Early retirement sounds lovely. Sitting on the beach, hiking in the mountains, or traveling the world without care is tantalizing. When I was 25 and single, I created a rudimentary financial plan. Since I wasn’t married, didn’t own a home, or have any children or pets, I could retire early.
Dr. Laurence J. Kotlikoff, Professor of Economics at Boston University, said, “early retirement is one of the worst money mistakes.” He added, “We are, as a group, lousy savers, making early retirement unaffordable. Financially speaking, it’s generally far safer and far smarter to retire later.”[1]
To retire early requires significant resources or a spartan lifestyle. If you retire at 45, you could live for another 55 years, so you need to support yourself from savings and Social Security. How do you replace 55 years of income? Retiring at 45 requires about $2.5 million in assets if you spend $100,000 per year. Can you rely on Social Security to fund your retirement? According to Dr. Kotlikoff, the average Social Security benefit is $18,000 per year.[2]
Are you ready to retire early? Here are a few suggestions.
- Save early and often. The more money you save, the better your chances of retiring early. Determine the amount you need to achieve your goal. If you’re 25 and want to retire at 50 with $2 million in the bank, you need to save about $2,000 per month.
- Working. Working is not retiring, but you could travel the world and pick up odd jobs or part-time work. It is easier than ever to generate income in the new gig economy. If you have a laptop, you can work from anywhere.
- Taxable accounts. Investing in a taxable account gives you access to your funds at any time. If you contribute all your money to a retirement account, you’re penalized 10% if you withdraw your money before age 59.5.
- Healthcare. Medicare starts at age 65, so finding affordable healthcare is vital. Regardless of your retirement age, healthcare will be a significant expense.
- Expenses. If your annual spending is $100,000 per year, you need about $2.5 million in assets to retire. If you reduce your costs to $75,000, your asset level drops to $1.875 million. To find your number multiply your expenses by 25. The lower your expenses are, the fewer assets you need to retire.
- Hobbies. What will you do in retirement? Do you have any hobbies? Reading? Hiking? Golfing? Fishing? An active lifestyle is a crucial component of longevity. Sitting on your couch all day is not healthy and doesn’t sound too exciting.
- Social Security. Forty quarters of credit or ten years’ worth of work is needed to receive full benefits. You can start receiving Social Security benefits at age 62, and the maximum age is 70. Your payment rises about 8% per year between ages 62 and 70. If your income is $18,000 at age 62, it could increase to $33,316 at age 70. You may need Social Security at age 62 if you lack savings.
- Financial Plan. A financial plan can answer several questions about your pending retirement. Can you afford to retire early? Will your money last forty to fifty years? How much money do you need to save monthly to reach your goal? A plan is paramount.
Are you ready to retire? Give it a go if you have the assets, a plan, a compass, and good hiking shoes. You can always return to the workforce if needed. Happy retirement!
What’s Enough? What’s the answer? ~ Leon Cooperman
February 2, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
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[1] https://www.cnbc.com/2022/02/01/why-early-retirement-is-one-of-the-worst-money-mistakes-youll-regret-says-harvard-economist.html, Laurence J. Kotlikoff, Contributor, CNBC February 1, 2022
[2] Ibid