Early retirement might sound like a way to win extra time in one’s personal life, but the financial realities can be challenging. We look at the facts surrounding retiring early and some strategies to live better on post-career resources.
If retirement is a complicated step to take in life, then leaving your working days behind before you’re in your 60s is even more complex. Some people actively choose to do this, with all the money in place to live well outside of a career — but others can end up retiring early because they fall ill or lose their jobs.
For those retiring on the early end of the spectrum, take heed. Managing the process without causing undue damage to your lifestyle takes know-how and careful planning.
Let’s turn to the realities of early retirement and some strategies to make the most of the years it entails.
Frugal living leads to easier retirement
For the early retiree — unless you enjoy significant independent wealth, investment windfalls, pensions, and/or an inheritance — retirement usually demands a more frugal lifestyle before leaving work. Start with the idea that conventional retirement advice, on the most basic level (and there are many variables, such as returns on investments), pegs the amount you need to save to retire at 15% of your annual take-home for about 45-50 years. If you take home $100,000 annually, then you could put some $15,000 per year into a 401(k). Say your salary increases an average of 3% per year, and your employer matches your contributions at 50% up to 3% of your salary — and figure an annual compounded return of, say, 5% — then you could be looking at about $4.2 million in savings after 45 years. You’d then live, under typical models, on about 4% of what you tucked away per year. In our example, that’s about $168,000 annually, plus any additional income from any assets.
Early retirees need to approach the equation even more aggressively. Assuming one could live frugally before retirement and save 30% for 30 years, under the same circumstances as our 45-year at 15% model, then you could estimate a career-end balance of about $2.9 million. That would become some $116,000 annually (again, figured at 4% per year to live on), post-retirement.
Early retirees and Medicare
One benefit of retiring early is that health considerations are often farther off than is typically the case for those who leave work in their 60s or later. In any case, for individuals seeking coverage away from the workplace, buying health insurance may be simpler under the Affordable Care Act than it was before — especially given the removal of obstacles surrounding pre-existing conditions. But remember that you still won’t qualify for Medicare until you’re 62. And even when that program kicks in, you’ll have spent resources for up to (or exceeding) a decade already. Bottom line, if you retire early, you’ll likely need additional monies to cover health expenses, given the longer span of exposure to personally covered events.