Once you slide into your 50s, however, the question of early retirement grows complex. You might still need your paycheck. If so, case closed. And you might love your work and hope to pursue it for many more years.
If you're ready to quit, however, there's a lot to consider before casting loose. On the plus side, you'll be able to take your life in any direction you want. On the downside, early retirement carries financial and emotional risks. Before telling your boss to take that job and shove it, run down this checklist to see if your plan is sound:
Do you really have enough money to finance a long retirement?
Don't underestimate your longevity. At, say, 55, men have an average of 28 more years to live, and women 31 years. Roughly half of you will live longer than that. During your early years of play, you'll be living primarily on your savings and investments, plus any special sources of income such as rents, royalties or perhaps a small pension. You'll have to wait until 62 to qualify for Social Security retirement benefits. But by claiming that early, your benefit will be docked by as much as 30 percent, compared with what you would receive if you waited until your full Social Security retirement age (67 for today's 55-year-olds). You might come to regret that.
Have you made a retirement budget you can live with?
To make it easy, sketch the budget for only your first retirement year. Start by listing the income that you can realistically expect after your paycheck stops. For budget purposes — and to feel fairly sure that your money will last for the next 30 years — assume that you'll take only 4 percent out of your savings and investments. The total, from savings and other sources, represents your spending limit.
Now add up your expenses. If they're higher than your spending limit, you'll have to cut back — maybe sharply. That might not be hard if your largest budget item is your house and you're happy to downsize. If not, you're probably not ready, financially, to make the leap.
In fact, you're not even ready if your budget just barely breaks even. Inevitably, you'll run into costs that you didn't expect. If you cover them by digging too deeply into savings, you might run seriously short of money a couple of decades from now. You might be better off staying at work for a few more years, cutting spending and concentrating on saving more.
When budgeting future withdrawals from your savings and investments, follow the classic 4 Percent Rule: Take 4 percent of your financial assets in Year 1. Take the same dollar amount plus an inflation increase in Year 2. In Year 3, take last year's dollar amount plus another increase to cover inflation, and continue on that track. When you eventually sign up for Social Security (later, not sooner, I hope), that income will be inflation indexed, too.
Are you out of debt?
Giving up a paycheck when you're carrying credit card debt is nothing short of madness.
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Do you have health insurance?
Some corporations provide early retirees with health insurance until they reach 65 and qualify for Medicare. If you're not that lucky, survey the private marketplace carefully to see what's available at a price you can afford. Going bare can wreck your finances overnight.
Do you have a sustainable investment plan?
At today's interest rates, you'd need a two-ton truck full of money to live off the interest paid by high-quality bonds or certificates of deposit. Low-quality bonds yield more but carry market risk. If you switch your savings into dividend-paying stocks, you're facing market risk plus a lack of diversification. That's because you'll have too much money in financials, consumer staples and utility company stocks and not enough in the growth stocks that typically don't pay dividends.
Financial planners might advise early retirees to hold 60 to 70 percent of their money in an index mutual fund that follows the total stock market (both large and small stocks), for 20- and 30-year growth. The balance would go into intermediate-term Treasury bond funds. They're a good cushion because their prices usually rise when the stock market falls. Research shows that following this strategy in conjunction with the 4 Percent Rule gives you very high odds of making your money last for 30 years. Put an extra 5 percent into stocks if you need the money to last for 40 years.
If you're married, how well do you and your spouse get along?
Retirement at any age throws you continually into each other's company. Doing the 50 states in an RV will become a misery if you're arguing all the time.
How flexible are you?
If your early retirement doesn't work out because you're bored or you're spending money faster than you expected, be prepared to go back to work — part time, at least. That means keeping up your skills or finding new ways of deploying the natural talents you have. If you're choosing a new place to live, you might consider its employment opportunities, just in case.
Who succeeds at early retirement?
People who have enough money (with "enough" depending on how high on the hog you want to live), plenty of personal interests and an adventurous disposition. Have a happy second half of your life!
Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.
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