When you ask a seasoned financial planner if you can retire early, he or she is most likely to ask you how you define both “retire” and “early.”
Helen Hogan, an investment advisor with Sunset Financial Services, based in Red Bank, New Jersey, says clients often open a conversation about early retirement only to discover what they really crave is a late-middle-age realignment of work and life. “Early retirement is rarely a full stop, but it’s a milestone by which they’ll make a significant change,” usually to a more meaningful career accompanied by a more flexible work schedule, she says.
In an era of economic uncertainty, the only sure thing about a major career downshift before age 65 is that you’ll need a plan B. Contingency planning and the willingness to adapt as the unexpected emerges are essential, planners say. “You can’t completely retire early unless you have simplified your life to only the necessities,” Hogan says. “Most people want to spend less time working and more time traveling, with grandchildren, or on hobbies, and all of that costs money. Many decide they’d rather keep earning to support those goals.”
[See: 6 Steps to the Retirement Lifestyle You Want.]
First, planners agree the basics must be in place before anyone can consider a complete realignment of work and resources. Pay off all debt, even student debt and your mortgage, move to a low-cost area and ascertain that you can get and keep affordable health care, Hogan says. The Affordable Care Act has somewhat mitigated the health insurance barrier, she adds, although that is likely to be offset by taking on long-term care insurance.
Take a holistic view of your health, Hogan advises. What illnesses and conditions are likely to emerge based on your family and personal history, and how can you take steps to stave off those conditions and associated expenses?
Explore a range of investment and lifestyle possibilities, says Dana Anspach, founder of a Scottsdale, Arizona-based financial advisory, Sensible Money. Run a “stress test” of your portfolio. Ask yourself what happens if it grows at only the rate of inflation for several years. What happens to your income, and how will you adjust?
“You can’t control market conditions, but you can test to see what would happen to your plan if the market changed,” she says.
[Read: Portfolio Analysis: A $1 Million Retirement Plan Built Like a Rock .]
Many people assume they can just go back to work if their portfolio shrinks, but as millions discovered in the recent recession, it’s difficult to land a job in a widespread economic downturn. Going back to your prior job or industry is not a feasible plan B, Anspach says. “You might consider developing a trade, such as being a handyman, but a plan B is really about controlling spending. Are you willing to shop at Goodwill or eliminate charitable donations?” she asks.
It’s also not smart to count every asset you own in your early retirement income plan, leaving yourself without a cushion or emergency fund. “If everything you own is in the plan, that’s not a good plan,” Anspach says. So leave some bedrock assets, such as home equity, out of the equation.
One erroneous assumption about early retirement is that you will both stop working and start living off your investments, Hogan says. But if you truly expect your investments to last a lifetime, you must find a third income stream to bridge the years after you leave your career and before you start tapping traditional retirement income sources.
With the recovery of the real estate market, Hogan has detected an uptick in early-retirement-minded clients investing in rental properties. Their strategy is to use the rental income to pay off the mortgages as quickly as possible, then divert the rental income to their own living expenses to fund a career downshift, she says. Of course, managing rental properties is a job in itself, she adds, which is why this strategy is a “love it or hate it” proposition.
Finally, reconcile yourself to constantly adjusting your lifestyle and spending with ever- changing income and economic realities, says J. William Carr, Jr., a certified financial planner who runs his own practice, Retirement Strategies, Inc., in Jacksonville, Florida.
[Read: How to Find the Best Financial Advisor for You.]
Early retirement — or downshifting — means more than earning less. It also increases your exposure to economic cycles. The longer you are retired, “the more you are exposing yourself to long-term market risk,” he says. “You will encounter multiple economic environments. Some will be OK and some won’t, but you’ll be exposed to much more uncertainty.”
The most underestimated risk, in his experience, is not lower investment income but higher inflation. A paid-off house still requires insurance, maintenance, property taxes and utilities — all big-ticket expenses that will hammer your budget if inflation heats up. And that’s not even counting health care inflation.
If you’re aiming for a genuine early retirement or a phased transition and realignment, remember that you’ll be managing your money more actively than ever before, Carr adds. Some early retirees, he says, find that process to be nearly a part-time job.
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How to Decide if You Can Retire Early originally appeared on usnews.com
