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How to Retire Early

How to Retire Early

At a time when many Americans are wondering not when, but if they will retire, is the notion of retiring early dead? Hardly. Even as late at 45 you could still say a grand goodbye to the 9-5 by 60. Doing so won't be easy, and will be a lot of work, but then of course you'll have eternity to get your groove back. Here's how to buck the trend and at 45 to start position yourself for a 15 year end-date.

Know your numbers. What will you need to retire? How much do you need to save? Assume a conservative rate of return and inflation, which is easy to do with calculators that you can find online. Do a "gap analysis" before pulling the trigger on retirement. Many people retire too early, only to find they need to return to work. A gap analysis can help you determine if there is a gap between your expected retirement income and expenses, says David Potter, a spokesperson for The Hartford.

Take for example, Jim, a 45 year-old who estimates he will have $3,500 in monthly expenses during retirement. If he has $100,000 saved in a conservative, short-term portfolio, yielding around 1.25%, at age 60, he would need approximately $850,000 to support an income stream of $3,500 per month. However, by age 60, investing short-term produced only around $125,000. Even with social security kicking in at 62, he would not be prepared for retirement, explains Mark Davis, senior vice president, Retirement Solutions, SunTrust Wealth & Investment Management.

Then there's Sally, 45, shooting for 60 too, with an estimated $3,500 in monthly expenses during retirement. She already has $500,000 in a portfolio evenly split between equities and bonds. Sally could have $1.1 million by 60, which would be adequate to cover her expenses. Even in poor markets, she could have about $774,00 which comes close to what she needs, says Davis.

Save systematically and keep it saved. Out of sight, out of mind. Understand the power of compounding returns and use "dollar cost averaging" to automatically buy more shares of something when it is priced lower and less when it is priced higher. Max out your 401k and IRAs. Understand the impact of taxes. Take advantage of every opportunity to tax deduct, tax defer and create tax-free retirement such as Roth IRAs.

Seek appropriate asset allocation and diversification. It's important to rebalance, typically twice a year, or as needed, to be sure your asset mix is consistent with returns needed, risk toleranace and your time horizon goal. With 15 years or more to go before you need your retirement savings, it doesn't make sense to have everything invested in fixed income or cash, says financial coach Kelley Long.

Understand the certainty of uncertainty. Plan for contingencies by having the correct amount of money in four areas -- cash reserves, insurance, fixed and equity assets. Having enough cash reserves can help you avoid forced selling of equities at a loss when markets are down because of a job change or income loss, says Peter Velardi, president of the educational website FiPath.com.

Do away with debt. In the best case scenario you should pay off your mortgage prior to retirement. Simply adding to your monthly payment will accelerate the timing of your mortgage burning party says Klea Theoharis, managing director at the investor relations firm Crescendo Communications. Strive to be rid of credit card debt. Spend wisely. If you haven't been a stickler for budgeting, it's time to change, otherwise you can kiss you early retirement dreams goodbye.

Anticipate obstacles. There are any number of risks to your early exit. Consider health care costs. Don't forget about health care coverage and affiliated costs required to bridge you from 60 until you reach Medicare age. Studies put the price tag of health care in retirement in the hundreds of thousands, says JJ Montanaro, a certified planner with USAA. Other threats include unexpected illness or disability; early job loss; inflation: rates higher than 2-4% could prove problematic; extraordinary low fixed-income yields that penalize savers; rising tax rates as governments attempt to close fiscal deficits, and stagnant real estate prices are just a few, points out Albert Lu, managing director of WB Advisors.

Life begins at retirement. Don't you want it sooner, rather than later?

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Anonymous   |     |   Comment #1
If you are going to be on your own for medical insurance, do not underestimate the future cost of the monthly premiums.   When I retired at age 55, the medical insurance premium was $560 per month. Today, and four years later at age 59, it is $765 per month.  Luckily, I had some cushion built into my retirement plan so I was able to handle the sharp increase on the premium. 
Hank III
Hank III   |     |   Comment #2
You wrote:
"Save systematically and keep it saved. Out of sight, out of mind. Understand the power of compounding returns"

This statement only works when the interest rates are above 3% or above the real inflation numbers, otherwise, it is a false hope plan.
Furthermore, why strain yourself by putting fictitious goals and numbers. Foe someone is enough $1000 per month and for someone with $10K per month is still not enough money to live on.
Nobody knows the future in long terms planning. There might be hyper inflation, the Dollar may be devalued or debased, Bernanke may decide to print money into oblivion, the taxes may be raised for veryone, there might be VAT introduced or the planed retirement might never come to fruition.

I planed to retire on $800K savings, but the present interest rates are killing me. I had to downsize on everything that I always counted on and changed my life style to bellow average standard.
Disappointed, yes, but learned a valuable lesson, I should have kept working and working and never really took retirement as a life style and now I would have double the savings.

Retirement is just a state of mind, you may feel retired in your 20s if inherited or made tones of money or you may never want to retire until the time of demise.

Putting unrealistic goals will lead to be slave 90% of your life span just to find out that your last 10% of your life are riddled with illnesses and straggle to keep up the life style you once imagined while working.

Be more free spirited and try to enjoy life, retirement goals are just imaginary sol searches that most of the times never fulfill your desire and may make your life miserable.
Mayorquimby   |     |   Comment #3
Retirement is a unique term that will only apply to the 20th century and the early raft of the 21st. I don't think things will remain stable enough for anyone in my generation to ever retire.
Bugs   |     |   Comment #4
I retired at 55....... and when i was 40 i started a "life long hobby" ....... the art of investing.....

Yes... i made a lot of mistakes in my hobby at first..... but time was on my side....

You can learn the art of investing when you retire, or like i did make all the mistakes when you can recover...

I am 65 and love my hobby, because it gives me something to do every day i want something to do, and of course it gives me a life still that most retires only dream about......

I can't make my point more clear...... start a "life long hobby" ....... the art of investing..... when you are young and can make the mistakes....
Anonymous   |     |   Comment #5
I never liked any of the retirement calculators.  That 4% max. yearly withdrawal rule, or your savings had to amount to so much percentage of your earned income, just did not give me enough confidence that I needed to determine whether I could retire or not.  I pretty well knew what my expenses and income were going to be. So before I retired, I developed a retirement excel spreadsheet which simulates my finances yearly up to age 90.  It includes all my estimated expenses, estimated income, expected future expenditures, and estimated income taxes.  Each year, I update it as needed (Change in tax rates and laws, income, earning rates, expenses, etc.). I have been retired now for four years and the spreadsheet has put me at a comfort level to a point that I can go fishing and not worry about having enough to live on.
article makes no sense
article makes no sense   |     |   Comment #6
The paragraph starting with "Take for example..." makes no sense. $125k in investments doesn't produce $125k in income in 25 years. The editor need to rewrite that.
Anonymous   |     |   Comment #7
Anticipate obstacles...last paragraph, pretty much will all happen so retirement seems like a pipe dream. Those who work in police, fire, govt, etc will do well, the rest of us slaves in corp America will die at the grind stone, poor and miserable.
Anonymous   |     |   Comment #8
One retires early by earning lots of money and spending little.  That's how it's done kids.  If you aren't earning lots of money, or you have personal circumstances that are forcing you to spend a lot, it's not going to happen.

Talks of low rates for savers are bogus though.  Have things been bad for the last 30 years or something?  If you invested aggresively in your youth, and more conservatively in your older age, you'd be fine.  The people in trouble are those that exited the market when it crashed and are waiting for it set a new record before going back in.
Brickell   |     |   Comment #9
Hank III - #2 has it ABSOLUTELY RIGHT.  Enjoy life along the way.  If you enjoy your work, don't stop.  There are many studies that show that when people retire, they physically and mentally deteriorate.  Work at least part-time if you can, start a business, etc.  The unexpected bonus of all this is that you spend less when you are working than when you retire.  Things like golf, eating out, cruises, etc. increase the cost of living for retirees.  If you can, take social sec. as late as possible.  "Retirement" is an artificial amd possibly obsolete lifestyle, unless you are physcially unable to work any more.  Hank, a great and wise post! I tip my hat to you.  Good luck to you.
Anonymous   |     |   Comment #10
police and fire governmental employees will earn 100k plus in retirement at a young 45-55yr old.  this is the blue collar to middle class guy pulling off what the big boys do in grand fashion.    this is the biggest robbery on our country that is right under our noses.  then you need to take care of federal employees whose benefits are amazing.  the you need to look at the biggest heist of all...and that is the retirement system for our congressmen and senators.  everybody bickers about everything else but where the true cost of things really are.  your well deserved retirement will fund all these folks quite well.  keep up the good saving.  they don't.
Anonymous   |     |   Comment #11

It is true that many federal employees have pensions and money that is directly fed into their retirement.  Some of that is directly taken from their paycheck, and some by their employer.

If you are going to bring it up, it's important to also mention that those same employees are paid less than their equally educated peers in the private sector.  To summarize, lower salaries, no bonuses, generally better job security, more benefits.  Most studies show that on average after including benefits they make perhaps a little bit LESS than those in the private sector.   Get your facts straight.
Anonymous   |     |   Comment #12
But if you factor in the retirement benefits, Fed. employees make double what the private sector workers get, over an 85 year lifetime.
Anonymous   |     |   Comment #14
Why do none of these retirement figures take into account that "if" one has adult children and they lose their jobs, a parent may end up having to completely support them and that includes, rent, food, medical, etc. etc.  How do you figure that into how much to save for retirement?  These articles make it sound so easy when they only include a couple.  How come no one considers the "adult" child aspect.  Maybe we should just buy a big dogcage and put them in it! 
Gredy   |     |   Comment #15
All union workers and all Gov. and state employee, should not be compensated with public money in the retirement.

First, they received taxpayer money as salaries at above national average, then they receive health care packages for the whole families for free all their working years and then in retirement years.

Second, they receive COLA every year (except when stopped by the Congress) and then they receive free re-education, free Government vehicles and fat bonuses.

Third, the taxpayer matches their retirement contribution for free.

Most of the Gov. workers can live on half of the their salary very well and can start their own second or third retirement package without felling squeezed for money.

Do not feel sorry or pity for any Union, State or Federal worker, they alway cry for more and more and is never enough, no matter how much more they received as salary and benefits.
emdtech   |     |   Comment #16
I have read through most of the comments and can summarize what you all have said:

1. Calculations must be realistic to determine if you have a large enough nest egg for retirement.

2. You must account for rapidly rising insurance costs (and the possibility of NO insurance from your employer once you retire).

3. Account for inflation when determining the size of nest egg - what may look good enough today will surely not be so 20 years out.

4. You may want to continue with some sort of employment to "stay sharp" in later years (like investing, working part time in a job, helping out as a grandparent etc.).

5. Expect to help your children during some time in your retirement years.

6. Plan to save based on solid planning with an additional "buffer" amount so you can avoid a few land mines along the way.

7. Enjoy yourself while working and especially in your younger years. Create a work / family balance, not sacrificing the family part.

All good comments and dialog – I wish you all well with your journey.


Pablo Savin
Pablo Savin   |     |   Comment #17
14.. The quote about having to support adult children. That's a choice, once you start supporting them both of you will end up broke. All I can say is, save, save, save. Plan for a three percent return on your money if it is better.. Ya-hoo. These are not easy choices, but they are choices. Good luck.
Anonymous   |     |   Comment #18
#17 seems to imply that an option would be to ignore the needs of an adult child truly in need of help...that may be an option, but not a reasonable option. Could anyone be so greedy and selfish as to actually take, or make, that suggestion seriously?
jrsmith45   |     |   Comment #19
This article is ridiculous and in fact, every investing or savings article I read is ridiculous because people with any money will be bankrupted by the cost of assisted living or nursing homes.  No one, not one financial expert I read, ever takes into account the needs of older people.  READ THIS AND WEEP.  A month in the state of RI in a private studio in assisted living will be about $4000 with minimal assistance.  If you are more demented and need more assistance,  expect to pay between $5200 and $7000 and if you need a nursing home, it's $375 a day...nearly $12000 a month.  We all are chasing yields and interest.  We need to be educating ourselves on how to give our money away to our children so we can become eligible for medicaid.  Then you pay nothing.  Even long term health care insurance will still leave you needing to pay...it won't cover all the costs. 
Anonymous   |     |   Comment #20
#19  That sounds easier said than done and lawyers cost a lot to do that for someone.  Also, our country is bankrupt and if everyone gives away their money to their children just to go on Medicaid, who do you think will be paying for it?  The taxpayers as usual!  I say let another Dr. Kevorkian do his job and we get to fly off to "happy land" and don't have to bankrupt the country even more! 
Anonymous   |     |   Comment #23
So It's okay to throw the cost on the rest of the taxpayers.  While the kids rightly keep their corvette and caribbean vacation money. 
Anonymous   |     |   Comment #24
Oh give it a rest!  Most children I know have already had to get help from parents due to job lost.  They certainly don't drive Corvettes and take fancy vacations!  You must sure live in a more upscale community and life than I do.  Without something like Medicaid, the poor would be dying in the streets!  I don't know any doctors who give FREE medical care! 
Anonymous   |     |   Comment #25
Of course they had to get help from their parents.  Help them with gas sucking trucks, vettes, and luxuries is expense.
Anonymous   |     |   Comment #26
#25  You evidentally are not a parent.  I think you must watch too much tv.  We have given our children a world they may not be able to survive in and you have the audacity to mock these young adults?  Don't judge other people's children by your own (if you have any).  If they lose their jobs do you just give them an old tent and throw them out in the streets??  What a joy you seem to be!
Anonymous   |     |   Comment #27
Cry me a river they still don't need Grandma's money, so she get's the taxpayers to pay for her stay in the old folks home via medicare.  Grandma's money should be used on Grandma.  Obviously #26 your a really inconsiderate person that thinks they are entiled to all kindas of socialistic benefits.
Anonymous   |     |   Comment #28
#27   What a joke!  I wouldn't be on this forum trying to get better interest rates if I was trying to get the taxpayers to support "me"!  I just happen to care what happens to people who may become needy due to problems they did not bring upon themselves.  Do you really think every homeless person started off like that?  People lose jobs or have tremendous medical bills which eat up what little they have and imo that is what our country is all about.  "Helping those more unfortunate than ourselves"!  By the same token, if YOU ever find yourself in the same position, I think you would be glad to have food stamps to feed your family rather than steal someone's dog food!  Get a conscience! 
Jacob Sandys
Jacob Sandys   |     |   Comment #29
It is very important to have a solid plan that you follow with discipline. Invest wisely, avoid wasting money on things with bad ROI like a really expensive supercar and so on.