Wondering if early retirement is a viable option for you? You're not alone; many clients come to our retirement investment advisors with retirement planning questions, such as "Can I retire early?"
The answer to that question may just come in the form of another question, specifically, "How do you define 'early retirement'?" For many clients, 'early retirement' really means a work-life-balance adjustment rather than a complete departure from the working world, with a shift toward a more flexible schedule and/or more meaningful work.
In uncertain economic times, however, it's always good to have a back-up plan before making significant career downshifts pre-retirement age, and be ready to adapt and remain flexible. While many dream of working less in order to spend more time with family, pursuing hobbies or traveling, all of those activities still require money -- so switching to a so-called "bridge job" before jumping into full retirement may be a solution. Here's what to consider.
Retirement Investment Advisors Recommend Preparing for Retirement
Before you evaluate your readiness to take an early retirement, ask yourself if the following factors are in place:
- Have you paid off your debt load, including mortgages and student loans?
- Do you live in a region that's relatively low-cost? Should you move to a less expensive area?
- Are you still subsidizing your children's lifestyle?
- Do you have access to affordable health care?
Speaking of healthcare costs, that's one area that blind sides many retirees. Medical costs can consume larger portions of the budget than many expect, and while the Affordable Healthcare Act has reduced barriers to insurance access for many retirees, you still must consider the cost of long-term care.
Evaluating your portfolio through a stress test can also help you develop a realistic picture of your financial preparedness for early retirement. Sit down with your retirement plan advisor to run a range of financial scenarios and see how your portfolio holds up.
Got Plan B? Retirement Plan Advisors Want to Know
Having a contingency plan is key. Many assume they can simply go back to work at their previous job or industry if their portfolio shrinks, but as many found during the last recession, finding a job may not be as easy as it sounds, especially if age discrimination is a factor.
Rather than assuming there's a job waiting in case of emergency -- or learning a whole new trade -- consider a contingency plan that's based on controlling spending. Passing up on that expensive vacation or that new car in favor of a downsized lifestyle is a more realistic "plan B."
Investment Planning: Can You Live Off Your Investment Stream?
Many potential early retirees assume that they'll be able to simply live off of returns on their investments. However, if you retire early, you'll have to find another income stream to fill in the years between the time when employment income ceases and you can start drawing retirement income, like Social Security.
For many early retirees, the key lies in learning to constantly adjust to the ever-shifting market and economic conditions, as you're more exposed to uncertainty. Risks such as higher inflation also require consideration, as rising inflation eats up the purchasing power of your saved dollars and can wreak havoc on your budget.
Your retirement planning advisor can help you determine if early retirement is a feasible option for you.