What does it take to retire early?
It's not impossible, but it does take some number-crunching. Financial journalist Jean Chatzky explains what you may need to know.
Can you still retire early? And by early, I mean before you hit "the big 6-0"? Don't choke on your coffee. I'm not being facetious.
Admittedly, we're a long way from the early 1990s. Those were the days when successful American corporations trimmed their pricey labor forces by offering older workers subsidies to "take" early retirement so they could be replaced by younger, cheaper employees. That is no more. Today, 37 percent of working adults are planning to retire after age 65, according to the Employee Benefits Research Institute (EBRI). Which is not to say early retirement is impossible. If it's something you truly want to consider, the responsibility rests with you to plan, save and strategize.
Here are the questions you need to answer:
What does early retirement look like?
Before you even consider the numbers, think about this in life terms. First and foremost, does retirement to you mean not working at all? Or not working in your current job or occupation? According to the 2012 EBRI Retirement Confidence Survey, 70 percent of workers say they plan to work for pay after retirement. Some of those folks work because they have to, but others work because they enjoy it. Work helps them stay vital and engaged. Are you one of those people?
Another important thing to consider is where you'll live after you retire:
- Will you live in your current (preferably paid-off) home?
- Will you swap your home for something smaller to simplify your life and further build your emergency and/or funds for retirement?
- Will you live in the same pricey suburbs where you put your kids through fantastic public schools?
- Will you move somewhere with a lower cost of living?
What do you expect in retirement income?
This means calculating two things:
- income you can expect from pensions, savings, and investments
- income you can expect from Social Security
There are some organizations (most notably state and municipal governments, as well as the federal government for employees hired before 1994) that will allow you to take early retirement with no penalties as long as you've put in, say, 30 years of service. Private organizations and employers often don't work that way. If you leave before you reach full retirement age, you don't get full retirement benefits. That's how Social Security works, too. You're allowed to tap your benefits at age 62, but your monthly check will be about 20 percent less than it would be if you'd waited until you hit full retirement age, says EBRI Research Director Jack VanDerhei.
Can you save enough to make up the difference in what you would've earned by working longer?
You want to aim to replace at least 85 percent of your pre-retirement income in retirement — more than that if you plan on traveling, taking up new hobbies or otherwise living it up. When you run the numbers, make sure you know how much you can anticipate receiving from Social Security based on when you're planning on taking it. And be conservative in your estimates of how much your portfolio will earn each year (I've been using 6 percent). Being too aggressive is akin to undersaving.
How about healthcare?
Finally, you must consider healthcare. If you retire before age 65, you're going to have to come up with your own health insurance until Medicare kicks in. COBRA will cover you for 18 months, but you'll have to pay your organization's premiums. And if you're not working longer than that, you'll have to buy a policy of your own.
After running all the numbers, what if you decide you can't retire until you reach that "full" retirement age? That might be OK too. According to Pew research, the average Baby Boomer believes old age doesn't start until age 72 anyway.
Use our interactive retirement planning tool to find out how much you may need to fund your retirement lifestyle.
- 2012 EBRI Retirement Confidence Survey, March 2012
- Assuming pre-retirement annual gross income of $40,000. AON Consulting 2008 Replacement Ratio Study, http://www.aon.com/about-aon/intellectual-capital/attachments/human-capital-consulting/RRStudy070308.pdf
- 2009 Growing Old in America: Expectations vs. Reality
Jean Chatzky is a compensated financial commentator, is not affiliated with any company of the Principal Financial Group and the views she expresses are not necessarily those of the Principal Financial Group or any member company.
* Retirement professionals are sales representatives of the members of Principal Financial Group®. They do not represent, offer or compare products and services of other financial services organizations.
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