Early retirement is what so many folks hope for, but as many as 23% of Americans are preparing themselves to work past their 70th birthday, as reported in a 2016 Willis Towers Watson survey.
Once people get to their mid-fifties, the idea of retirement transforms from “someday” to the near future. For some who are not in love with their work, the idea of an early retirement is really tempting. After all, they think, we’re frugal, we can live on very little. But can you really?
MarketWatch’s recent article, “Why early retirees should prepare for austerity,” says that for some resourceful people, an early retirement is a viable possibility. About 2% expect to retire before age 55, based on the Willis survey of 5,100 respondents. If your nest egg exceeds eight figures, you’re probably safe retiring in your 50s (or your 40s). However, for the rest of us, the arithmetic gets trickier.
Examine your household spending and project how this might change over time. Use your budget to identify what your lifestyle is and how it will change in retirement. If you don’t know how you’re spending money today, you have no idea how much you’ll need in retirement.
Along with health care, insurance, and travel expenses, calculate the risks of inflation and market swoons that can deplete your portfolio. This can thwart a well-planned retirement strategy. For instance, health care costs in your 50s and early 60s (prior to Medicare) might continue to outpace inflation. A couple retiring at age 65 in 2017 will need about $275,000 in savings to cover out-of-pocket medical expenses until they pass away. This doesn’t take into account long-term care and nursing home costs, over-the-counter drugs and most dental services.
Run the numbers based on various scenarios, such as if inflation grows to 4% or more. Multiple projections can help you determine if your savings can stand up under adverse conditions, especially if the conditions persist over long periods. A general rule of thumb is that you’ll need 75% to 80% of your pre-retirement income to maintain financial security, after you stop working.
To mitigate the risk of a sudden and steep expense, you could add to your retirement income with a part-time job, which can also help you delay taking Social Security—increasing its payout.
Imposed frugality works best for those who have experience living within their means. Otherwise, your impulse to retire early can lull you into a sense that you can cut back and enjoy it. Often those who’re planning early retirement believe they can exist on $4,000 a month, but when you look at their expenses, there’s a big disconnect if they’re currently living on $9,000 a month.
One way to give yourself and your frugality a reality test: try living on your proposed retirement budget for six months. Leave yourself extra money to pay your mortgage and any other expenses that will not be present during retirement. Can you really make those numbers work? If not, try a two-fold approach to retirement: ramp up your savings and dial down your spending.
Reference: MarketWatch (December 6, 2017) “Why early retirees should prepare for austerity”
Holden & Campbell, LLC – Annapolis Estate Planning Attorneys
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