Can You Afford To Retire Early Right Now?

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The idea of retiring early, which was formerly nothing more than a fantasy for most Americans, has been gaining real-world traction over the past 10 years. Encapsulated by the “Financial Independence, Retire Early” movement — also dubbed “FIRE” — it’s a concept that more and more younger Americans are embracing.

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However, behind the dream of retiring early is the hard math that retiring at 50 or even 40 requires. For example, if you think you might be able to retire with a $1 million nest egg at 65, retiring at age 40 may require three times as much — and you’ll have a much shorter time to acquire that money. Here’s a look at what you might need to retire at age 40 or 50, along with a list of things you shouldn’t overlook when planning an early retirement.

Retire by 40

Let’s face it, retiring by 40 under any circumstances is ambitious. The major problem with retiring so early from a financial perspective is that you’re giving up time to save and extending the time you’ll need your money to last.

For example, if you retire at 65, you might only need your money to last 20 years or less. But if you retire at 40, you haven’t even lived half your life yet. According to IRS tables, you should expect to live nearly 46 additional years from age 40. If you plan on spending $50,000 per year in retirement, that comes to $2.3 million in lifetime retirement spending. If you adjust that amount up for inflation every year, you may need $3 million or more to retire relatively modestly at age 40.

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Retire by 50

Retiring by age 50 is much easier mathematically than trying at age 40, but it will still take a lot of planning — along with a lot of saving and investing.

For example, if you want to live off $50,000 per year, by retiring at age 50 you might only need $1.8 million in lifetime retirement spending, as your life expectancy according to the IRS at age 50 is about 36 years. Plus, you’ll have an additional 10 years to save and invest your money, which will make reaching your retirement goal that much easier. Still, you’ll need to begin an aggressive investment program at a young age to make this goal feasible.

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Things To Factor Into Your Calculations

Retirement projections are just an average best guess. As every person’s financial situation and lifestyle is different, there’s no one best answer as to how much you’ll need to retire early.

To tweak your estimate to make it as accurate as possible for you, you’ll need to factor in some of the financial characteristics that are specific to your own life. Here are some of the most important to consider:

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Where You’ll Live

Since income in retirement is often fixed, the best way to stretch your dollars is to reduce your expenses. The single best way you can usually do this is by relocating to a more affordable place.

The cost of living varies so dramatically across America — and across the world — that a simple change in location can effectively translate into thousands of dollars per month in extra funds. If you plan on living in a high-cost area like New York or Los Angeles, you’ll likely have to raise your retirement “number” by quite a bit.

Rising Healthcare Costs

As you age, it’s a near-certainty that your healthcare costs will rise. This is something that younger savers often overlook, as it’s hard to imagine at a young age that your healthy body will eventually wear down and require some type of care.

In addition to expenses themselves increasing as we age, the cost of healthcare services in general seem to go up every year, so you’ll have to factor that into your retirement equation as well. Don’t overlook long-term care costs either, as they are not generally covered by Medicare and you may require those services before age 65 anyway.

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Your Social Security Plan

Planning your Social Security strategy is an important step for those who plan to retire early. For one thing, you want to make sure that you work enough to at least qualify for Social Security, which generally requires 10 working years. But you’ll also want to maximize your benefits.

There are two ways that you can do this — through earning more and by claiming Social Security later in life. Even if you have a high income at an early age, the Social Security Administration bases your payout on your 35 highest years of earnings. This means that if you retire at 40 or even 50, there will likely be some years of zero income in that calculation, dragging down your ultimate benefit.

Waiting to file until age 70 is a way to boost those benefits, but 70 can seem like a long way away for someone retiring at 40. Since these types of calculations can get complicated, it’s best to work on them with the help of a financial advisor and/or retirement specialist.

Your Chosen Lifestyle

Your lifestyle goes a long way to determining how long your retirement savings will last. If you’re the type of person who needs to take six vacations a year, fly first class and cruise around the world, you’ll need a huge sum of money to retire early. But if you enjoy a simple life that mostly involves staying at home or in your local area, you can likely get by on much less.

To have a successful early retirement, you’ll have to find the spot where your income and your lifestyle needs overlap.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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