Financial Retirement Planning


$800,000 saved; can I afford to retire early?

can I afford to retire earlyCan I afford to retire early when I have $800,000 saved towards retirement and when I retire, I will also collect a pension along with various government pensions. Our home is paid for and we have no debt to be concerned about. We have been doing a lot of research on this topic to understand what the correct answer is for someone in this position, who by the way is in a very enviable position. Most people nearing retirement are not anywhere close to this situation, however that is a topic for another article.

Can I afford to retire early – Factors to Consider

The quick answer to this question of early retirement under this situation is that it really depends on a number of factors, such as:

  • How long this couple will live during retirement, some people will spend 40 years in retirement
  • Exactly when will they begin to collect their pensions, some companies have restrictions that make people wait until they are 60 or 65.
  • What kind of life style do they want to lead? The 70% rule is very broad and really does not apply if you plan to do a lot of travel around the country or the world.
  • What will your expenses be over this time period and where will you live? Will you downsize, buy a vacation home or stay where you are and travel on shirt trips to various places.
  • When you retire will you have medical coverage or is this something you need to purchase separately?

We suggest that any person who is thinking about retirement take a look at each of these questions and try to address them for themselves and any family members, especially if you have dependents. Preparing a budget on a spreadsheet or with the help of a good adviser will help to clarify this question.

Assess Your Income

Start by determining all of your income streams, the year when you can begin to collect them and how much they will be. You can also factor in growth if these income streams are indexed. The $800,000 is a little more difficult. Some people will decide that they do not want to touch the investments or the income they generate, while others will draw the income off and retain the investment principle. In some cases you may also want to being drawing down the original investment in addition to your income that is generated by this investment. You can try different scenarios which will reflect these we just mentioned plus volatility in the stock market and the income stream associated with your investments, whatever they might be.

Assess Your Regular Expenses

Develop a budget for your day to day expenses. This would include utilities, food and clothing, taxes and medical coverage, entertainment and gifts. All of the things that are part of your normal lifestyle. Once you have this expense identified, at in an inflation factor of 3% for each year of your budget and compare your income to your expenses. Hopefully there will be still some money left over which can be applied to the next area of your budget which we will get to in a moment. If your income is not sufficient at this point to cover all of your expenses, then some difficult decisions will need to be made. Somehow your expenses will need to be reduced to match your income or you will find yourself in a difficult debt situation at some point in the future.

Assess Your Lifestyle

The 70% rule that many people talk about during retirement applies to what we have discussed in the preceding paragraphs. Now you have all of this free time which needs to be filled. Some will go back to work, some will volunteer and some people will become involved in activities that they never had time for while working. Travel is usually a big factor for many people, which takes a lot of money.

The basic question is what will your life style be like and what will it cost to achieve this lifestyle over and above your basic budget for regular expenses. Readers are urged to give this part a lot of thought and discuss this planned lifestyle with the family to make sure that everyone is on board. Develop a budget for this part of your retired life and compare to your income, regular expenses etc.

Only then will you be able to determine if the savings that you have set aside will be sufficient to provide the quality of life you expect in your retirement over the next 30 to 40 years.

 

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