One question that probably bothers many people close to retirement is whether there is enough invested to feel secure about early retirement. The solution is not very easy and may need the expertise of a financial specialist for a practical answer. Let’s explore the various challenges.
Motivated to Set New Financial Goals
Are you self-motivated to reassess your financial situation and set new goals? If you are thinking of early retirement, it is important to start taking action, being goal oriented and motivated. What do you do in your current situation? It depends on the state of your current financial situation. Make an attempt to see a financial advisor where you have a chance to sit down and discuss the details. In so doing, you will have a clearer and better picture of how to move forward.
Many individuals who are thinking realistically about early retirement tend to be stuck in jobs where the company has subsidized the cost of their health insurance. In that sense, most of these individuals will not see this as a continuous expense. However, for early retirement, you will still need health insurance and you have to figure out how you will pay for your own. Affordable Care Act provides some sense of relief, but may not cover everything. Whether you like it or not, health care cost is high and will dig deep into your finance without the help of an employer-sponsored health program.
Social Security benefits for people who retire early is like peanuts compared to whether you wait until the appropriate age of retirement and even that is not enough to live on. In reality, social security benefits should be considered as additional income and not your main source of income. Of course, it has it perks because it will help to lessen your withdrawal rate.
For example, let us consider that your social security will pay you $2,000 each month at the age of 67. If you had a withdrawal rate of $40,000 annually, once the social security benefit begins, you can reduce the withdrawal rate to $16,000 annually and still maintain the same amount of funds in your bank account. Of course, the amount you will have when you retire would be smaller. Most people hope that politicians will consider increasing the amount of social security for everyone so that those who want to retire early can do so.
How do you know when a withdrawal rate is safe? You know when the percentage of the original funds invested can be withdrawn every year and you have enough confidence that the investment will last you for the remainder of your life. For instance, if your original investment was $750,000 and you took out $30,000 of it each year, you would have a withdrawal rate of 3%. How do you know that this amount is safe, though? The funds left in the account will increase in growth every year so a withdrawal rate of 3% means that this should last you for an extended period of time (about 25 years) while the remaining balance is still growing steadily. However, you have to factor in inflation into the equation.
It is difficult to consider early retirement when you are not financially prepared. However, you can overcome the challenges discussed here, but make sure you find an expert to guide you along the way and do so as early as possible.