Tuesday, June 13, 2017

Is Early Retirement Still Possible?

     As I've said many times, I am a Baby Boomer who was able to take early retirement. It's just that, for me, it wasn't entirely voluntary. But after what my boss said to me, I found that I could no longer in good conscience work for that company anymore. What did he say? "Tom, you're getting laid off. You have two weeks notice."

     Some people think two weeks notice is actually pretty good. I remember my ex-wife, early in her career, was once informed of her layoff after lunch on a Friday. She was told to clear out her desk and be out of the building by the end of the day.

     I personally made early retirement work for me for a variety of reasons, but mainly because:

     1) I was old enough (54) so my two kids were halfway out of the house. Therefore, my financial obligations were going down significantly.

     2) I had a small but still-helpful company pension, and I had contributed consistently over the years first to an IRA and then to my 401K plan, so I ended up with pretty healthy balances.

     3) I could never find a fulltime job in my industry (printing and publishing) at my age -- not one I was willing to take anyway -- but I was able to cobble together some freelance work to supplement my income. I continue to take occasional assignments to this day, more than a decade later, to help finance my retirement.

     All this is by way of introduction to some good advice offered by my friend Jeremy Kisner, of Surevest Wealth Management in Phoenix, AZ, who has penned a helpful piece on early retirement, presented here with his permission (with a few slight modifications for space and style).

     And by the way, if you think you're beyond the topic of early retirement ... wait for the last line!

Some people never want to retire. In fact, some research shows that the happiest seniors are those who continue to work, at least part-time, as long as they can. Nevertheless, others cannot wait to retire and are focused on achieving financial independence as soon as possible. Few things give you a greater sense of freedom than knowing you do not need to work anymore, even if you choose to. This type of financial freedom is possible prior to full Social Security retirement age for young families willing to make some sacrifices.

The simple truth is the higher your savings rate, the sooner you can retire. Pretty simple, eh? You must spend less and/or earn more if you want to move up your retirement date. We usually have more control over spending than income, so spending less is the more practical strategy for most people. The biggest categories (by far) to make a real dent in spending are housing and transportation. Those two categories represent around 63% of the typical household budget, whereas entertainment is only 5.5%, clothing 3.5%, and food 13%.

So if you want to retire early, you most likely will need to live in a modest home and drive used cars until the wheels fall off. The good news is smaller houses and older cars are unlikely to reduce your happiness level significantly. A growing body of research shows that we get the greatest happiness (per dollars spent) by spending our money on experiences, not material things.

Conventional wisdom says you need to save 10-15% of your income to retire by age 65 at a similar lifestyle to what you enjoyed while working, assuming you will not have a big pension or significant inheritance. You will likely need a 25 to 30% savings rate throughout your career in order to retire in your early to mid-50s.

The average American has not demonstrated a willingness to save nearly this much. The average savings rate in the U. S. is only around 5% which includes contributions to retirement plans such as 401Ks. Here is an idea: If your savings rate is too low and the idea of budget cuts is too painful, simply commit to saving 50% of all future raises and bonuses. This strategy can produce significant savings and also keep a lid on lifestyle creep, in which your expenses grow proportionally with your income. Another pitfall of lifestyle creep: It just increases the amount you will need to maintain that lifestyle in retirement.

Here are a few other early retirement tips:

1.  Start investing as young as possible. Savings is a habit that should start with a person's first paycheck. The math tells the story: You can save just over $998,000 by age 60 if you invest $5,000 a year starting at age 20 and average 7% investment returns. However, if you wait until age 30 to start a similar saving regimen, your nest egg would only be $472,000 at age 60.

2.  Invest aggressively, assuming a time horizon of 10 years or more. The chances of retiring early are very slim if you keep your money in the bank or in very conservative investments. That most likely means investing in stocks, which have averaged about a 10% return per year over the past 90 years. Most investment analysts expect more modest returns in the future so dial back those expectations a bit (e.g. 7%).

3. If you are planning on Relocating in Retirement take a look at a state with lower state income and real-estate taxes and a lower cost of living. Consider these 23 Cheap Places Where You Will Want to Retire, or other places with similar characteristics.

4. When you consider the cost benefits of downsizing make sure you are not simply trading home-maintenance costs for steep association fees.

5. Avoid debt. Try not to ever borrow money for anything that is going to depreciate (e.g. a car, a boat, a home-entertainment center). Plan to have your home mortgage paid off by your planned retirement date. 

Here is a cool (yet simplistic) When Can I Retire Calculator. This calculator assumes 5% investment returns after inflation and a 4% withdrawal rate once you retire.

P.S. If you are already retired, pass this on to your kids.


Stephen Hayes said...

#3 caught my attention. Oregon is not a good place for retirees because of our high taxes and cost of living. I'm looking for a better place to retire, somewhere with more sunshine.

Savoring Sixty said...

Excellent post! I plan to send this article to my children. Thanks for sharing!

Anonymous said...

We live quite well in Hawaii, because of the reverse mortgage, my inheritance, and our IRAs. Plus, we have decided not to travel anymore.

Still the Lucky Few said...

Oh, to be my grandson's age (20), and have the opportunity to put a modest sum aside every month, and watch it grow! Unlike me, who finally woke up and started saving in my 40s! I'm not complaining, I did okay due to a pension that I contributed to since I was in my early 30s. If it hadn't been for that, I'd be sunk! Great article, Tom!

Onevikinggirl said...

Great post and great advice. I will get better! Early retirement can happen to any of us with no notice (no pun intended). I cleared my house in six weeks four years ago and it was a nightmare. But now my soul is lighter and I am free to roam and to nest as I wish.

DJan said...

When I retired ten years ago, I had turned 65 and got full social security as well as diversified my annuities in order to have a monthly income for life. It's enough, and money is never something I worry about, but I do live in a rented apartment and drive an old car which still has its wheels. I'll drive it until it falls apart. Good advice, Tom! ":-)

Lee said...

Our biggest roadblock to early retirement (we are both 59) is health insurance and health care costs. We live modestly in a rural part of the country, so health insurance for both of us and costs (deductibles and copays) would be our largest expenditures. And in today's political climate, I think those costs will continue to skyrocket.

Anonymous said...

One thing that helped us to retire was knowing that you gain time....which allows you to watch youtube videos on repairing everything from tile floors to cars to air conditioners to toilets! Decades ago it seemed like the parts were expensive and the labor was cheap. Now the opposite is usually true. I have a lot more time for maintenance than I do money.

Rian said...

#4 caught my attention since we have friends that have done this. They downsized, but I think moving and association fees drain the possible savings of the downsizing. We are already retired... DH from 2009 and myself from 2011. We love it. Money isn't plentiful, but it's enough. Owning your own time is priceless. We made sure we'd paid off our mortgage before we retired. And we retired in place... and intend to stay here unless down the road we become less independent.

Help To Older Age People said...

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Thanks for sharing this information.

retirementreflections said...

I agree with your other readers, Tom. This is a great post -- and great to send to our children.

Jono said...

These are good ideas for anyone earning enough to be able to save and to start early doing so. Unfortunately, in today's world there are quite a few not in that income bracket. Wages have been declining for decades and what worked for our parents and many of us isn't today's reality. Saving as much as possible is always a good idea, though, and will always help those who can.

Anonymous said...

I seem to be getting a 502 Bad Gateway error to the

"When Can I Retire Calculator"

joared said...

Excellent advice young people would do well to take to heart. My children are older but can still benefit from this as a reminder if they aren't already practicing it. Life is so unpredictable -- people make their plans and others upset them as you experienced with your position -- all too common for many, or other similar upsets as my husband encountered and complicated by health issues.

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