In my business, I work with all different types of people. They run the gamut. Some are employers, while others are the employees. Some tell me they want to retire early. To that, I then ask them what retiring early means to them. Are we talking late 50s, early 60s, perhaps even early 40s? The key to helping them reach that goal is to know the age that goal needs to be achieved by.
Retiring early constitutes walking away from making income, living solely off our assets and whatever income they produce. For our example, let’s say the person wanting to retire early is looking to do so between 55 and 60. (For more, see: The Pros and (Mostly) Cons of Early Retirement.)
The very first thing to consider is how much this person is going to live off of at each retirement age. There’s a calculation that needs to be made on your budgetary requirements based on what you are currently living off of each year. Then we must factor in inflation. We know the cost of living will go up, so it’s vitally necessary to prepare for that when quantifying these numbers for retirement.
What to Evaluate
So if someone is retiring at 50 and they typically spend $50,000 a year for living expenses, then we must ask: Can their assets produce that amount plus whatever percentage we calculate for inflation over a 40-year period? It’s been my experience in dealing with clients that most people spend about the same or more in retirement than they presently do in everyday life due to having more free time. So the very first question you need to ask is: What’s my budget at that point?
Next, you need to look at your assets. How much are your assets going to need to produce for you in order to keep up with inflation? That’s what we call an inflation-adjusted income. So if you’re spending $50,000 a year and have a million dollar portfolio earning 5% interest a year, that amount alone would cover the $50,000 income in retirement. However, when you factor in inflation (and for this example, we’ll say it’s coming in at around 3% on average), then you’re no longer able to cover your budgetary needs. Instead, your portfolio needs to earn around 8% interest. That will keep you at your $50,000 plus inflation over the next 40 years if you’re 50.
Another element to consider when preparing an early retirement game plan is that you cannot factor Social Security in as income until after the age of 62. However, even then you cannot consider the entire amount you would receive because the Social Security Administration doesn’t offer full benefits until somewhere between 65 and 67 depending on when you were born. So that’s a 12 to 17-year gap if you’re looking at retiring at 50. That means your asset base must entirely cover those years without Social Security assistance.
Another major constraint people often forget to make provision for is health care. The cost of health insurance alone can be daunting. I have numerous clients that don’t necessarily need the money but continue to work just to get health insurance benefits. The cost of health insurance for a couple in their late 50s or early 60s can be a thousand to three thousand dollars. They won’t reach Medicare/Medicaid eligibility status until at least age 65. So this is definitely another huge cost you’ll want to factor in when it comes to retiring early. You’ll still need health care. (For more, see: 5 Ways to Stretch Your Retirement Budget.)
Prepping a Game Plan
Once you’ve come up with the numbers for at the very least the four major details you’ll need to cover in retirement, you can then set out on a plan to achieve your goal of early retirement. So we've examined what bases you needed to cover to prepare a game plan for your perfect retirement age. Now here's what you need to do to round those bases as you head into the retirement game.
Honestly, it all goes back to financial planning 101. The very first step you take is spending less than you make. No matter what you make you must spend less than your net income. You cannot spend all the money you make and expect to have something when it comes time to retire. You put some of it back into some sort of asset category that is going to provide you with an income later in life. It’s vital your budget has a surplus for investing options. You must save and I don’t mean put in a savings account earning a measly 0.02% or hide it under your mattress. Don’t go buy assets that depreciate like cars. Invest it somewhere.
For some that may be a business. Others may choose to start buying real estate. The stock market is another place to start placing resources to garner income for the future. I actually partake in all three of these areas in preparation for retirement. Whatever it is you chose to invest in, the key is investing some portion of your income in an asset that will gain in value providing money for you to live on later in life.
Hope that helps as you're making your early retirement plans. Make it a great day. (For more from this author, see: Secure Your Financial Future With These 3 Steps.)
Disclaimer: Heritage Investors, LLC, 11470 Parkside Dr Suite 201, Knoxville, TN 37934, (865) 690-1155, is registered as an investment adviser with the State of Tennessee. Heritage Investors only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.