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Is Can I Retire Early the Right Question?

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If you only had a quarter for all the times you’ve wondered if you could retire early.

Wait, in that case there would be no need to worry.

For the rest of us, it requires analyzing. Not only the numbers but also the reason.

Most of us have daydreamed of the moment when our days will consist of more adventurous things like trips to exotic locations, extended stays at the beach, or volunteering where we are more passionate.

If you’re in this camp, chances are you’ve spent time running multiple online calculators to pinpoint the year it will happen and the “number” you will need to save up.

But during all this planning, have you answered how you plan to spend your time in retirement?

Is Retiring Early Really Possible?

Rules of thumb and simple online calculations have trouble factoring in the variability of life. Particularly upon first retiring or transitioning to other work.

Most often, when you first retire, there is extra spending that happens in the first 5-10 years because you now have the time to spend it.

The usual suspects include longer overseas trips, bigger house projects (patio and bathroom renovations), and increased giving to children and charities.

These calculators also struggle to take extra income in to consideration. Many people now are finding they want to continue working doing something they enjoy.

By adding extra income and increasing spending in different years, you get a better look at how things will look year by year while in “retirement”. Running multiple scenarios also helps to spot potential adjustments when things don’t go according to plan.

In my latest MONEY article, I discussed one client’s decision making while answering the question if she could retire early.  The story breaks down the different alternatives discussed to help this client gain the confidence to retire early.

Renaming Retirement

Once you know it’s financially feasible, the next question is what you plan on doing after you retire early?

For many, the most common answer is traveling.  But do you really intend to travel the majority of the time when no longer working?

Surprisingly, we have seen more people retire only to go back to work. But the definition of the word “retire” includes the phrase “ceasing to work.” So is “retire” really the best word to describe the reality for most folks today?

We actually like some of the other phrases being used to rename retirement like what Michael Kitces describes as “Financial Independence” or what Jon Chevreau has coined “Findependence.”

Chris Farrell, a writer for Bloomberg Businessweek, has written a book titled Unretirement which discusses how baby boomers are changing the way they think about work – in particular – how they plan to continue working.

Regardless what we call it, we still have to be comfortable understanding the risks of potential elongated periods with no employment income.

How Will You React?

Before making this move, it’s important to understand your comfort with drops in your savings.

Some people making this transition will choose to earn more income. But for those that don’t, it’s critical to understand your tolerance for risk.

Do you remember how you felt in 2007-2009?

What was your reaction during this time? The answers to these questions can have a big impact on how you will feel while in retirement. But it’s likely to feel even worse, knowing that you are now pulling from your assets verses contributing.

Understanding how much risk you need in your portfolio to sustain your desired spending levels is an essential part of the decision-making before giving your final two-week notice.

Great Opportunities

For those that have saved diligently, retiring early can create incredible opportunities.

This is especially true when you’ve saved in accounts with different tax treatment for withdrawals and have low guaranteed annual pension payments.

Many don’t realize the flexibility that is created when you have control over your taxable income each year. Having savings in a Roth IRA, HSA, or high basis in a brokerage account, gives you the option to avoid moving in to a higher tax bracket for necessary withdrawals near the end of a year.

Common Questions

We’ve heard a long list of questions in discussing this topic with clients through the years and have answered the following questions in other blog posts. Here are some of the most common:

Are You Ready?

By asking the questions mentioned above, you can prepare for a successful transition to the next phase of your life.

That may be a long and prosperous retirement or a more flexible work arrangement doing something you truly love. Either way, if you are doing what you love, I think we all would say that is a life well spent.

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