Is Early Retirement an Option for You?
We’ve all asked ourselves the question. Maybe it came after a grueling month at work or after seeing your globetrotting friend’s posts or after counting the wishes on your ever-expanding bucket list.
Either way, it’s there in the back of your mind. Is early retirement an option for me?
But that question is really an abridged version of a more fundamental one: How much savings do I need to afford the retirement I want? Answering that one takes a lot of soul-searching and a bit of math.
What does retirement mean for you?
Everyone’s ideal retirement is unique. Because of this, the financial strategy that works for one won’t work for another. That’s why wanting to retire for retirement’s sake is a bad idea. It doesn’t provide you the information you need to prepare.
Before you can think about retiring early, you need a good grasp on what you want out of retirement. Is it staying close to home and family? Is it migrating with the seasons in an RV? Is it a jet-setting lifestyle filled with historic sites and new cultures? Or is it pursuing a dream career that can’t otherwise support you?
Early retirement only works as part of an intentional life plan, one based on concrete goals and financial knowledge.
How much money will early retirement cost?
As we’ve discussed, it’s impossible to define a one-size-fits-all nest egg. That’s a conversation you’ll need to have with a financial advisor whom you trust. However, we can sketch out a scenario to serve as an example.
The rule of thumb is that you’ll need 70 percent of your pre-retirement income to get by. This amount can come from many sources: savings, pensions, investments, part-time jobs, etc. If you retire early, you won’t be able to draw from Social Security, so you’ll have to make up the difference.
Let’s say you have $1.5 million saved. Drawing 4 percent of that nest egg will net you around $50,000 a year for 30 years. That’s 80 percent of $62,000, the U.S. median household income. But that number leans on some assumptions, specifically that inflation remains steadily under 3 percent and that the rate of return is around 6 percent.
For some, an annual stipend of $50,000 will build a cozy retirement. Others not so much. Retirees who travel a lot may end up spending 100 percent (or more!) of their annual pre-retirement income. They will need to save more than the aforementioned $1.5 million to draw $62,000 annually.
Want to experiment with some figures? You can find a helpful retirement calculator here.
Plan for more retirement than you think
Americans are living longer than ever. According to the U.S. Social Security Administration, a 65-year-old man can expect to live until he is 84, a woman until 86.5. And those are just averages. One out of every three 65-year-olds will live into their 90s.
That’s great news, but it comes at a cost to the early retiree. Living longer means stretching your savings across those additional years. Even if you remain in good health, medical expenses increase with age. You’ll pay for every bonus year you live. (Though, that’s certainly better than the alternative, right?)
Can I retire early?
Is early retirement an option for me? For many of us, the answer is probably not. A 2018 National Institute on Retirement Security report found that roughly three-quarters of Americans fall short of retirement saving targets for their age—let alone for early retirement.
But early retirement shouldn’t be seen as a solution to bad work-life situation. Chances are many of those problems would either follow you into retirement or retiring early would create more. You’re better off trying to solve these issues with less drastic changes.
On the other hand, if you’ve saved, discussed a strategy with a financial advisor, and have concrete goals that fit within an intentional life plan, early retirement may be an option for you.