Some time or the other, almost everybody, on getting tired of work related travel and stress, thinks of retiring early in life, though, unfortunately, most can ill afford to realize that dream. Though you may find a lot of information on the web or through books telling you how to retire early, they all emphasize on detailed planning.
Retiring early doesn’t always mean leading a leisurely life, comprising of travel and pursuing hobbies. While some look at the prospect of retiring early, others may be forced to retire earlier than planned. Then, we also have professionals in the fields of law enforcement and military personnel who are obliged to retire early. Thee days, one can also consider retirement in the form of reduced hours of working, taking a break for sometime and going back to work or getting self-employed.
On going through Bogleheads Guide to Planning, you may realize that successful retirement calls for creating viable plan and following the same. Yet there can be many differences.
The major factor deciding when to retire is your capacity to make sufficient income for paying your bills. Expenses after retirement vary a lot with individuals. These are influenced by individual’s household expenses, state of health and thus the expense thereof and expenses towards hobbies and travel. Yet, there is one item that doesn’t differ with respect to individual’s options and that is the safe rate of withdrawing funds from their investment.
The safe rate of withdrawal for people retiring at the normal age, in their mid sixties, is about 4% of their original portfolio, keeping adjustment for annual inflation. However, this rate is very high for people retiring early in life, looking forward to spending forty to fifty years in retirement. In their case it needs to lower, say in the neighborhood of three percent of their portfolio. So, on an initial portfolio of one million dollars, it would come to thirty thousand dollars, compared to forty thousand for someone retiring in their sixties. There is a clear reduction of twenty-five percent in annual outlay for those opting to retire earlier.
Here’s a suggestion that makes living easier after retirement when inflow of money slows down. Start living on less money for quite sometime before your planned date of retirement. Other than getting used to a different lifestyle, you also save money for retirement in the process. Start keeping a detailed account of your expenses for a prolonged time before arriving at the final date of retiring. If your calculations show that your present portfolio will fail to support you during retirement, look ways for filling the gap. Some of the options that will most likely come to your mind are: tapping of retirement accounts, using the 72(t) exception for avoiding ten percent penalty on premature IRA withdrawals, withdrawing contributions from Roth accounts, annuitizing taxable investments or looking for another job. You may also consider selling your present house and moving to a smaller one in the same city or relocate to a not so expensive city. Be ingenious and you may realize that early retirement is indeed possible.
It’s not difficult to see that the question, how to retire early means different to different people, depending on their age, investment portfolio and present lifestyle etc.
But don’t forget that circumstance can change things and your life! Even the most carefully made plan on how to retire early may be thrown out of gear, the markets might crash or there may be an earthquake. Should the worst happen, go back to work once again. It’s not unusual for many to start working in the later part of their life and face the challenges that life has in store for them after they have had enjoyed retirement for a couple of years.