Have you ever reviewed your pay stub or thought about your boss or your workload and entertained thoughts of an early retirement? Who hasn’t? Suppose you are age 55 and could take home 60% of your pay if you retire now. If you earn a high income, 60% may seem like enough for you to retire in reasonable comfort. However, before setting the date for your retirement party, weigh all of the facts carefully to be sure an early retirement makes financial sense for you.
Here are eight rules you should consider if you’re thinking about taking an early retirement:
Retirement should be a time to relax, free from financial worry. Many people dream of retirement as a time to travel, or a time to pursue hobbies or special interests, a break from a 40- hour work week. But without careful retirement planning, you may actually face the prospect of working harder and longer during your so-called retirement years than you ever imagined. With this in mind, it may be safe to say that the best-laid plans begin well before the age of 65.
Know Your ResourcesHow many times have you said “I’ll do that when I retire,” expecting to have more time to pursue other interests when you no longer have to report to the office everyday. But have you considered what the costs of these interests may be? A general rule of thumb is that you will need 60% – 80% of your pre-retirement income to maintain your lifestyle during retirement. Careful planning can help offer security and comfort in retirement, along with the resources to pursue these new interests.
For many, Social Security, employer-sponsored retirement plans, and personal savings are the primary sources of retirement income. Although Social Security may contribute a certain percentage, the Social Security Administration estimates (SSA, 2011) that for the average worker, benefits replace only 40% of pre-retirement income. However, for many, an employer-sponsored retirement plan can also contribute substantially. But both of these sources may need to be supplemented with personal savings to help provide enough income to maintain the lifestyle to which you may have become accustomed, and/or even provide the extras you look forward to in your retirement years.
Put Time on Your SideEarly retirement planning, puts time on your side. It is never too early to begin saving and never too late to start. In fact, an advantage to early retirement planning is that the longer you have before retirement, the greater your opportunity to increase your savings through potential growth.
An equally important consideration for retirement planning is the ever-present reality of inflation, which can quickly shrink even a substantial savings total. For example, a modest 4% inflation rate, maintained over 15 years will reduce the purchasing power of $250,000 to $138,816. Starting early may help your savings outpace inflation.
Although it can be difficult to imagine a time when you will not have to be at the office, or job site in the morning, the day will be upon you sooner than you think. With this in mind, planning for retirement now, even if it seems premature, may help ensure a secure financial future for you and your family.