Ready To Retire Early? 3 Questions To Answer First

After spending decades at a nine-to-five, the idea of retiring early is an appealing prospect for most. In fact, a recent study from research firm Hearts & Wallets found that over a third of people under 54 said they aspired to retire by 55.

But how many of them are prepared (financial or otherwise) to do so? For many pre-retirees, leaving their jobs early can feel more like a dream than an actual possibility.

We want to help pre-retirees determine if retiring early is an attainable goal. Below consider three questions regarding your financial and emotional preparedness for an early exit from the workforce.

Question #1: Are You Financially Ready for Retirement?

The idea of retiring early is exciting, but cutting your timeline short will require more savings than you previously anticipated. You’ll likely need more savings the earlier you wish to retire. Shaving 5+ years off your timeline may require different financial strategies than only retiring a year or so earlier than planned. 

To determine your retirement readiness, reverse engineer your savings. This process puts a rough number on retiring early, which you can use to establish a savings goal.

Start by figuring out your yearly expenses. Take a look back at the past couple of years and identify recurring bills or costs. These could include house payments, insurance, travel, holidays and birthdays, phone or internet bills, utilities, taxes, debt, etc. The more detailed you can be with this list, the more accurate your estimate is.

Also, don’t assume you’ll automatically spend less in retirement—many retirees’ spending remains relatively consistent and can even spike in the first couple of years as you check off big-ticket items like traveling, moving, etc. 

Once you have a comprehensive roundup of your annual expenses, multiply it by the number of years you anticipate being in retirement. If the current average lifespan in the U.S is about 80 years and you retire at 55, you could be in retirement for 25 years! Count on a long and prosperous retirement, as you want to be sure your nest egg lives longer than you.

This exercise can leave you with a rather large, intimidating number to put on your retirement. If you find that you’re a hair or two shy from your goal, consider how you can make up the difference:

• Delay retirement to continue to work and max out your retirement savings vehicles.
• Plan to pursue a part-time job or encore career after you leave your job so you can rely on a steady paycheck.
• Redirect current spending toward saving for retirement.

With enough planning, dedication, and sound strategizing, we can work together to get you there.

Bonus: Make A Cash Flow Plan

You want to retire early, incredible, but how will you access your hard-earned money? In most cases, you have to be 59 ½ to withdraw funds from your retirement accounts (401k, traditional and Roth IRA, etc.) without a penalty. 

So, what can you do?

• Consider the Rule of 55. This IRS rule allows you to withdraw funds from your 401(k) before 59 ½ without the 10% penalty. But, you’ll have to follow a couple of rules. First, you have to leave your job in the calendar year that you turn 55 or older. Second, you can only withdraw funds in the 401(k) from your most recent employer, not any others you have floating around—which makes consolidating sound like an excellent idea. 
• The 72(t) Rule. The 72(t) rule allows you to access funds from your IRA before you turn 59 ½. But this is an incredibly complex rule riddled with intricacies. We can review your situation to determine if it could be a good fit for you.
• Use your Roth IRA. While you can’t withdraw earnings, you can withdraw contributions penalty-free if the account has been active for five years.
• Lean on personal savings. Now is your brokerage account’s time to shine! You can use some funds to supplement your expenses.

Question #2: What Are You Retiring To?

What is your reason for wanting to retire early? Escaping a stressful work environment is understandable, but dig a little deeper into the “why.”

If you’re unhappy in your current position, consider whether a job change or career shift could be a suitable alternative to retirement. Retiring early requires an immense amount of planning and preparedness. If you think you may find fulfillment by switching jobs instead, it could be a less financial strain in the long run. 

Not to mention, entering retirement before you’re truly ready is a jarring experience. A significant number of retirees suffer from depression caused by loneliness and isolation, and the CDC estimates that over 7 million adults over 65 battle with depression. Going into the next phase unprepared may not be the right answer to combatting an unfulfilling work life.

Before diving headfirst into the unknown, think about what you want your next chapter to look like. You know you’re looking for a change, but that doesn’t have to be as drastic as early retirement. Pivot career tracks to something that’s more aligned with your interests. Or, check out part-time jobs, consulting or freelance opportunities, even starting your own business. These can be fulfilling alternatives that continue to keep you engaged without the commitment or stress of a full-time job.

Leaving the workforce altogether may still be your ultimate goal. But before clocking out for good, put a clear plan in place for what you want to do next. One of the most critical elements of your retirement lifestyle is planning for your time. Build a purposeful and meaningful routine you’re excited to pursue—not just idly feeling the sand wedge into your toes. 

Set up volunteer opportunities in your community, offer to babysit your grandkids a couple of times a week, or focus on hobbies you’ve wanted to try. Retiring with a solid game plan is what makes you feel fulfilled and satisfied in your golden years.

Question #3: What Adjustments Do You Need to Make?

Before leaping into early retirement, there are a few things to check off your to-do list first. These include lifestyle adjustments that will help make up the difference between how much you need to sustain your retirement and how much you already have saved up. Examples of these lifestyle adjustments include downsizing your home, increasing your retirement savings, and paying off debt.

The fewer financial obligations you’ll have in retirement, the less you’ll need to have saved up. That’s why reducing or eliminating debts like a mortgage, car payment, and personal loans can impact your retirement plan.

Finances aside, keep in mind the personal adjustments you’ll face in retirement. If you’re used to spending every day at the office, what will you do with your weekdays in retirement? Going from a full workweek to an empty schedule is more difficult than most people realize. It’ll be helpful to determine how you want to spend your days ahead of time to avoid any shock and doubt during the transition into retirement.

Bonus: Make A Healthcare Plan

Leaving your job comes with several consequences, and one that many early retirees forget about is their health insurance. If you retire before you’re eligible for Medicare (65), you must have a plan to supplement your expenses. Here are some ideas to consider:

• COBRA coverage—usually available for up to 18 months after you leave your job
• Become a dependent on your spouse’s insurance
• Shop for a policy on the marketplace.

Retiring with Legacy Wealth Advisors

Retiring early is an exciting dream, and for many diligent savers, the reality is more possible than they realize.

If this is something you’re considering, we encourage you to speak with your advisor sooner rather than later. At Legacy Wealth Advisors, we can help you create a strategy that moves you closer to your goal.

Feel free to schedule a 15-minute call with us; we’re happy to dive deeper into your goals for retirement.

Disclaimer: Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. 

Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.