If you want to get a jump-start to an early retirement, you've got to have a plan.(Photo: Getty Images/iStockphoto)
Retiring early is perhaps the No. 1 goal of millions of Americans. Achieving that goal, however, is rarely possible in the absence of good old-fashioned planning. So what are the elements of a sound "retire-early" plan?
•No plan, no early retirement. To retire early, on your own terms, you have to make it a priority. You can't just talk the talk. You have to walk the walk.
"It's one thing to dream about retiring early, but quite another to take the actual steps that will help you realize that goal," says Katie Libbe, vice president of consumer marketing and solutions at Allianz Life Insurance in Minneapolis.
Katie Libbe, vice president of consumer marketing and solutions at Allianz Life Insurance Company in Minneapolis. (Photo: Handout)
According to Allianz's LoveFamilyMoney study of American families, people who were planning to retire early shared a few key traits — and a privileged upbringing was not among them, says Libbe.
"Instead, these people were similar in their approach to managing finances with their spouse/significant other, their use of benchmarks to set their financial goals and their willingness to openly discuss money with their families, including teaching their children," she says. "Incorporating these good habits and following good examples can lead to a better chance of retiring on your own terms, and on your own schedule."
And once retired, don't forget to review and adjust your financial plan as needed, at least annually. Also, revisit your "base spending" based on the trough value and not the peak value of your portfolio, says Larry Frank Sr., a certified financial planner with Better Financial Education in Roseville, Calif.
Larry Frank Sr., a certified financial planner with Better Financial Education in Roseville, Calif. (Photo: Handout)
•A delicate balance. Increase your savings rate and build a diversified portfolio that includes investment in U.S. and international stocks, says Stavros Panageas, an associate professor at The University of Chicago Booth School of Business. "Internationally diversifying one's portfolio is also a good idea," he says.
The difficult part of the how-to-retire-early question, however, is this: Increasing the average return of a portfolio typically involves taking on more risk. "So, if markets don't perform well, one may have to accept either a later retirement date, or be forced to save more later in life, or accept going to retirement with lower wealth," says Panageas.
•Build a floor. Calculate whether you'll have enough steady income to fund your essential expenses over the course of your household's retirement.
"Start by deciding on the latest time and the minimal amount that one would need for retirement, and invest that amount in very safe securities that guarantee a yield to their maturity in nominal or even better real terms, such as TIPS," says Panageas. "One can take risks on the remainder of his or her portfolio, which could — if markets perform well — facilitate an earlier retirement."
•Retirement is expensive. Identifying your various sources of retirement income and what will fund essential expenses and what will fund discretionary expenses is one essential part of your retire-early plan. So, too, is getting a handle on the expenses you'll face in retirement, including housing, health care, transportation and the like.
Consider: If you retired today, you'd need at least $885,000 in your nest egg (you could include the net present value of your Social Security benefits in that amount) to pay for annual expenses of $40,000 (in today's dollars) over the course of 30 years of retirement.
•Retirement risks are many. Retiring early is also riskier than most people realize, says Dirk Cotton, a financial planner with JDC Planning in Chapel Hill, N.C., who recently analyzed the cost of retirement starting at four ages between 55 and 70. Read Cotton's blog on the subject at The Retirement Café: The Risk of Retiring (or Being Retired) Early.
According to Cotton, retiring early means forgoing years of annual savings contributions when the amount that can be saved is often near its peak and tapping into savings years early and increasing the probability of outliving one's savings. Retiring early also increases the cost of retirement by making it longer.
In addition, Cotton warns, it increases the risk that you'll have to withdraw money from your retirement accounts when the market is falling in value.
"Early retirement, I can say from experience, has tremendous non-financial benefits, but workers really need to understand the risks before making that decision," says Cotton.
•Delaying retirement. Given that retiring early can be very expensive, David Blanchett, head of retirement research at Morningstar Investment in Chicago, recommends delaying your retire-early plan by at least one year. "Adding even one year to your retire-early plan does four powerful things that can significantly reduce the overall cost of retirement," he says.
David Blanchett, head of retirement research at Morningstar Investment in Chicago. (Photo: Handout)
It gives you one more year to save, one more year for your assets to grow and for your Social Security retirement benefits to increase and it reduces by one year the span you have to fund in retirement. "In other words delaying retirement is a double win, because it increases your assets and reduces your liability," he says.
And don't give working longer a second thought if working longer is what you have to do to make your retire-early dream a reality. "Most people will need to work as long as they are able in order to fund a retirement where they can maintain the same standard of living after retirement as before," says Blanchett.
Retirement doesn't have to wait, if you're prepared. (Photo: Getty Images/iStockphoto)
•Stress-test your plan. And no matter whether you plan to retire early or not, stress-test your retirement plan with "shocks," such as unexpected health care costs and what-if scenarios, says Blanchett. "I'm guessing many people would be shocked to see the impact this would have on their retirement readiness," he says.
Others also suggest contemplating and planning for all that could wrong. According to Frank, disability insurance is one method to address the risk of loss of income early due to injury or illness, typically before 60. "The advantage with disability insurance is that it can be designed to bridge some income until their mid-60s or so, which takes some pressure off of the portfolio," he says.
•Forced early retirement. To be sure, the news is filled each day with firms offering workers early retirement packages. For them, retiring early might mean having to make some tough choices, says Blanchett.
The good news, though, is this: Most people retire before they expect to, and retirees as a group are generally quite happy — despite the fact they retired before they expected to, says Blanchett.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.
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Source: How can you make early retirement happen?
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