Everyone contemplating early retirement will ask, can I retire early? But the answer to that question will really depend on the answer to this question. Do You Have Enough to Fund Early Retirement?
You probably have already determined the yearly (monthly) amount it takes to fund your early retirement lifestyle. You have also figured out how you will fund your monthly expenses, fun and retirement lifestyle by pension and/or savings. The big question is, will your funding last as long as you do? Only then will you be able to answer the can I retire early question.
Many say that all you have to do is take the amount of your yearly retirement lifestyle cost minus any pension you might receive. Then multiply the results by 25. That gives a good estimate to see if you have saved enough.
For example. If you have estimated your retirement living cost as $40,000 a year with no pension. Then the equation looks like this. $40,000 X 25= $1,000,000 as needed in your portfolio.
Take that same $40,000 a year retirement lifestyle cost. But in this case there is a pension that pays $24,000 a year. Then the estimate equation would be $40,000 – $24,000 = $16,000 X 25 = $400,000. That $400K is what’s needed in the portfolio to fund your retirement. But that is just an estimate.
This simple equation assumes a certain optimized investment strategy and length of retirement. There is much more we can do to answer the question, Do You Have Enough to Fund Early Retirement?
There are many uncertainties to consider
We don’t really know how long we will be retired. Hopefully it will be a long time. Longevity can be estimated based on your relative’s life spans, your own health, and how risky of a lifestyle you live. However it isn’t an exact science. Nobody knows.
We also know there are no guarantees on investment returns or the impacts of future inflation.
However there is a way that we can better answer the early retirement funding question so please continue reading.
Retiring Early and Social Security
Do You Have Enough to Fund Early Retirement? To get closer to the real answer we need to get an idea of what our projected Social Security payments may be. We also must decide whether taking Social Security at 62 is better than waiting until our full Social Security age or waiting until age 70.
It’s important to get our estimated amounts from the Social Security Administration ( http://www.ssa.gov/myaccount/ ) by creating an account and printing it out. The estimate is based on the highest 35 years of earnings.
You must have worked and paid into Social Security for at least 10 years. Some people in Public positions or Rail Road workers may be limited or restricted from receiving Social Security due to their pensions.
For everyone who do qualify for Social Security we need to realize that the figures they display are based on their projection. That being that we will make our most recent salary right up until age 62 or older.
If we retire early those future years may be zero and the Social Security estimate we see now may be a little higher than actual. But it will be close. Once we have retired for a full year and have no earned income we can always ask for another estimate from the Social Security Administration. With our zero earned income now projected forward the estimate will be more accurate.
One of the arguments against retiring early is the impact to our Social Security. This is due to fewer years paying into the Social Security system. I guess as a Leisure Freak I look at things differently. If retiring 10 or more years early costs me $250 a month or so in Social Security then I figure it’s a pretty good trade.
Do You Have Enough to Fund Early Retirement? Look Before You Leap
Verify Your Early Retirement Funding Numbers.
When we retire early, taking Social Security is too far into the future to worry about now. A lot can change. But picking a reasonable number to expect is necessary to use a retirement calculator I really like. It helps us understand whether we have enough funding to last our projected lives.
I use the free Firecalc site (http://www.firecalc.com/index.php) because it allows us to change our investment strategy, when and how much we expect from Social Security, along with various spending and investment models. This is a Monte Carlo type retirement calculator that uses 100+ investment cycles. It finds the likelihood of our retirement funding success for the years of retirement we enter into it.
Make sure when entering your figures into the Spending Model tab to use a constant spending model with at least a 3% a year inflation rate. After getting those results then run it again using their Bernicke’s Reality Retirement Plan option to see the impacts to your overall retirement calculation results. I do believe there is merit to Bernicke’s assessments even though medical and long-term care issues are an unknown and may erode the savings his study suggests.
Do You Have Enough to Fund Early Retirement?
If the results you get are less than expected you can always join me in the Retire Early and Often lifestyle. Even working a little part-time gig that interests you can make a huge difference.
You may even be planning on selling your home at a certain age. Try adding some income to the Portfolio Changes section of FIRECalc retirement calculator to see what impacts it makes. This is a great retirement calculator to play with. It is always nice when the results show 100% success in your favor.
Go ahead and run your numbers. Do You Have Enough to Fund Early Retirement?