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How to Retire Early – 6 Important Life Decisions

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What does retirement mean to you? Is it a point in time where you can stop working and do what you want to do? Is it a sum of savings and investments where a salary or wages are no longer necessary to maintain your desired lifestyle? Is it the age when you become eligible for Social Security payments, Medicare, and AARP (American Association of Retired Persons) membership?

According to a June 2013 poll by the TransAmerica Center for Retirement Studies, 42% of all workers plan to retire at age 65 or earlier, but only one in eight have a written strategy, and many of those overlook factors that will affect their retirement satisfaction such as investment returns, healthcare costs, inflation, and taxes. In other words, many people dream of retiring early, but have done nothing concrete to attain their goal. Even those people who save 10% or more of their annual salaries through company-sponsored plans such as IRAs or 401ks have only accumulated an average of $161,000 in total household savings to cover their retirement years.

Keys to Retiring Early

For most people, the ability to retire early is a result of choices made in their early working years plus the choices about the desired lifestyle they hope to enjoy after ceasing employment. The combination of the cost of the lifestyle you desire and the years remaining after you stop working drives the amount of investment capital you need in order to maintain the lifestyle you want.

For example, if you are a 25-year-old male and hope to retire at age 40, it is likely you will live, on average, an additional 38.23 years following your 40th birthday, according to the 2009 Period Life Table of Social Security. Table A illustrates the amount of monthly savings needed to provide a retirement income of $50,000 per year at an investment return of 6.5% before consideration of inflation, Social Security payments, or taxes.

Investment Needed for $50,000 Annual Income at Various Retirement Ages
Table A: Investment Needed for $50,000 Annual Income at Various Retirement Ages

Knowing that you will need $1.9 million means that you must invest on average almost $75,000 annually for the next 15 years at an average annual return of 6.5% to reach your goal. If you doubled your investment return to 13.0% annually, you would still need to invest about $42,000 a year. The fact is that the numbers don’t work for you if you earn an average income of less than $100,000 per year and are not willing to invest the bulk of your current earnings for retirement. Furthermore, you must be willing to enjoy a living standard at least equal to lower-middle class ($32,500 to $60,000) through your retirement years

The age at which you can enjoy freedom from full-time employment with some degree of security is dependent upon the following life choices.

1. Picking the Right Partner

At the turn of the 19th century, destitute British noble families regained their fortunes by trading titles for American cash. Nouveau riche American fathers were happy to wed their daughters with accompanying dowries to bankrupt English lords in return for an adopted lineage. While women seeking wealthy men are infamously known as “gold-diggers,” men are just as eager to marry up. Picking a fabulously wealthy partner has always been a common method of achieving financial freedom.

That said, the right partner doesn’t have to bring wealth to the relationship – however, they should agree on the lifestyle which you will share together. One partner who is miserly and another who is a spendthrift may find preparing for an early retirement difficult and frustrating – and likely un-doable. Be sure your potential mate shares your values and ambitions, and is willing to make similar sacrifices when and if necessary to achieve your mutual goals.

2. Limiting the Size of Your Family

As a father, I wouldn’t take anything from one of my children. However, children are expensive. According to a 2011 report by the United States Department of Agriculture, a first child born in 2011 will cost their parents from $212,370 to $490,830 to raise until 18, or, on average, about 27% of total household expenditures. Fortunately, adding children is not quite as costly: The second child adds another 14% of gross expenditures, and the third an additional 7%.

These numbers do not include college expenses. Add another $22,2261 for an in-state public college or $43,289 for a private university per year, and you’re beginning to talk about serious money. A friend of mine often tells me his retirement is “on the hoof,” hoping that his kids will be there to help support him and his wife in their golden years.

3. Living in the Right Places

Generally speaking, it is more expensive to live in a big city than a smaller town, on one of the coasts rather than in the middle of the country, and in the North instead of the South. New York City, San Francisco, Boston, Los Angeles, and Washington, D.C. are the most expensive places in America to live, while Fayetteville, Memphis, and Norman, Oklahoma are among the least expensive locations, according to the Cost of Living Index maintained by the Council for Community and Economic Research.

For example, a $50,000 lifestyle in Norman would require an additional $81,670 to maintain in New York City. Conversely, moving from a high-cost area where you may have been employed, to a lower-cost area for retirement is a common strategy. Many Americans elect to retire and live in a smaller country to stretch their retirement savings.

4. Living Lean

It is virtually impossible to retire early if you consume all or a bulk of your income for living expenses. At the same time, the first 20 years of employment usually include large expenditures for homes and children, so that saving is especially difficult and may result in feelings of sacrifice and deprivation. Balancing the needs of today with your plans for the future is one of the most challenging decisions you will make.

As you wrestle with decisions such as purchasing a new car or driving the old car that is paid off for a few more years, understand that the difference between saving 10% and 20% of your income will have a dramatic impact upon the age at which you can comfortably retire and the amount of investment income you will enjoy. Maintaining a modest lifestyle before and after retirement improves the possibility that you can retire early and maintain the living standard you enjoyed while employed.

Budget Living Expenses

5. Staying Healthy

A 2012 report by Fidelity Investments projects that an average 65-year-old couple will need $240,000 to cover medical expenses through retirement. This estimate doesn’t include the costs of healthcare from the age of early retirement until age 65 (when Medicare is available) including the expense of mandated coverage under the Affordable Care Act, which goes into effect in 2014.

While health issues increase with age, many of the illnesses and conditions result from poor lifestyle choices such as smoking, too much alcohol, bad diets, and no exercise. A pack-a-day smoker will spend an average $150 per month for cigarettes and may be charged up to 50% more for health insurance premiums, justified on the basis that smokers incur greater healthcare expenses as they age.

Aside from quality of life issues, your decision to indulge in unhealthy habits will also cost you money in later years. You will need a larger investment pool to cover the increased costs likely to occur from health expenses, even as your life expectancy decreases.

6. Monetizing Your Avocation After Retirement

Many current retirees continue to work on a part-time basis, either because they enjoy what they do (isn’t that what retirement is all about?) or because they need extra income. Being able to earn money while performing activities you enjoy is a real bonus, and the dollars you earn will reduce the amount of capital needed each year from your retirement portfolio.

If you have specialized knowledge and writing skills, you may be able to develop a regular income from the sale of articles and blogs. For example, Kevin Yee, a former Disneyland employee, has written or co-written 16 books about Walt Disney World since 2008. One friend loves to play golf; he works part-time in the golf shop for an hourly wage plus free green fees worth $75 per round. Another friend loves woodworking and regularly sells his pieces to neighbors who also recommend them to others; he has at least a year’s backlog in orders now and he loves it. Gardeners can sell produce at local farmers’ markets; computer aficionados can teach other retirees the magic of the Internet or develop websites; those who love cooking and baking can teach classes, cater meals, or provide product to local businesses. Chances are if you love something and are good at it, someone will pay you for the product or service you deliver.

Final Word

With proper and early planning, early retirement may be a possibility for you. And if you plan to continue working on a consultancy basis or as your own boss, the dream of early retirement becomes much more practical as long as you plan ahead and have realistic expectations as well as a willingness to forgo immediate gratification for future security. Leaving a secure salary and striking out on your own to pursue activities you enjoy during middle age (45-65 years of age) is possible for most people if you exercise discipline and flexibility prior to and after ending salaried employment.

What other tips can you suggest to help achieve an early retirement?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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