Wanting to retire early is relatively common. Even if your goal was to stick it out until 67, your circumstances may have changed, or you might feel different about work than you did a couple of years ago.
And that’s OK. We speak to lots of people who are in the same scenario – looking for a viable way out that won’t jeopardize their quality of life in retirement.
In this guide, we’ll take you through the process of early retirement, including how it works, what to consider, and whether it’s the best option for you.
You can watch the video on this topic above, or to listen to the podcast episode, hit play below. Or you can read on for more…
Why do some people want to retire early?
There are lots of reasons why you might be considering early retirement. You may be feeling stressed and exhausted at work or have a new boss that you don’t get along with.
A wish to retire early isn’t always based on negative aspects of work, either. You may want to spend more time with your grandkids or start that round-the-world trip a few years earlier than you planned.
The question is: can you make it happen without endangering your financial freedom in retirement?
Retiring early – what it looks like and how it works
Retiring early may be something you can think about, but it does all depend on your finances and assets.
To show you how retiring early works, we’ve put together a detailed example which covers our process and all the things you’ll need to consider. But before we get on to that, allow us to introduce our character for this particular scenario, Cindy.
Cindy is 62 and looking to retire. She had planned to work until social security starts at 67, but she’s no longer happy in her job and wants to call it a day.
Does that sound familiar? Many of our clients are in a similar situation, so we thought it would be useful to look at whether Cindy could take early retirement.
Finances and spending
First, we need to get a picture of Cindy’s finances, assets, and spending. We want to find out:
- Does she have any savings?
- Does she have a pension?
- Does she have any other forms of income?
- What is her spending plan, and how much money will she need in retirement?
In Cindy’s case, it turns out she doesn’t have a pension or any other forms of income. But she does have a healthy savings pot, with about $1.1 million in a 401k.
She’s also projected to receive $3,000 a month in social security at 67, so that’s a good source of income to include in her retirement plan.
But what about her spending? Well, Cindy needs around $5,000 a month to cover both her essential needs and her “wants”. That could be money to spend on her grandchildren or to put towards regular vacations.
From here, we can create Cindy’s retirement income plan. This is a detailed document that sets out how she’ll use her money and how far it will stretch in retirement.
Creating a retirement income plan
Until you know what your finances will look like in retirement, it can be difficult to plan ahead and look forward to finishing work. That’s where a retirement income plan comes in.
After talking through Cindy’s finances, we’re now in a position to create her bespoke retirement income plan. To do this, we use specialist software that allows us to input all her information and make quick changes – like her chosen retirement age.
Let’s say Cindy already had an income plan which was set up for a retirement age of 67. By changing it to 62, this will affect the numbers and how much money Cindy has in leftover assets.
When creating a retirement income plan, it’s important to account for a person’s entire life – regardless of existing medical conditions or other factors. That’s why we calculate retirement assets up to age 90.
Based on Cindy’s circumstances and projected spending ($5,000 a month), this would leave her with only $100,000 at 90 if she were to retire at 62. For us, that’s not a reasonable enough buffer to say, “yes, you can retire right now”.
The problem with Cindy’s situation is that she’s too reliant on her savings assets. Even with $3,000 a month in social security (which doesn’t start for another five years), she’s drawing a lot from her savings pot each month to get by.
It’s impossible to predict what unexpected costs our retirement years will bring. That’s why Cindy’s $100,000 isn’t adequate for us to confidently say that now is the right time to retire.
And there are other things to consider too, like the cost of inflation. The inflation rate may be low at the moment, but history tells us that the average is around 3% – so that’s the figure we use when projecting retirement income and expenditure.
Consider that Cindy’s average monthly spending is around $5,000. Taking the 3% inflation rate into account, that rises to $6,800 by the time she turns 72, and over $9,000 when she’s in her 80s – meaning she be could be using more and more of her savings in later life.
What are the options?
This might sound like bad news for Cindy, but there are a few things we’d recommend.
First, she could wait it out for a couple more years. This would reduce her reliance on savings in the years before receiving social security, but it wouldn’t solve the problem of feeling dissatisfied at work.
Second, Cindy could look to reduce her spending. Again, this would reduce the draw on her assets, but it’s not ideal if she’s been looking forward to a retirement free from financial worries.
The third option, and one we’d recommend, is for Cindy to look at alternate income streams. Is there anything she’s always wanted to do that would pay an income, even if it means taking a significant pay cut compared to her current job?
Whether it’s selling artwork or becoming a part-time gardener, Cindy could quit her job and still earn income elsewhere. This would protect her savings and give her a greater safety net in later life.
Say, for example, she started a new part-time position which brought her $3,000 a month in regular income. This would be of huge benefit to her retirement income plan, even if she only did it for a few years until social security kicks in.
A final word on early retirement
Taking early retirement can feel like the only way out when you’re through with work and ready to put your feet up. But often, having the security of knowing what your finances will look like in retirement is enough to get you through those final years.
Having seen their retirement income plan, many of our clients reconsider early retirement. It changes their mentality towards work, showing them that there is a light at the end of the tunnel.
That’s not to say you shouldn’t retire early if your finances allow. But if you’re concerned that doing so might jeopardize your financial freedom, we would encourage you to get a retirement income plan and find out how you’re set for the future.
If you’re ready to take control of your finances, we can help you create a bespoke retirement income plan that puts your money into perspective. Remember, if you need any advice or expertise, our financial specialists are here to help. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.