gig. Often we see our clients become happy, young grandparents. We’ve seen clients open businesses in retirement and take control of their schedule and destiny. Others have traveled, taught, mentored, volunteered or become pillars of their community.
- Take stock of your financial situation
So, the goal is to no longer work full-time, right? This generally means a large reduction in income. There are four components to every financial situation: ASSETS, DEBTS, INCOME and EXPENSES. So if you anticipate a reduction in INCOME, then you must take stock of your ASSETS (Am I saving enough?), DEBTS (Do I have debts which will impede an early exit?) and EXPENSES (Will I spend just as much now as I will when I retire?).
When assessing your situation, ask yourself:
- Are their opportunities to refinance, restructure, consolidate or pay down debt?
- Am I “Paying Myself First?” (filling savings buckets before spending on the fun stuff)
- Can I increase savings into my workplace retirement plan? (401k, 403b)
- Am I spending too much now?
One other thought on INCOME…Some people who plan to retire early will look for extra income sources to funnel directly into their retirement coffers. Side hustles and income producing investments are the two most popular ways to increase your income and retire faster. A side hustle (consulting, teaching, part-time work) which nets $6,000/year after taxes can fully fund a Roth IRA! Do that for 10 years and that’s an additional $60K for your retirement before a dollar of growth is figured in!
- Expenses NOW vs. Expenses in Retirement
No matter how you look at it, retiring early means making changes to your current cash flow and spending habits. When you stop working full-time, you need to think about how much money you’ll need to get by each month. You’ll want to be very specific about this number, and base the number on your basic living expenses, occasional expenses (dental work, new furnace, etc.) and big ticket items (car, second-home).
Your budget will look different in different stages of your retirement, and it’s important to consider each stage and plan accordingly. There may be a point where you drop life insurance, and instead add long-term care insurance. You may plan to travel more in your 60s, and spend more time with family in your 70s. It really is a personal decision!
- Have an Investment Plan that “Evolves” and Considers Risk.
As you get closer to those crucial years prior to retirement be sure that your portfolio at Age 50 does not resemble the portfolio you had at age 30. When you are ten years or less from retirement, the argument could be made that you have more to lose than to gain. The hard truth is that retirement savers still need growth!
The mix of investments you hold should evolve over time as you get closer to retirement and those other life milestones which need a whole lot of money.
A bucketing system can be a helpful way to allocate your risk before and during retirement. Each bucket has a goal, like a second home purchase or a child’s wedding. The closer the time horizon is on that goal…the more careful you may want to be with that money.
- Consider an “Outside Source” for Advice
As an investment advisory firm, we have been honored to be the third voice in the room for a couple or an empathetic set of ears for our single or widowed clients. We have seen first hand the value of an outside source to bounce ideas off of and to tackle questions along the way. It is not always a financial advisor. This could be a best friend, your accountant or a trusted family member.
Money is a very personal and private matter – but a second set of eyes may be able to see things in a slightly different way.
- Be Idealistic…but Realistic.
When you’re ready to retire, you need to think about the practical sides of retiring in order to maximize your chances of living the life you envision. Consider the following:
- Revisit your retirement dream: Check in with your life partner or spouse. What do you both expect? How do you picture your daily routine? Have aging parents or grandkids completely changed the “retirement equation”? Has your vision changed from a few years ago?
- Where will you retire?: Where you live during retirement will determine a lot. What’s the cost of living in your area? Do you plan to downsize? Do you plan to move elsewhere? These are all important decisions to make prior to retirement. If you move once you retire, without planning, it could have a major impact on your finances.
- Will you work?: Some people still plan to work during retirement for some extra income. If you plan to work part-time, what will you do? If not, will you miss the social interaction? It’s all up to you – but you need to understand what that future will look like!
- Evaluate options for healthcare and social security: Healthcare is one of the biggest expenses for early retirees. Our pre-65 retirees are not yet eligible for Medicare which is an issue – but not one which should not necessarily force you to work longer. Social security is a big and often forgotten source of income in retirement. The longer you delay social security, the higher your payments – but there is a balancing act for our early retirees who are not eligible until age 62.
When you’re planning an early retirement, there’s a lot to consider! That’s why it can be so important to work with a financial professional to help you figure out the process.
It’s OK to ask for help.
When you’re thinking about retiring early, it’s important to be realistic with yourself and understand your priorities, your needs, and your desires.
In our daily routine at Arsenal Financial, our goal is to get our “T-Minus 10 Years to Retirement” clients on a near autopilot plan so you don’t have to worry about IF you retire, but HOW you retire. It has been a joy to be a sounding board for our clients as their lives and thoughts on retirement take shape.
If you are still reading this blog and we have been helping you for years – drop us a note and feel free to tell us what you are thinking. If you are not one of our clients and find yourself reading this article – we are all ears for an initial conversation.
Thanks for reading & Happy Planning!