Do you dream of retiring before you turn 60? What about before you turn 50? If that's the case, you might want to think twice before you make the big move. If your heart is set on being able to leave work early, be sure you do so with the right mindset and the right estimation of your financial potential.
Retire with a realistic picture of your income needs.
In late 2006, the Center for Retirement Research at Boston College surveyed 400 employers from the private sector. Those employers estimated that 25% of their employees between 50 and 60 years old lacked the financial resources to retire even at the traditional retirement age. If you’re like most Americans, your retirement expenses will be about 75–80% of your pre-retirement expenses. Do you have enough? To answer that, you need to calculate if the income derived from your 401(k), 403(b), pension, or other sources can generate that. Keep in mind that you cannot receive any Social Security benefits before the age of 62.
Retire with the idea that you’ll live to 100.
Considering all the recent advances in health care, you could become a centenarian. That sounds like great news but it also means that your income streams may need to last 20, 30, 40, or even 50 years. Any income streams that you have today may need to be supplemented or adjusted due to unforeseen needs and inflation. Many new retirees make the mistake of withdrawing income at too high a rate in the first few years after leaving work. They live “high on the hog” for a while, only to discover, much to their chagrin, that their retirement nest egg is shrinking because they are spending more than their portfolios can earn back. Additionally, you may also need to pay for health insurance if you choose to retire before age 65. All of this may point you in the direction of part-time employment rather than total retirement.
Retire with purpose.
Leaving work in the rearview mirror can be exhilarating. But after the first few months of freedom and fun, you may also face the question, “Now what?” Early retirement is better with a plan for meaningful and purposeful living regardless of your finances.
If you do a Google search with the right keywords, you’ll come across a number of stories about people who chose to retire later in life. They kept working out of passion or necessity. If that’s not for you, and you don’t want to work much longer, talk to your trusted financial adviser and they'll help you see if you're financially prepared to retire. They typically have lots of professional insight to share.
How do you picture your future?
If you are like many people who are contemplating retirement, your view is likely more pragmatic compared to the view your parents had. This doesn’t mean you must have a boring tomorrow. Even if your retirement savings are not as great as you would like them to be, there is still lots of potential to design the life you want.
With that in mind, here are some key things to think about.
What do you absolutely need to accomplish?
If you could only get four or five things done in retirement, what would those things be? Answering this question might lead you to compile a short list of life goals. While they may have nothing to do with money, your financial decisions could be integral to achieving them.
What would revitalize you?
Some people retire with no particular goals at all. Others are just burnt out. Inevitably, after weeks or months of respite, ambition returns. They start to think about what pursuits or adventures they could embark on to make these years special. Others have known for decades what dreams they want to pursue, and yet, when the time to do so arrives, those dreams may unfold differently than anticipated and might be supplanted by new ones.
In retirement, time is your most valuable asset. With more free time and opportunities for reflection, you might find your old dreams giving way to fresh, new ones. You may find yourself called to volunteer as never before or motivated to work again but in a different context.
Who should you share your time with?
This is another important choice you get to make in retirement. The quick answer to this question for many retirees would be “my family.” Today, we have nuclear families, blended families, extended families; some people think of their friends or their employees as family. You may define the term "family" as you wish. And you may allocate as much or as little of your time to your family as you desire (some people do want less family time when they retire).
Regardless of how you define “family” or whether or not you want more “family time” in retirement, you probably don’t want to spend your time around “dream stealers.” If you have a grand dream in mind for retirement, you may meet people who try to thwart it and urge you not to pursue it. (Hopefully, these people are not in close proximity to you.) Reducing their psychological impact on your retirement will increase your happiness.
How much will you spend?
We can’t control all retirement expenses, but we can control some of them. The thought of downsizing may have crossed your mind. You can also get rid of one or more cars (and the insurance that goes with them) and live in a neighborhood with extensive, efficient public transit. Ditching landlines and premium cable TV (or maybe all cable TV) can bring even more savings. Having garage sales or making donations can have financial benefits while also helping you reduce clutter, either generating cash or a federal tax deduction.
This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your overall tax strategy.
How are you preparing for retirement?
This is the most important question of all. If you feel you need to prepare more for the future or reexamine your existing strategy in light of recent changes in your life, conferring with a financial professional experienced in retirement approaches is a smart move.