The Road Not Taken
By Robert Frost
I'm 48 years old and would like to retire by the time I'm 55. What do I need to do make that happen? -- V.M.
Many people dream of making an early exit from the work-a-day routine. But making that dream a reality can be a challenge. The reason is simple. By retiring at 55 instead of, say, 65, you not only have 10 fewer years of saving and investing to build a nest egg, that nest egg also has to support you through an extra 10 years of retirement. That double-whammy of fewer working years to save and more retirement years to spend is what makes early retirement so tough to pull off.
But while calling it a career a good decade before you reach a more traditional retirement age may be daunting, it's not impossible. It will, however, take some serious, disciplined planning. Here are the four most important things you should do to improve your chances of success.
1. Ramp up your savings rate.
To maintain an acceptable lifestyle throughout a retirement that could last upwards of 40 years, you're going to need a sizable savings stash to support you. For example, let's say that in addition to the income you'll eventually receive from Social Security and any other sources, you'll need an inflation-adjusted $50,000 a year from savings in order to maintain your standard of living in retirement.
To have a reasonable shot at being able to pull that amount from savings year after year without too high a risk of running out of money too soon, you'll likely need a savings stash somewhere in the neighborhood of 30 to 35 times the annual income you wish to withdraw, or in this example a nest egg of roughly $1.5 million to $1.8 million.
You can get by with a much smaller nest egg, of course, if you'll be depending on it for significantly less income. But the point is that to accumulate enough savings during your working years to support yourself over an extra long retirement, you're going to have to do some heavy-duty saving.
The savings rate you should shoot for will depend on how much you've managed to tuck away already, how many years you have until you retire and how much income you'll need your nest egg to generate. But the standard recommendation of 15% or so a year isn't likely to do it. To have a realistic chance of throwing off the shackles of your 9-to-5 in your mid-50s, you may have to have to sock away upwards of 25% to 30% a year.
You can get a decent estimate of what sort of savings effort will be required by going to a good retirement income calculator and plugging in the age at which you hope to retire, the amount you already have saved and how income you think you'll need when you retire. By running several scenarios with different savings rates, you should be able to come away with a sense of how much you'll need to ratchet up your savings rate to have a reasonable shot at success.
2. Get a handle on your retirement expenses.
Many people assume their expenses will drop once they retire, but that's not necessarily true. Indeed, a 2015 study that examined changes in household spending in retirement found that nearly half of retirees actually spent more after leaving their jobs, at least in the initial years after retiring. So if want to accurately gauge whether you'll have enough income to cover your retirement living costs if you leave your job early, you need to have a realistic fix on what you're actually likely to spend.
The best way to do that is to create a detailed retirement budget. There are a number of free online interactive budgeting tools out there, but I like BlackRock's Retirement Expense Worksheet because it easily allows you to enter some 50 different expenses in eight broad categories. The worksheet also separates essential living expenses (housing, food, etc.) from discretionary ones (travel, entertainment, hobbies) so you can easily see how much room you'll have to cut expenses if necessary in the future without eliminating necessary expenditures.
Don't worry if you're not certain what your eventual retirement expenses will be. Do the best you can for now, and then make sure to update and refine your estimates as you get closer to your planned departure date.
3. Nail down health insurance.
For many people aspiring to retire early, getting and maintaining health insurance can be a major stumbling block. The reason: You're not eligible for Medicare until you hit 65. So if you retire before that date and don't have coverage through a former employer (or, if you're married, through a spouse's current or former employer), you'll have to buy health care coverage on your own. That can be a budget wrecker, which is why it's imperative you have a good idea of what the tab for health insurance will be before you actually leave your job.
Unfortunately, estimating what you'll pay for health insurance in the years ahead is a bit of a guessing game at the moment. But you can at least get a sense of what you might need to budget for coverage now by going to sites like eHealthInsurance.com and HealthPocket.com. You can then re-visit these sites as more details about health insurance costs emerge.
But make no mistake. You shouldn't even think of pulling the trigger on early retirement unless you're confident you'll have the resources to cover the cost of medical insurance as well as your potential health care costs overall.
4. Do some "lifestyle planning."
Lifestyle planning, or thinking seriously about how you actually want to spend your time once you leave your job behind, is an important part of any retirement plan. It's especially crucial, however, if you're contemplating early retirement. After all, by retiring early you could easily be looking at a post-career life that will last as long, if not longer, than your career. Thus, if for no other reason than to avoid boredom or the feeling that you're just marking time, you'll want to do all you can to make this stage of your life rewarding and fulfilling.
Research shows that retirees who have a wide circle of friends tend to be happier in retirement. So in the years leading up your planned exit date, you'll want to consider a variety of ways to remain socially connected, such as reconnecting with old friends, making an effort to stay in touch with colleagues from work and even cultivating a new network of friends and acquaintances, say, by volunteering at a local charity or enrolling in adult-education classes. Starting a new hobby or throwing yourself into a new project --writing a book, launching a blog, learning a new language or musical instrument, etc.-- can also help engender a sense of purpose during a lengthy retirement.
Lifestyle planning can also help with the financial side of preparing for your early retirement, as the way you live in retirement can directly affect how much you'll spend and thus how large a nest egg you'll require. So as you're working on your retirement budget and gauging how much you need to save, you'll want to think about such issues as whether you plan to travel a lot or stick close to home and whether you intend to remain in your current house or downsize to smaller, less expensive digs in an effort to free up home equity and lower housing costs.
It's also important to remember that some lifestyle decisions have both social and financial dimensions. For example, choosing to work part-time can not only be a good way to earn a few extra bucks and reduce withdrawals from your nest egg, but an effective strategy for remaining socially engaged.
Clearly, there are other topics you'll have to address as you prepare to make your early exit. You'll want to be sure you're following a consistent investing strategy that jibes with your tolerance for risk, balances growth and downside protection and keeps expenses to a minimum. If you won't have enough savings in taxable accounts to fund the initial years of your retirement, then you'll also want to look into ways of tapping tax-advantaged accountswhile avoiding or minimizing early-withdrawal penalties. And you'll want to monitor your progress as you near your planned retirement date to gauge whether leaving your job at 55 is still realistic or whether you might be better off delaying a year or two.
But this much is certain: The sooner you create a plan and put it into action, the better the chance your early retirement dream will become a reality.