Can I Retire Early? Six Questions to Ask Yourself
by Steve Lewit
Can I retire early? It’s a question that many Americans ask themselves, from the remote corners of Maine to the sunny beaches of southern California, to the streets of SGL Financial’s hometown Buffalo Grove, IL. After all, who wouldn’t love to wave goodbye to work deadlines, rigid schedules, and unhinged bosses?
Many people, actually. Retiring early can necessitate sacrifices that sometimes outweigh the appeal of early retirement. But deciding when to retire has a significant impact on your retirement planning, so it’s an important question to consider. Read on to learn more about what you need to consider as you explore your retirement age options and work to achieve financial independence.
Am I still eliminating my debt?
In a perfect world, you’ll head into retirement with zero debt. Particularly if you’re retiring early, you’ll want as low a cost of living as possible to minimize the risk that you’ll outlive your savings and investments.
The last thing you want to do is head into retirement with high-interest debt, particularly credit card balances. But also think beyond credit card debt to other repayments. For example, where are you on your mortgage? Do you want to pay it off prior to retirement? Or are you okay using your savings or retirement assets to pay that monthly obligation? If not, a few more years of work could get the house payment off of your plate prior to retirement.
In addition to existing debt, try to also consider future debt. What big expenses do you anticipate encountering in the foreseeable future? Will you need a new car? Are you interested in purchasing a second home? Does your current home need any expensive repairs? As much as you can, knock out these purchases before retirement, so you can apply the bulk of your retirement income to daily living expenses.
Can I cover my expenses without dipping into my retirement accounts?
One of the reasons many people do not retire early is because there are penalties for accessing retirement accounts like an IRA or a 401(k) before the golden age of 59½. Moreover, it’s not possible to collect Social Security before age 62 (and it’s generally even better to wait to collect until age 70 when you can maximize the benefit), and Medicare won’t kick in until age 65.
Although there are some ways to get around the 59½ age requirement for IRAs, there are complicated rules and potential penalties that are rarely worth the ability to access (and deplete) these accounts. Similarly, there are alternatives to Medicare and employer-sponsored healthcare plans, such as taking advantage of your spouse’s healthcare or investing in private healthcare, but you’ll need to carefully weigh the pros and cons of these options.
If you are retiring early, you’ll need to identify where your post-employer, pre-retirement income will come from, and whether the funds will sufficiently cover your needs. What’s most important is to have a viable income plan and a healthcare plan that you’ve already assessed for affordability.
Do I have a comprehensive retirement plan?
It’s time to sit down, draw up a budget, and maybe consult a professional to determine how much you’ll need to withdraw over time and how you can make sure you have enough to fund your desired lifestyle, both in terms of how you want to live and how long you’ll likely need to fund your lifestyle.
Consider everything from your monthly cash flow to your long-term strategy. How much money do you need each month to feel comfortable? From where will you source that money? How will withdrawing that money affect your taxes and the longevity of your accounts?
Without a paycheck replenishing your accounts, you’ll need to plan for the long-term in order to reduce the likelihood of running out of money. If you haven’t crunched the numbers yet to determine how retiring early will affect you in 30, 40, or maybe 50 years, then you’re not ready to retire.
How much income do my investments generate?
Some investors build retirement savings with the goal of living off of the income their investments generate. For example, you might buy dividend-paying stocks and reinvest your dividends along the way, allowing the magic of compounding to work in your favor.
Living off of dividend income can afford you the opportunity to use less or none of your principal. You’ll have to do the math to compare the amount you expect to spend each month on fixed living expenses as well as discretionary items and the amount of interest your investments reliably and consistently generate.
If you discover you’ll need to use both dividends and principal to cover your expenses, you will quite likely decrease your dividend income as your principal begins to decrease. Along similar lines, as you start spending dividend payments rather than reinvesting them, your projected dividend income could change. Both scenarios will affect future income and budgets should be rebalanced to account for those effects.
Between your core nest egg and your investment income, verify that you not only have enough money to cover your expenses into and beyond retirement age, but that you have a cushion to ward off unnecessary anxiety down the road.
Will I struggle emotionally or psychologically if I retire early?
While it’s widely regarded as one of the pinnacles of the American dream (along with homeownership), retirement also represents a major life transition.
As with any life transition, consider how you will respond to it, not just financially, but psychologically. While some people experience nothing but happiness, freedom, and the all-around good life in retirement, others struggle with a whole host of emotional issues.
Questions to consider include: Without work to define me, will I go through an identity crisis? Do I have other things happening in my life that characterize who I am beyond my professional life? Will I, at some level, continue my professional life, maybe by consulting, serving on a board, or volunteering at a non-profit? Will I be able to find ways to spend my time without the structure of employment?
Beyond these deep, personal questions, there’s a straightforward one — will I be bored? You can be happy to be no longer working every day, but at the same time feel unmoored by having absolutely nothing to do. Figure out not only what you like to do outside of work, but if these activities will sustain you over time and potentially lead to other, equally as exciting endeavors.
Do I have the means to test run retirement?
If you have the luxury, such as vacation time banked and the financial resources to pull it off, test your retirement.
Take two weeks or, in a perfect world, more time off of work and mimic what you think your retirement life will look like. Try not to go on an actual vacation. Instead, kick around the house. Engage in your hobbies. Pilot your anticipated budget. Work through the numbers. Take a hard and realistic look at what your life might be like in retirement and decide if you like that better at an early age than getting up and going to work each day.
You might be an excellent candidate for early retirement. However, before you take the plunge, it’s wise to review your situation to ensure you live life after work stress- and worry-free. Also, consider discussing your situation with a trusted financial advisor and tax strategist so that you don’t encounter unwelcome surprises down the road.